Asia’s past successes in reducing poverty are under threat. More than 80 per cent of Asians live in countries where inequality is widening. The same forces that drove the region’s rapid growth for the past 30 years – globalisation, new technology and market reform – are widening the gap between rich and poor.
As the region’s middle class expands, more than 1.6bn Asians continue to live on less than $2 a day. These people lead highly vulnerable lives. It is time for Asian governments to raise the bar on growth; to commit to a future in which all their citizens have access to the basic tools needed to participate in a modern economy and to benefit from the region’s huge growth potential.
Fiscal policy can play an important role in making this happen. Three actions will help governments lead their countries toward the path of growth and broadly shared benefits.
First, governments should invest more in improving access to education and healthcare, both of which improve welfare. Moreover, better educated, healthier people have a greater chance of finding and keeping work, and of earning higher incomes. Yet access to such services is deeply unequal in many Asian countries. This is a major source of income inequality.
Public spending on education averages 5.3 per cent of output in the advanced economies and 5.5 per cent in Latin America, but only 2.9 per cent in Asia. The difference is even starker when it comes to public spending on health. Permanently raising public spending on education by 1 percentage point of output could lower the Gini coefficient – a common measure of inequality – by 1.1 percentage points within a decade; doing the same for healthcare buys a 0.3 percentage point gain.
Second, governments should adjust tax policy to raise more revenue and fund increases in public spending. Asia’s revenue base remains small by global standards. In the past decade, the ratio of tax revenue to gross domestic product averaged
18 per cent in developing Asia, well below the global average of 29 per cent. And in the decades ahead, many countries will face rising costs associated with ageing societies and mounting environmental pressures.
A wide range of revenue sources need to be explored. One option is to increase personal income tax – which is low in developing Asia, at 1.7 per cent of GDP in 2010, compared to 7.6 per cent in advanced countries. Another is value added tax. Corrective taxes – such as those levied on cigarettes, alcohol and pollution – are yet another possibility. Taxes on property, capital gains and inheritance are naturally progressive, claiming a higher proportion of wealth and income from the rich than they do from the poor. These, too, should be explored.
Experience in the Philippines, which raised taxes on cigarettes and alcohol in 2013, shows how powerful such reforms can be. Revenues increased by about $1.4bn. What is more, 85 per cent of the new revenues are allocated to health infrastructure and services. This enabled health insurance to be extended to an additional 9.5m poorer families.
Governments should also reform the large energy subsidies that are common in Asia, which can amount to as much as 8 per cent of GDP. These costly programmes do little to narrow income gaps: the rich tend to use the most energy. Targeted financial transfer programmes do much more to level the field.
Third, policy makers should adopt equality goals when they plan their budgets. Addressing inequality will take time; if progress is measured, it has a better chance of being made. Governments need to look beyond annual budget cycles and balance competing demands on public resources. A framework that incorporates explicit equity objectives into fiscal policy – such as targets on access to education and healthcare – would be a powerful device of commitment. Politicians should make detailed plans to increase the share of public spending benefiting target households. Overall fiscal sustainability cannot be sacrificed.
Fiscal policy should play a bigger role in promoting inclusive growth in Asia. This is a long-term challenge. Policy makers must plan and act now to create the future Asia deserves.
Juzhong Zhuang is deputy chief economist at the Asian Development Bank
Fonte: FT
