Confronting East Asia's Rising Income Inequality

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Confronting East Asia's Rising Income Inequality
Recent decades have reversed the region's former 'growth with Equity'

HONOLULU (Oct. 5, 2011) -- Over the last half-century, East Asia’s dramatic economic growth has fundamentally altered global economic and political landscapes, as the region’s primary economies grew from among the poorest to among the richest in the world.

Equally remarkable is that for the first several decades of this upsurge, economists characterized it as “growth with equity,” marked by relatively equitable distribution of increased income throughout populations. But more recently, a new era of “growth with inequality” has been ushered in, writes sociologist Wang Feng in a new East-West Center policy brief. This not only leads to more divided societies, Wang asserts, it threatens democratic institutions and suffocates economic growth.

In his AsiaPacific Issues brief titled “The End of ‘Growth with Equity’? Economic Growth and Income Inequality in East Asia,” Wang – a senior fellow at the Brookings Institution and professor of sociology at UC Irvine – writes that post-war economic growth in Japan, South Korea and Taiwan not only increased their total GDP; it also benefitted much of the population through rising income levels and standards of living.

“This pattern helped these economies avoid social unrest and develop or consolidate democratic governments,” he writes. Furthermore, East Asia’s experience contradicted the popular belief that rising income inequality was inevitable during the initial stages of sustained economic growth.

While the causes behind this are complex, Wang writes, there are several notable explanations. “As East Asia transformed from agricultural- to industrial-based economies, collectivist cultural traditions that focused on sharing among family members in the agrarian context were, to some extent, carried over into the new urban industrial society,” he writes. “Companies in Japan, South Korea, and Taiwan often provided such benefits as childcare, company housing, guaranteed life-long employment, health care and subsidized meals in addition to wages. Moreover, wages and bonuses were often set with an employee’s age and family composition in mind.”

Export-oriented production, a common feature of East Asia’s economic growth, created continued demand for a large number of factory workers, and the structure of large-scale manufacturing allowed more equitable wages for most employees, according to Wang. Also, urban-bound migrant workers often sent a portion of their earnings home to the countryside, helping to reduce income inequalities between urban and rural segments of society.

“Societies in this region notably expanded public education and promoted public health,” he writes. “The youth of the region participated in the world’s greatest improvement in life expectancy and educational attainment. This contributed to a broad-based increase in labor productivity and income enhancement.”

Even in China, which up to the end of the 1970s was under a socialist planned economy system, urban work organizations provided benefits and services from cradle to grave to all employees, Wang points out.

However, by the mid-1980s, these trends began to reverse. Sustained increases in income inequality began to emerge in almost every part of the region, and within a couple of decades inequality rates had mostly surpassed what they had been a half-century earlier.

The most significant case, he writes, is in China, which since its free-market transformation has enjoyed the world’s most spectacular economic growth, but now also has one of the fastest-growing rates of income inequality.

East Asia’s shift away from income equity has reflected trends occurring worldwide. In the United States, for example, the real income of 60 percent of all families has remained essentially constant, while the income of the wealthiest 5 percent has risen dramatically. A comprehensive study of 73 countries that account for 80 percent of the world’s total population found that inequality either increased or remained constant in all but 9 countries for the period from 1950 to 1995.

What caused such a radical change? “The global rise in income inequality occurred during a period of worldwide capitalist expansion fueled by unconstrained free-market ideology and the rise in power of multinational corporations that have challenged and undermined state and local authority,” Wang writes. “Over the last several decades, the world’s more advanced economies moved from [being] industrial- to post-industrial-based. Large-scale manufacturing industries, frequently associated with more equitable wages, were replaced by the expansion of service sectors where pay is much more heterogeneous and unequal.”

In East Asia’s case, Wang says, the global forces driving rising inequality have been augmented by a lessening of the cultural and structural values that had helped promote the earlier period of growth with equity.

“Declining fertility and mortality rates marked a rapid demographic transition in this region,” he writes. “Families and kin networks, previously the main sources transmitting and nurturing the values of collectivism, became older, smaller, and weaker. Western individualistic values, introduced and disseminated through the arrival of modern media ranging from TV to the Internet, greatly challenged and undermined traditional collectivist values.”

East Asia’s reversal toward growing inequality has become an increasingly pressing social and political concern in these societies, Wang writes, prompting inquiry into what lessons, if any, can be drawn from the region’s earlier model of growth with equity.

The first lesson, he writes, is that economic growth alone cannot be counted on to promote equity: “For a limited period of time economic growth did indeed produce a spectacular reduction of poverty in East Asian societies. But alleviating poverty and reducing inequality are not necessarily the same thing. In many societies, including those in East Asia, poverty reduction and rising income inequality have proceeded hand in hand.”

According to Wang, the East Asian experience also demonstrates that the record of income redistribution by governments through such means as taxation policies and social-welfare programs is mixed, at best. “State redistribution may have contributed to the growth with equity model of the 1960s and 1970s and into the mid-1980s but, in more recent decades, it has been less successful in countering the trend of rising inequality,” he writes.

The achievement of equitable growth requires collective determination and effort, Wang writes, including national policies addressing the causes of rising inequality, such as labor market regulations prohibiting discrimination and education and health policies that target the less privileged.

Confronting rising inequality is now a major national agenda in almost every East Asian society, but to do so they must institutionalize economic models that are inclusive and provide patterns of growth benefiting the broadest segments of their societies, he warns.

“Once East Asia was the envy of the world by providing an example of growth with equity,” Wang concludes. “It has the promise to again be that example.”

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