Rising income inequality across Asia poses a fundamental risk to the region’s growth and stability, leading regional figures have warned.
Although per-capita incomes have increased significantly across emerging Asia over the past decade, rapid economic growth has exacerbated divisions between rich and poor, and between rural and urban populations.
Hiroshi Watanabe, president and CEO of the Japan Bank for International Cooperation (JBIC), warned that, if not addressed, the income maldistribution could bring underlying social tensions to the surface and threaten the region’s stability and development.
“Unfortunately, some Asian countries have very unevenly distributed income,” he told Emerging Markets in an interview.
“This is going to create social instability, especially where the bottom layer of society has a very low level of income, which means they will be heavily affected by the hike in food prices. Income redistribution measures of some kind need to be adopted.”
Watanabe, who is rumoured to be a likely successor to ADB president Haruhiko Kuroda, said income inequality was particularly evident in Asia’s fastest-growing major economies. He called on emerging Asian nations, and China and India in particular, to address income redistribution through progressive tax reforms.
“Emerging countries are too heavily dependent on value-added taxes and they should adopt more progressive income tax,” he said. “That way redistribution can be achieved automatically.”
He added that while China was “coming round to the idea” of making income tax more progressive, that change is much slower in India, and called on both governments to do more. “China and India are too dependent on VAT and corporation tax,” he said.
Watanabe’s concerns over income inequalities were echoed by current ADB President Kuroda, who told Emerging Markets that the growing wealth divide was one of the largest risks facing the region.
“Asian nations have to overcome the widening income gap between rich and poor”, he said. “Almost all developing countries [in the region] have seen a widening income gap.”
The ADB highlighted “rising inequities and disparities” as one of the five “mega risks” to Asian long-term growth outlook in a report entitled Asia 2050: Realizing the Asian Century, published on Wednesday.
The report said it is “imperative to minimize the disparities of incomes and living conditions within countries, otherwise the large and growing disparities will generate rising social dissatisfaction and threaten peace and stability. This in turn would destroy the political support for the extraordinary discipline required to realize the vision of the Asian century.”
Although the report’s headline findings presented a picture of Asian global economic dominance by 2050, projecting that it could account for more than half of global GDP by then, it also highlighted in stark terms the significant short- and long-term risks to this outlook.
“Long-term projections of Asia through 2050 cannot rule out the possibility of a ‘perfect storm’ scenario, whereby the combination of bad macro policies, exuberance combined with lax financial sector supervision, conflicts, natural disasters/climate change risks, demographic and weak governance could lead to a major setback to Asian growth,” it said.