Income inequality could trigger unrest, warns Sachs

Developing Asia must beef up spending on education, health and infrastructure to redress income inequality and stem the risk of social instability, leading global economist Jeffrey Sachs said on Thursday.

Sachs, whose World Bank presidential bid was torpedoed by the US’s successful nomination of health expert Jim Yong Kim, said: “Asia’s mega urbanization over the years has led to the creation of many marginalized urban populations, so good infrastructure investments and a focus on ensuring inclusive growth with education and skills generation are needed.”

Nurturing an environmentally sustainable growth model should accompany the region’s urbanization efforts, he told Emerging Markets in an interview in Manila yesterday.

Income inequality is a key issue for the Manila meeting. ADB president Haruhiko Kuroda is pressing governments to take urgent steps to redress widening wealth disparities.

In an interview with Emerging Markets Kuroda described income inequality as “a really big issue” that had risen significantly in the last couple of decades, particularly in rapidly growing economies like China and India.

Sachs said: “The very drivers of Asia’s economic success - new technology, globalization and market-oriented reforms - have also served to create and increase disparities within and among Asian economies.”

Sachs said the problem of income inequality was not confined to the developing word and policies needed to be calibrated according to the socio-economic context but the state’s role in the economy should not be understated.

“In Africa, the poor are generally rural farmers so a rural-led strategy can help with growth and dealing with income inequality, while in the United States, an education-led policy would be a more effective pro-poor strategy.”

Inequality of incomes also tends to trigger inequality of political power, he said, citing the power of the banking lobby in the US. “Globalization has led to the creation of large pools of private capital that command political influence,” he said.

“But only an efficient division of labour between markets and a properly functioning state capacity will help to address poverty and income inequality issues.”

The share of income going to the richest households has jumped in the past decade in Asia, with around 20% of total income in the region currently flowing to the wealthiest 5%, the Asian Development Outlook 2012 report noted.

Sachs comments come as outgoing World Bank President Robert Zoellick launched a robust defence of the institution’s anti-poverty efforts amid fears Washington’s budget restraints will crimp US financial support for the multilateral lender.

But Sachs said the World Bank needed to provide intellectual leadership, acting “not just as a financier but as an idea generator” with respect to public health policy, agriculture, renewable energy as well as information communications and technology.

He argued the United Nations-led Rio+20 Earth Summit this summer should provide an “important” framework for the Bank to assess the priorities of its anti-poverty programme in the coming years.

In other comments, he said “slowing markets for exports, trade protectionist tendencies and the continuing risks of financial stress caused by deleveraging institutions in the United States and Europe” were the key risks for Asia.