Whilst media attention focused on Syria during the G20 summit in St. Petersburg, the Leaders’ Declaration issued at the end of the meeting last Monday will hopefully re-center global attention back on key questions of growth and development. As in previous years, much of the communiqué focuses on financial reform and regulation, and on creating an international financial architecture that promotes stable, inclusive growth.
The links between financial and fiscal policy, and social development, have rarely been so explicit as in the recent financial crisis. This is true not only for the U.S., but also for much of East and Southeast Asia, which capped an extended period of fast economic growth only to realize that inequality and social exclusion have increased as a result. A recent paper from the IMF’s research department, “The Elusive Quest for Inclusive Growth: Growth, Poverty, and Inequality,” sheds light on why East Asian growth over the past two decades largely fails the test of inclusivity. The research uses both the gini coefficient as well as other indicators such as educational attainment and access to public services, to measure inequality.
The analysis shows that inequality has increased since 1990 in every Asian economy except for Thailand, Nepal, Cambodia, Malaysia and Vietnam. The most extreme increases came in China, both urban and rural. Moreover, Asia’s post-1990 results largely reverse the positive trends prior to 1990, when all of its economies except for Hong Kong were able to reduce inequality. In addition, the research shows that Asia’s increasing inequality is exceptional in the developing world, with most of Africa, Middle East, Latin America and the Caribbean making good progress to reduce inequality over the same time period.
Why are Asia’s results so perverse? And what can be done?
The research points to three areas which should be targets for policy adjustments in the near term: fiscal policy, labor markets, financial markets and governance.
- Fiscal policy would target a reduction in indirect taxes which tend to weigh more heavily on the poor, and a more progressive tax system, in addition to deeper pension and social security systems.
- Labor market reforms would increase the rights of workers (e.g. collective bargaining) and end the large disparities between formal and informal sectors which would have the same effect.
- Financial market reforms should improve access to financial services, and transparency and competition in their delivery.
While these recommendations may all make good sense for growth and stability over the long term, implementation in the short term may be contentious as they seek to roll back realities which are perceived to be supportive of growth. Take labor market reform. At one point, it may have been necessary to focus on the creation of sheer quantities of jobs, perhaps before considering the empowerment of workers. What today’s labor protests and inequality data both show is that over the long term, workers must be given their due share of productivity gains and industry expansion. This is exactly what China is accomplishing by raising wages to head off social unrest.
What will help governments and businesses to make these hard choices, i.e. between the urgencies of the short term and sustainability over the long term? The IMF paper names one more factor: good governance. Without saying too much, the paper basically says that corruption and poor governance exacerbate inequalities, and that institutional reform should be a high priority wherever a country sits on the scale of development.
Much of the G20 communiqué emphasizes principles and broad targets rather than specific actions, and this may be appropriate for a leaders’ declaration. However, as ministers consider policies to back up their commitments, they will hopefully understand the long-term social impacts of their measures, even for finance which may seem somewhat removed from social impact. Businesses will also be called upon to register their support or opposition, particularly with regard to labor market reform. They would do well to recognize that what may be good for profit and growth in the short term can be perverse and destabilizing in the long term. These factors will of course ricochet back onto the business environment.
In sum, growth can be seen as a series of trade-offs in the pursuit of development for society as a whole. Let’s hope that leaders remember this when they make their choices.