Inequality in Asia

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Post-Brexit, the theme of inequality is likely to gain ground in political and policy debates. The connection: perceived inequalities arising out of globalization, including class, sectoral and spatial ones. The increasing openness of the North Korean economy and the marketization process is almost certainly driving increased inequality in North Korea, and we have focused on the phenomenon in South Korea as well (here and here).

The most recent issue of Global Asia—my favorite policy journal on the region—has a symposium on inequality in Northeast Asia, with contributions on Japan, Korea and China and a wrap-up by Cyn-Young Park on growth strategies for inclusion.

In my contribution, I sketch out how Asia might be situated in the recent debates raised by the important new books by Piketty and Milanovic. At the core of Piketty’s work is the simple observation that the rate of return on capital is likely to grow more rapidly than average incomes, implying an ineluctable tendency toward greater concentration of both income and wealth. But in fact, his account is not only economic; it is deeply historical, showing that the leveling of incomes in the advanced industrial states was a function of World Wars and Great Depression, which destroyed the wealth of ruling classes, and the postwar growth of the welfare state raised incomes at the bottom.

Given Asia’s heterogeneity, it is hard to know whether we can construct an equally plausible historical account of the new inequality in Asia. War and its aftermath certainly played a role in leveling incomes in Northeast Asia, reducing the concentration of income by breaking up concentrations of industrial power and land reforms. The impact of globalization for these countries was also positive. As economic theory would predict, export-oriented growth strategies in labor-abundant economies proved equalizing, as workers were rapidly absorbed into manufacturing and real wages rose.

For the more advanced industrial states in the region—Japan, Korea and Taiwan—the forces that are operating to generate inequality are quite similar to those in the other advanced industrial states, with globalization, technology and the shift of employment into services all playing central roles. Taiwan shows the dynamic perhaps most obviously, but quite similar forces are at work in Korea too: increasing integration with the mainland has benefitted capital, as cross-Strait investment has exploded. The less-educated and skilled, by contrast, face greater exposure to imports from China and diminishing life chances. The transition to a service economy also begets new inequalities, as professionals absorbed into higher skilled segments such as finance, law and higher education fare well while those consigned to more traditional service jobs—in retail and health care for example—do more poorly.

For states undergoing social revolutions—most notably China and Vietnam—war and fundamental social upheaval also had leveling effects, but through quite different political mechanisms. While opening and reform had hugely positive effects on incomes they ended up having largely detrimental consequences for equality, as will undoubtedly be the case in North Korea. Those regions most linked to the world economy grew fastest and the introduction of market forces necessarily generated new inequalities as well.      

The Southeast Asian cases—gaining independence from European colonial powers—constitute a third cluster of cases. They show a more heterogeneous long-historical path in which the effects of war were mediated quite strongly by the nature of new nationalist leaderships. In Malaysia, a government committed to redistribution—along ethnic lines—managed to curb tendencies toward increasing inequality although at the expense of the Chinese community. In the Philippines, by contrast, the break with the old oligarchic order was not great and inequality remains high.        

The Role of Policy

Increasing availability of data for the advanced industrial states that distinguishes between market-income and post-tax and transfer income shows clearly that the evolution of the European welfare state had a dramatic effect on muting income inequalities.

At least for some of the advanced industrial states, the positive effects of government intervention may have diminished as a result of the swing to the right. But government intervention still matters.

Asia has had its own debate about social policy, to which I have contributed in a 2008 book with Robert Kaufman. Newly industrializing countries such as Korea, Taiwan, and Hong Kong pioneered a distinctive “productivist” welfare state in which entitlements in the form of pensions, social transfers and health insurance were minimal but investment in education was robust. Singapore was a partial exception to this pattern because of its inheritance of a Central Provident Fund and an aggressive housing policy, but in other ways it fit the mold as well. This minimalist welfare state had its political foundation in authoritarian developmental states that were closely allied with private sectors seeking to minimize taxes and maximize discretion on the shop floor. In countries such as Thailand and the Philippines, somewhat different political forces were at work, but welfare provision also lagged under authoritarian rule.

As Bob Kaufman and I show, there is strong evidence that democracy mattered in reversing these patterns. In Korea, there was a clear connection between the transition to democracy, electoral competition and the expansion of pension and health insurance. The key issue going is whether governments are interested and capable of acting in ways that offset the adverse forces that are operating in the form of globalization, technological change and the shift toward service economies. Korea suggests the challenges. Despite an expansion of the formal safety net, the country liberalized labor markets in the aftermath of the financial crisis of 1997-98. While this was seen as a way of reducing the rents accruing to a labor aristocracy working in the largest chaebol groups, the policy did not work out as intended. Some workers managed to protect themselves, while labor shedding and the informalization of labor markets resulted in downward mobility and increased insecurity for others. Yet Korea still has among the lowest—if not the lowest—social spending of all of the OECD countries, despite the fact that it faces daunting demographic challenges of an aging population looking forward.

The Political Dimension

Politics clearly plays a very important role in these processes, and both as cause and effect. Even among the new democracies of the region, it has long been noted that electoral systems in Asia tend to mute left-right or ethnic cleavages, generating catch-all centrist parties—many vulnerable to elite capture—and weakening the space for social democratic alternatives. Unions are also relatively weak, reducing a second source of pressure for more ample social provision; South Korean unionization approaches American OECD lows at around 10% of the workforce. Weak unions have also contributed to labor market dualism and informality, a key source of inequality in both developed and developing Asia.

In authoritarian regimes, governments may choose to be responsive to social demands for their own survival motives but in principle such regimes are less accountable and more likely to be corrupt, both factors that should—ceteris paribus—serve to increase inequality. The concern with corruption on the part of the Chinese Communist Party demonstrates these dynamics as corruption has been a source of increasing income concentration and even extreme accumulation of wealth, and casts a shadow over the party’s once-egalitarian brand.

The larger political challenge is whether inequality has an adverse effect on democracy itself. In new work with Robert Kaufman, I show that these fears are exaggerated when looking across all transitions during the so-called Third Wave of democratization from the mid-1970’s to the present; there does not appear to be any systematic relationship between inequality and regime change one way or the other. But this does not rule out cases in which these dynamics are quite clearly at work, most notably in Thailand since 2006.

Finally, even if we cannot find systematic evidence that high or rising inequality threatens democracy outright, we can see in debates in the US and Europe a growing concern about the effects of inequality on the quality of democratic rule. Money can pervert the functioning of democratic regimes in myriad ways. In a number of new Asian democracies, vote buying and clientelism are facilitated by small middle classes and large pools of poor voters. The concentration of income also increases opportunities for elites to manipulate politics through campaign contributions, direct access to political office, control of cultural and communications institutions, and bribery. There can be little question that the adverse effects of inequality should not be seen as limited to the economic sphere, as they extend into the political arena as well. 

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