Actions for inclusion amid rising inequality

By Vinod Thomas 29 July 2015

At a slum village in Mumbai, India, many of its residents work as as cleaners and washers in surrounding high-rise buildings, hotels and hospitals. How do we reduce inequality, but in ways that do not hurt macroeconomic stability? Photo by: Dellboyy Art / CC BY-NC-SA

Concerns over inclusion feature in 10 of the 17 sustainable development goals that are set to replace the Millennium Development Goals, which expire this year. Such a focus on inclusion is vital for Asia and the Pacific where inequality has risen some 20 percent in the past two decades, and around 1.4 billion people live under $2 a day.

All can agree on the societal merits of lessening inequality. Beyond that, rising inequality can also stifle growth and minimize the impact of growth on poverty reduction. Simply put, the greater the ability of lower-income groups to gain education, remain healthy, and accumulate human and financial capital, the greater are their economic contribution and the possibilities for broad-based and more lasting growth.

Economic globalization may have raised the relative returns to capital and given a premium to skill differentials, accentuating inequalities. Technological change can sometimes create winner-take-all contests for incomes. The return to capital relative to labor in manufacturing output is estimated to have risen between the mid-1990s and the mid-2000s in China and India. An individual country, however, may have little control over the effects of globalization.

On more actionable aspects, inequality in incomes has had roots in disparities in education, health and other components of human capital, and unequal opportunities more generally. Government spending on education and health as a share of gross domestic product in Asia has generally been lower than in comparable regions. Furthermore, weaknesses in the workings of the labor markets and policies that favor capital over labor are proximate factors too.

But efforts that seek to reduce inequalities do not automatically have payoffs. History is replete with examples of redistribution efforts — from credit subsides to labor market restrictions — that were highly inefficient and did more harm than good. The crucial question is what policy responses promise to lower income inequality without hurting economic efficiency. Three directions, in particular, look promising.

First, a key area for action is reducing disparities in human capital, but in ways that do not hurt macroeconomic stability. Higher investments in education and health can provide growth enhancing returns, when the emphasis is not just on quantity and access but also on quality and productivity.

Education spending is particularly important both to increase access to schooling and to improve learning outcomes, which is what matters in the labor markets. Livelihood and skills training too is not just about access; it must be relevant and calibrated to the needs of local markets and local employment situations. Furthermore, the increasing role of technology advancement in raising productivity and automation of processes requires an increase in the level of skills set of the population.

South Korea provides experiences in raising the quantity and quality of education through spending both in the public and private sectors. The fast pace of expansion of secondary education (enrollment rate of 97 percent) and then tertiary education (enrollment rate of 98 percent) as well as a high premium on research and development enabled South Korea to have high human capital to support its transition from middle to high-income status, helping to avoid the so-called middle-income trap. South Korea allocates some 7.6 percent of its GDP to education (2010) compared with a 6.3 percent average for the Organization for Economic Cooperation and Development.

Second, social protection and social safety nets can aid investments in human capital development of the poor. They also provide coping mechanisms against adverse shocks such as periodic food price rises or recurring natural disasters. In Brazil, Mexico or the Philippines, conditional cash transfer schemes have provided annual grants to poor families who meet conditions linked to education and health.

Conditional cash transfer programs in these countries have gained considerable ground in reaching a large number of poor and providing socio-economic benefits. Evaluations find that the Philippine program has produced strong socio-economic results that include increasing enrollment rates among children 3-11 years of age, encouraging poor women to use maternal and child health services, and promising improvement in the employability of the poor.

Third, labor market reforms can support job creation for the lower-income strata. These include job matching and information systems, and policies that support labor mobility and flexibility. Thailand’s Tonkla Archeep addressed joblessness due to the global economic downturn that started in 2008. This program combined a skills development and training program with that of unemployment insurance. The program extended financial support to several companies to postpone layoffs.

Related is information and technology, facilitating better functioning of markets. Improving access to information, especially for micro, small and medium entrepreneurs, can help make often fragile businesses less vulnerable. A case in point is small farmers in India benefiting from access to free, real-time pricing and other key agriculture information from village Internet kiosks to improve the supply chain for its agribusiness exports (for example, the so-called e-Choupal program).

These three aspects — human capital, social protection and labor markets — are far from comprehensive, and there is no “one size fits all” for greater inclusion. But as inclusion assumes a big part of the SDGs, learning from the experience of programs for greater inclusion assumes urgency.

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About the author

Vt connecting the dots
Vinod Thomas

Vinod Thomas is director general of the Asian Development Bank's Independent Evaluation Department since 2011. Thomas also has 35 years experience with the World Bank, where his last position was director general and vice president of the Independent Evaluation Group.


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