Yawning income gaps threaten growth
You would not know it from all those glitzy new shopping malls sprouting up in Asian cities. Record condo prices are not telling the whole story either. In truth, not everyone is joining in the region's prosperity.
In recent years, Asian economies have performed impressively enough, even shrugging off the global financial crisis with apparent ease. But the boom has been kinder to some people than others, and this rising income inequality could impede sustained growth.
To be sure, poverty has been significantly reduced. Not only in China but across much of Southeast Asia and India, the middle class has grown faster than ever -- anywhere. South Korea is perhaps the most dramatic example. In the early 1960s, the country's per capita income equaled that of Sudan. Today, it is a global trading power and its population, on the whole, enjoys all the comforts of modern life.
And yet, across the region, income imbalances have grown more pronounced. Official data, patchy as it is, bears this out. Since the 1990s, the weight has shifted more rapidly in Asia than in most other emerging market regions. China's tilt has been especially sharp: By some measures, income distribution on the mainland is more unequal today than in Brazil, which is among the world's most unequal societies (although the situation has improved of late).
For anyone living amid the bustle of Asia's burgeoning metropolises, the contrast between top and bottom is all too apparent.
In part, this may be inevitable. As economies develop, income inequality tends to rise in the initial stages, only to ameliorate with time. Some are fortunate to join the modern economy before others, temporarily skewing incomes. Western economies went through the same process during their industrialization. Today, globalization may add additional pressures, with harsh competition among the world's workers restraining income gains.
Since the global financial crisis, soaring asset prices have sharpened the contrast. Rising real estate values are great for those already holding a title, but they are frightening for those forced to rent. Frothy stocks benefit few in the provinces, where most are already facing meager returns on precious savings. One might think that rising wages make up for much of this, but in reality, labor's share of national incomes has steadily declined across the region.
To leave it at this would be shortsighted. Income inequality poses risks that need to be carefully managed in order to maintain growth momentum.
First, it limits mobility. The greater the divide, the more likely it is that those at the bottom will be stuck, their talents wasted amid the grind. China's breathtaking ascent over the past decades has many sources. But one, arguably, is that it started out with a fairly equal distribution of income, allowing those with skill and perseverance to spur the nation's development.
Second, the problem opens the door to populist policies. As elsewhere, officials in Asia are sensitive to the frustrations of those left behind. Quick fixes, then, become tempting for governments trying to satisfy an aspiring populace. They often take the form of ill-designed subsidies that lead to waste and eventually become as costly as they are difficult to repeal. Restrictive labor market regulation, with the commendable intention of protecting those with jobs, may inadvertently hurt others without.
Third, increased inequality encourages excessive household debt. The less fortunate, aspiring to the same comforts so prominently flashed about by others, borrow to complement their lagging incomes. You only have to look to the U.S., where inequality has soared over the past three decades. When money was cheap, homes and cars were purchased on credit. In the end, that wasn't sustainable; subprime lending drove the boom and caused the eventual bust. In many Asian economies, if not all, household debt has swelled to record levels of late.
What may be done about this is not entirely clear, and a measure of inequality must be accepted as a byproduct of rapid development. But policy can intervene to curtail excesses. Equality of opportunity is a high priority. Access to quality education, for example, should be offered to all, not just to the select few able to afford the fees. Tax policy too, could be used to skim off the top and distribute more at the bottom. That, of course, would be unpopular with some, but it would be a small price to pay to ensure lasting growth in Asia.
Frederic Neumann is co-head of Asian economics research at HSBC. He is a former Fulbright scholar and taught graduate courses in Asian economics and politics at a number of U.S. universities before joining HSBC.