Developing Asia should spend more on equity-promoting programs

Any discussion or strategy about poverty reduction invariably invokes the term inclusive growth. This is particularly true in developing Asia, where years of economic growth have not always translated into higher quality of life for the poor. Some economists and development experts argue that one way to facilitate inclusive growth is for governments to increase public spending on equity-promoting social programs. According to the Asian Development Bank, however, countries in Asia lag behind much of the rest of the world on critical socio-economic spending — a reality which holds major implications for the foreign aid and global development community. In its latest outlook report for the region, the ADB notes that Asia’s public spending on education, health care and social protection is well below that from members of the Organization for Economic Cooperation and Development. Even Latin America — a region comparable to Asia in both income and development — spends more on equity-promoting programs than Asia. Education, for example, receives a meager 2.9 percent of Asia’s gross domestic product. OECD countries, meanwhile, channel 5.3 percent of their GDP to education, while Latin America spends even higher at 5.5 percent. The difference in health care spending is much larger. Advanced economies spend 8.1 percent of GDP on health care services. Latin America devotes 3.9 percent, but Asia only allots 2.4 percent. The discrepancy is most significant when it comes to social protection spending. OECD countries spend 20 percent of their GDP on social protection, while Latin America and developing Asia commit 12 percent and 6.2 percent, respectively, to social protection programs. So where does developing Asia devote the most largest portion of public spending? Infrastructure. The ADB report shows that since 2000, ADB member countries have been spending an average 7.7 percent of their GDP on physical infrastructure. This is significantly higher than OECD members’ average infrastructure spending, which is 4.3 percent of their GDP. Historically, Asia has focused on growing its economy — “an understandable priority when Asia’s economies were largely low-income,” according to the ADB report. From this perspective, infrastructure spending makes sense as it creates the crucial linkages that buttress economic growth. But infrastructure’s impact on reducing inequality is not as clear-cut. Citing a forthcoming report by University of Sussex economics professor L. Alan Winters, ADB notes that infrastructure can actually exacerbate inequality because the rich are better poised to take advantage of the economic opportunities that arise from such developments. Political influence also often dictates the location of infrastructure, which further hinders the poor from benefiting from it. If Asia is committed to bridging the worsening wealth gap, then there is an urgent need to spend more on equity-promoting programs, according to ADB. Higher, better-targeted spending on education, health care Despite dramatic growth success stories in the region, Asia has seen widening levels of inequality, the ADB report notes. While technology and market reform have helped the region capitalize on globalization, they have also worsened the gap between the rich and the poor. ADB contends that while developing Asia should continue to invest in physical infrastructure and market liberalization, governments and donors should also boost spending on programs and infrastructure that directly benefit the poor. Education and health care, in particular, should be prioritized. Policy simulations from the ADB report show that permanently increasing government spending on education by 1 percentage point of GDP can lower its Gini coefficient by 1.1 percentage points within a decade, while doing the same for health care yields an improvement of 0.3 percentage point. The Gini coefficient is the most common way to measure inequality. Ramping up investments in education and health also has a positive effect on growth. In a recently published economic update, the World Bank notes that growth from 2014 to 2016 in countries such as Myanmar and the Philippines — two of Southeast Asia’s emerging economies — depends on increases in education and health care spending, among other factors. The international institutions warn that merely increasing public spending is not enough. Rather, government expenditure on education and health care should prioritize inclusion by channeling resources toward basic education and rural health clinics, for example. The ADB report points out that in Asia, government spending on social protection does not reduce inequality as it does in the rest of the world. Welfare programs, for instance, tend to benefit urban residents, who generally enjoy better living standards than the rural population. Unemployment benefits also typically exclude those who engage in informal jobs. Join the Devex community and gain access to more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.