Taking the Income Gap in Southeast Asia Seriously

Summary

EXECUTIVE SUMMARY

1. • Although Southeast Asia has experienced the fast pace of economic development and exhibited exceptional economic performance, it has increasingly become apparent that the benefits of growth in the region are by and large unevenly distributed.

2. • Southeast Asia, to date, achieves substantial progress in terms of boosting income per capita and, thus, poverty reduction, notwithstanding unending economic uncertainties in the U.S. and euro zone.

3. • However, the buoyant picture has mostly been plagued by remarkable rises in income inequality.

4. • There are at least three main structural drivers of rising inequality in the region. These include economic growth, trade openness and liberalization, and financial market development.

5. • A set of policy options that allow the region to thrive on inclusive growth, include enhancing and equalizing access to education, incorporating inclusion and equity into economic strategies, improving governance and institutional quality, and rebalancing public spending on social protection.

INTRODUCTION

Although the economies in Southeast Asia have exhibited exceptional performance, development between the countries is largely uneven, and the emerging disparities pose critical challenges to inclusive and sustainable growth. There are quite a number of reasons for this which necessitates a new phase of policies and reforms that enhances inclusive growth.

First, disparities necessitate redistributive policies and interventions which fundamentally distort resource allocation and may practically entail inefficiencies in terms of poor administration and corruption. Second, inequality constitutes a root cause of socio-political instability and violence, which have become evident in many parts of Asia. Unrest arising from disparities is therefore detrimental to the growth trajectory of a country. Third, concentration of wealth and economic resources to small groups is eventually translated into inadequate market size and small aggregate demands that undermine the competitiveness of an economy. Finally, inequality entails misallocation of investment because rising inequality necessitates substantial social investment, especially in human capital and institutional infrastructure, ultimately hampering economic growth.