Wednesday, May 11, 2011

Talking Inequality

Alan Wheatley, Reuter’s China Economics Editor, says more attention should be paid to inequality (excerpts, H/T The Star):

Mind the gap: Asian income gulf shows economic model's flaws
By Alan Wheatley, Global Economics Correspondent

...policy makers are drawing increasing attention to another shortcoming of Asia's export-oriented growth model: inequality.

Disquiet over a widening gap between the haves and the have-nots was a factor in Singapore's election on Saturday, which resulted in unprecedented gains for the opposition.

And the urban-rural fault line running through Thai politics is in good part a rich-poor divide...

...Inequality, up to a point, is a spur to efficiency. But excessive inequality holds people back and stifles consumption. No one can be expected to spend freely if they have precarious, poorly paid jobs and scant social protection...

...China is the best-known illustration of the economic and income imbalances spawned by such a model. Living standards on the seaboard, where export industries are concentrated, are many times higher than in the interior…

…The Korean economy recovered strongly from the 2008 global financial crisis thanks to a largely undervalued won, huge fiscal stimulus and lower interest rates.

The ensuing increase in inflation and domestic debt overhang penalized wage earners, while corporate profits rose as a share of national income.

The resulting widening in income inequality was one reason why the ruling Grand National Party fared poorly in by-elections held on April 27, Kwon wrote in a report...

...Other governments across Asia are also reacting. China is ramping up health and welfare spending, while Hong Kong has just introduced a minimum wage. The Philippines is experimenting with a conditional cash transfer program to help the poorest.

Yu at the World Bank said the 2008 crisis had brought home the need for a degree of social protection in a region where the umbrella of the extended family has largely substituted for public welfare...

...Of course, it will take more than a social safety net to temper inequality. As technological progress puts an ever-growing premium on skills, poorly educated workers are falling behind.

Here, the task for governments was to ensure a more level playing field by investing in skills development, Yu said, adding that Singapore, Australia and South Korea were showing the way.

In the grander scheme of things, nurturing a more equal, better-educated society will be critical if Asia is to avoid falling into the middle-income trap…

As in many topics in economics, everything’s relative. High income and wealth inequality is not a social problem per se, but rather it’s low income relative to the cost of living that matters. If a state has everyone poor, or everyone relatively well-off, inequality shouldn’t matter. In  other words, as long as everyone can have a satisfactory share of the cake, its not important if one or two have “too much” and the others “not enough”.

It’s that last point regarding skills development that I think is important. It’s not necessarily a good solution to recreate a Western-style welfare state, but rather ensuring equal opportunities to succeed that matters.

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