On Inclusive Growth in Asia

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The release of two highly publicized reports–Planning Commission of India's 11th Plan Document on Inclusive Growth and World Development Report 2006, in 2006 will have a major impact on the development debate in Asia over the next two decades.

India, which has had poverty reduction as the central goal of policy over the last 50 years, has recently switched to a new development strategy focusing on two basic goals: raising economic growth and making growth more inclusive (Planning Commission of India 2006). The central focus of the 2006 World Development Report (World Bank 2006) is the pursuit of equality of opportunity while avoiding extreme deprivation. Both reports emphasize the paramount importance of inclusive growth, i.e., creating economic opportunities through sustainable growth and making the opportunities available to all including the poor.

The pace of poverty reduction depends not only on the rate of economic growth but also how the benefits of this growth are shared, i.e., how the distribution of households' per capita income or consumption expenditure evolves. The US$ 1-a-day poverty line established by the World Bank in 1990 represents the median poverty lines of the 10 countries with the lowest poverty lines at that time. It focuses on extreme deprivation and represents a very conservative measure of poverty. As income inequality has increased over time, Asia's impressive achievement in poverty reduction has been driven by rapid growth. Every 1% of growth has been associated with an almost 2% decline in poverty incidence on average. Across regions, the income poverty target of the Millennium Development Goals had been met by 2005 for most Asian countries but not in South Asia. The decline in the number of the poor from 945 million in 1990 to 604 million in 2005 is largely attributable to rapid growth in the People's Republic of China (PRC) and Viet Nam. In South Asia, with the exception of Pakistan and Sri Lanka, the incidence of poverty and its magnitude in 2005 are still very high. With a benchmark growth rate (the average of annual growth rates of GDP per capita between 2002 through 2006) coupled with pro-poor distribution (the bottom 40% of the distribution experiencing consumption growth percentage points higher than mean growth), poverty incidence for developing Asia would fall from 18.0% in 2005 to 2.0% in 2020, with the total number of extreme poor falling from 604 to 78 million.

From 1990 to 2005, the Asian development experience has been characterized by rising income and expenditure inequalities and stubbornly high levels of non-income inequalities. Using the Gini-coefficient, a commonly used measure of inequality, except for those severely hit by the Asian financial crisis (Indonesia, Malaysia, Thailand) and Mongolia, inequality has increased in all countries, with the largest increases occurring in Bangladesh (5.8%), Cambodia (6.3%), PRC (6.5%), Nepal (9.7%) and Sri Lanka (5.8%). Household expenditure surveys indicate that most Asian countries' growth in per capita expenditure of the top quintile far exceeded that of the bottom quintile. The ratio of expenditure growth of the top to the bottom quintile is 2.5 for PRC, 3 for India, 7 for Sri Lanka, and 25 for Bangladesh. Considering that the base year per capita mean expenditure of the bottom quintile was low to begin with compared to the top quintiles, it is clear that absolute differences in mean expenditures across quintile groups are increasing rapidly in most Asian countries.

Persistent and growing inequalities in education and health attainments within countries are also a significant concern for developing Asia, and they exacerbate income inequalities. In many Asian countries, primary-school-age children from households of the poorest quintile are almost three times more likely to be out of school than those from the richest quintile. Good inequalities are associated with efforts that increase as a result of market incentives that foster innovation, entrepreneurship, and hard work. Bad inequalities that are linked to circumstances (e.g., geography, social exclusion, inadequate levels of human capital, and lack of access to credit) prevent people from moving to high-productivity activities. Inclusive growth focuses on expanding opportunities for all while targeting social protection interventions at the chronically poor.

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