When it comes to inequality, it's not just about the economy

To tackle income inequality, govts need to raise fiscal spending, reform tax, make better use of remittances and invest in education

Growing income differences were decisive for Brexit and Mr Donald Trump's election victory. Despite benefiting from the fastest economic growth in the world, decision-makers in Asia should take note and act because income inequality in the region is showing some of the biggest increases anywhere. Even when economic growth in the aggregate is robust, inequalities among people, coupled with a rising distrust of globalisation, are increasingly determining political outcomes.

Developing Asia's Gini coefficient - a measure of income inequality- went from 0.39 in the mid-1990s to 0.46 in the late 2000s (zero represents complete equality and 1, complete inequality).

Countries that make up 80 per cent of developing Asia's population have seen rising inequality roughly over this period. By this measure, Singapore is at the top end in inequality among Asian countries, though this may well be overstating the situation because big cities worldwide typically have high levels of disparity. On the other hand, the exclusion of temporary workers from the measure and the inclusion of provident fund contributions of employers that are capped at higher incomes could be understating Singapore's inequality.

How to narrow inequality

Fiscal and financial policies will play an essential part in narrowing income inequities and making growth more inclusive. Government spending on education as a share of gross domestic product (GDP) in developing Asia in the late 2000s was less than 4 per cent, compared to an average of 5.2 per cent in high-income Organisation for Economic Cooperation and Development (OECD) countries.

For spending on health, developing Asia's 4 per cent share in GDP is much lower than the OECD's 7.4 per cent.

Countries that make up 80 per cent of developing Asia's population have seen rising inequality roughly over this period. By this measure, Singapore is at the top end in inequality among Asian countries, though this may well be overstating the situation because big cities worldwide typically have high levels of disparity.

Both of Asia's most populous nations, China and India, need to increase government spending more towards education, healthcare and social protection. Economic studies of both middle- and low-income countries highlight the need for better public service delivery, supported by adequate checks and balances to minimise leakages and corruption.

Promoting greater equality will not be possible unless tax systems in most Asian countries increase revenue collection and improve tax administration through tax reform.

The share of tax revenue to GDP in Asia is low, compared to other regions: in 2011 it was 12-14 per cent in Bangladesh, Cambodia, Myanmar, Pakistan and the Philippines, about half the world average of 25 per cent. There is considerable room to strengthen direct taxation in many Asian countries, and make the system more progressive by raising taxes relatively more in higher-income brackets within countries. Implied by measures of the size of the region's shadow economy, tax administration needs strengthening, especially in Thailand, Sri Lanka and the Philippines. Political support for these often unpopular measures will have to be built.

The remittances of overseas workers - which topped US$430 billion (S$615 billion) in the developing world last year - have yet to be capitalised for development purposes, but have the potential to be a powerful tool for inclusive growth.

Cutting transaction costs in transferring remittances through more competition among service providers will make a difference, as shown by reductions in fees in the US-Mexico corridor. Here, a transition from informal to formal channels has been occurring, aided by greater awareness in the migrant communities of their financial options, use of acceptable identity cards and information technology, and the availability of more financial channels and thus competition in the provision of remittance services.

China's mobilisation of diaspora finance for manufacturing investment and India's for information and communication outsourcing services are well-known. Several schemes worldwide of widely differing sizes have had varying degrees of success in channelling overseas financing for domestic development.

Brazil's Dekassegui mutual fund, for example, invests in new enterprises using the remittances of Brazilian migrants in Japan. A programme in Mexico has provided matching government funds for diaspora financing of local infrastructure, Tunisia has offered financial incentives to promote small businesses, while Turkey has used remittances as loan collateral.

South-east Asia is a dynamic remittance market with some 13 million migrants abroad. The Philippines, after India and China, is the third-largest recipient of remittance inflows (some US$30 billion) worldwide. Singapore is a primary conduit of investments in South-east Asia.

In Indonesia, the Philippines and Vietnam, some 50 to 90 per cent of the population is employed in small business, and there is plenty of potential for governments and their development partners to craft programmes and policies to channel a greater proportion of remittances into this sector, and so promote greater financial inclusion. To take one example, Atikha, an NGO for overseas workers and families in the Philippines, mobilises the resources of migrant workers to invest in agro-based cooperatives.

It will not be possible to narrow inequality unless the growing vulnerability of people on low incomes to trade fluctuations, health epidemics and climate-related disasters is addressed. Social safety nets are weak in much of Asia. But global experience has demonstrated the effectiveness of transfers to mitigate such shocks, particularly conditional cash transfers that require families to meet education and health targets.

The initial wave of these programmes in Mexico, Brazil, Colombia and Chile, and later ones in Turkey, Cambodia, Indonesia and the Philippines, helped improve education, health and incomes of the poor, according to evaluations.

Brazil's Bolsa Familia (Family Allowance), Mexico's Oportunidades (Opportunities) and the Philippines' Pantawid Pamilyang Pilipino Program (Bridging Programme for the Filipino Family) are the largest such programmes, covering millions of low-income households.

Chile's Solidario Programme, on the other hand, targets only people living in extreme poverty (5 per cent of the population). Here, beneficiary families work with social workers to understand actions that could help them get out of extreme poverty. They commit to action plans that become the conditions for receiving the benefit.

These programmes are good value for money: some of the large ones covering the bottom one-fifth of the population cost less than 0.5 per cent of GDP.

But as these programmes expand, they must anticipate the demand they place on administrative capabilities as well as leakages that occur in transfers going to non-intended beneficiaries.

For a more egalitarian society, no single factor over the long haul will be more important than investing in quality education. Asia has made huge strides in expanding access to education, but keeping children in school continues to be a struggle in the region's poorer countries. Here, school-age children from households in the lowest income quintile are three to five times more likely to stay out of school as those in the highest quintile.

Aside from improved access, it is the quality of education that matters for employment and earnings.

High-income economies in Asia took the top five global rankings recently in mathematics and science scores (Singapore, Hong Kong, South Korea, Japan and Taiwan, in that order). But the provision of quality education and learning outcomes need improving for the lower-income strata. Education curriculums in many countries are out of sync with the increased demand for skills in high tech, energy, health and finance.

Sustaining strong economic growth across Asia will depend increasingly on distributive measures that are market-friendly and growth-oriented. Like it or not, a better distribution of economic gains has become not only a moral imperative but also a political necessity.

  • The writer is visiting professor at the Lee Kuan Yew School of Public Policy, National University of Singapore, and former director-general of independent evaluation at the World Bank and Asian Development Bank.
A version of this article appeared in the print edition of The Straits Times on December 03, 2016, with the headline 'When it comes to inequality, it's not just about the economy'. Print Edition | Subscribe