China May Be Biggest Economy, But Not the Best
According to new data from the World Bank, Asia's developing economies appear to be even more powerful than previously thought. As measured by purchasing power parity, China's gross domestic product now seems poised to overtake America's as the world's biggest as soon as this year. India has leapfrogged into third place, while Indonesia rounds out the top 10. Predictably, headlines around the region are crowing about the beginning of the long-awaited Asian Century.
Yet a darker story underlies these giddy new figures. In terms of per capita GDP, India doesn't rank third but 127th. (Indonesia is 107th, and China 99th.) Perhaps more importantly, while growth has mostly thrived over the last 20 years, inequality in Asia has also risen dramatically -- from a reading of 0.33 to 0.46 between 1990 and 2010. Zero means perfect equality; the higher the number, the less egalitarian things are.
Those who lag behind may soon find it harder and harder to catch up. The roughly 1.6 billion people living on less than $2 a day -- a standard measure for global poverty -- are growing more vulnerable, according to the Asian Development Bank. These global poor confront a tsunami of risks from runaway inflation, to the impact of climate change on crops, Federal Reserve tapering, natural disasters, another global financial crisis, you name it.
What gives? While the macroeconomic picture in Asia has evolved in recent decades, barriers to economic mobility at the micro level persist. Thomas Piketty's bestseller "Capital in the Twenty-First Century" has lately drawn much attention to this problem. But in reading the book, I was struck more by its parallels to Joe Studwell's earlier "Asian Godfathers."
I caught up with Studwell in Hong Kong in August 2007, a time of great optimism and, it turns out, hubris, in Asia. It was exactly 10 years after the region's financial crisis, and vibrant growth had returned. GDP rates were booming, equities surging and government debt levels coming under control. But as Studwell predicted during our chat and in his book, the all-too-tight relationships between financial and political elites in Asia virtually ensured that inequality would widen even as GDP expanded. Sadly, he's been proven right.
That web of relationships now concentrates more and more of the region's huge economic gains among the 1 percent. This is the common thread that links Thailand's perpetual state of protest, India's disillusionment with dynastic politics, Malaysia's muddled politics, the Communist Party's fear of social unrest in China and the cynicism with which many Filipinos and Indonesians view pledges to level their nations' playing fields. In South Korea, President Park Geun Hye's promises to rein in the chaebol inspire more eye-rolling than confidence.
The danger is that in Asia, this ossified status quo traps billions far below middle-income levels. Rapid GDP growth has been remarkably successful in lifting hundreds of millions from the $1.25-a-day mark consistent with extreme poverty to $2 or even $3. But getting to $5 or $10 per day, or moderate poverty, is proving quite a reach. Governments aren't doing anywhere near enough to improve social and physical infrastructure, invest in education and health care and attack crony capitalism and corruption.
Widening income gaps are a drag on innovation and productivity. They also give rise to a dangerous brand of populism that emphasizes short-time priorities, including budget-busting subsidies, over long-term prosperity. Unfortunately, all too many Asian leaders remain in denial about the extent to which inequality is a huge blemish on the region's growth story.
Take China, which is often held up as a poverty-killing role model. New data show its rich-poor gulf has surpassed America's and stands as among the widest anywhere. President Xi Jinping could be excused for looking askance at Deng Xiaoping's edict: "Let some people get rich first." In China today, "some people" largely means Communist Party apparatchiks, not ordinary citizens.
Officially, the title of Studwell's book referred to Asian tycoons, who exploit political connections to suffocate competitive forces from Jakarta to Seoul. Piketty goes further, highlighting how these problems have become global ones. Some pundits have pointed to rising GDP numbers in middle-income countries to argue that unfettered markets are actually democratizing the global economy. But Asia's failure to narrow the rich-poor divide shows something is indeed rotten in the world of capitalism that only government action can correct.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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