Asia’s Rich-Poor Divide

Growth is not enough. Or so argues the Asian Development Bank's chief economist, Ifzal Ali, a vocal critic of the region's yawning rich-poor divide. He says too few "good jobs" are being created today, and that Asia's wealthy are claiming a disproportionate cut of the spoils from the current economic boom. He fears that unless the pattern changes, more countries risk following Nepal's bloody descent into what at heart is a war between haves and have-nots. Ali spoke recently with NEWSWEEK's Hong Kong bureau chief George Wehrfritz by telephone from ADB headquarters in Manila. Excerpts:

NEWSWEEK: Asia's economies are expanding at their fastest rates in a decade, yet you have warned of a looming jobs crisis. Explain that.
Ifzal Ali:
At the end of 2005, of the 1.7 billion people in Asia's workforce, 500 million of them were either unemployed or underemployed. In the next 10 years another 250 million people will join the workforce as new entrants. So [the region's economies] have to create 750 million new productive and decent jobs over the next decade, a challenge that's unprecedented in the history of mankind.

Asia is growing faster than it has in a decade, so why is job creation slowing?
In the past we saw very rapid growth accompanied by rapid increases in employment in what we call "good jobs": jobs that paid well [and provided] access to welfare protections and job security. That is what really distinguished [the growth pattern] in Japan, Korea, Taiwan and to a certain extent Hong Kong. What has changed? First, the public sector is in retreat virtually everywhere. Given that the public-sector jobs are those that provided relatively decent standards of living for workers and their families, and considerable job and income security, the retreat has put a dent in the creation of new jobs. In addition, globalization has [intensified] competition virtually everywhere and increased the rate at which new technologies are introduced. And while capital mobility has increased quite a bit, labor mobility for the relatively unskilled remains lower. [These factors] are diminishing bargaining power for workers and have played a prominent role in the high share of nonpermanent jobs being generated these days. I'm not suggesting that we clamp down on competition, trade and technological change. But we do need to recognize that [globalization] can be disruptive at the level of the individual and redesign social welfare systems for workers in developing countries.

To what extent has job creation become a casualty of cheap capital?
For a country like China there are a variety of impediments to job growth. For example, from the mid-1980s to the mid-1990s, we found that every three percent of GDP growth led to one percent of additional employment. From the mid-1990s to 2005 China required more than 8 percent growth to generate one additional percentage point of employment. This is a major shift. Why has it occurred? One reason could be the lower cost of capital, but other [contributors] are globalization, technology change and competition.

Policymakers in China are struggling to rebalance their economy away from investment and exports and toward household consumption. To what extent is rising income inequality a cause of this imbalance? And how might the widening rich-poor divide hinder Beijing's efforts to achieve this rebalancing without triggering an economic downturn?
Inequality is an outcome. The important question is what processes led to this outcome. China's household savings rate is exceptionally high; its savings as a percentage of the economy as a whole must be among the highest in the world. If you look at the precautionary reasons, they include the lack of social safety nets, including access to primary health care and primary education for vast [segments] of the people, particularly in the rural areas. They cause people to become very conservative and constantly focus on saving. What would make the consumer more confident? The obvious answer is the availability of productive and decent jobs. Secondly, it is access to social services. China has moved progressively toward an open, market-oriented economy, but many of the social protection systems have fallen by the wayside. These are long-term structural issues that will have to be addressed to rebalance the economy [toward greater household consumption].

You advocate wealth redistribution to narrow the rich-poor divide. Can you cite a country that has adopted such policies and been successful?
One that has been very successful is Japan, where the inheritance tax is high. But when we are dealing with very poor countries, we are extremely cautious regarding redistributive policies, because if you are not careful you could choke off the very incentives for growth that create opportunities. You have to find a very fine balance. If government expenditure is taking place in education, there may be a need to reprioritize from tertiary to primary, or reprioritize from high-tech to elementary health care. These are the kinds of redistribution policies we'd like to focus on more when dealing with developing countries. For a poor person, a health crisis is a sure way to debt penury and poverty for generations. Similarly, primary and secondary education is the surest way to ensure upward mobility.

Your recent writings cast the ongoing political crisis in Nepal as an outcome of the country's huge rich-poor income gap. What are the lessons for the rest of Asia?
There is a very, very high correlation in Nepal between inequality in income, inequality to access to basic health and education, inequality in access to land, and the intensity of the conflict. In today's world no group or geographic region can be bypassed in the growth process [without] sowing the seeds of future problems. The case of Nepal underlines how systems, policies and institutions that [permit] large swaths of society to be bypassed eventually [breed] social unrest and political instability. It's in the self-interest of all enlightened countries to distill, understand and to act on that lesson. Even in India, which is growing at 8.5 to 9.0 percent year in and year out, you have a large part of the country under the influence of the Naxalites [Maoist rebels]. You have similar problems in Thailand, in the Philippines, in Indonesia. In the 21st century it is simply not feasible to leave large parts of society out in the cold. That, to my mind, is the imperative of inclusive growth.