Offsetting inequality

Despite not being the poorest region in the world, South Asia has some of the worst human development outcomes, with millions lacking access to services like clean water, electricity, vaccinations and schooling. For centuries, upward mobility has often depended on aspects such as gender, location, or caste. But a recent World Bank report has found that substantial upward mobility in the biggest countries in the region is now being driven by jobs and migration, even among socially disadvantaged groups.

The paper, titled "Addressing Inequality in South Asia," focuses on the extent, nature, and drivers of inequality in this region which includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. It credits this change largely to an abundance of non-farm jobs available in the region's ever-expanding urban areas.

However, Martin Rama, World Bank Chief Economist for South Asia and one of the authors of the report, says in a DW interview that unless governments can raise more tax by broadening the base and spurring private sector development, South Asia will not end poverty and boost shared prosperity.

DW: Several South Asian countries have experience rapid GDP growth rates over the past years. Has this translated into less inequality or has the gap between the rich and the poor widened?

Martin Rama: Rapid growth has affected inequality in South Asia differently depending on the dimensions – and even the indicators – considered. One of the findings of the report is that single metrics fail to capture the complex nature of inequality in the region.

Take for instance the Gini Index – a measure of inequality in income or expenditure per capita that varies from zero in egalitarian societies to 100 when there is destitution for everybody but one person. Based on that metric, South Asian countries have low and relatively stable inequality. But the assessment is different when other key development outcomes, such as education and health, are considered. Inequality in outcomes such as good nutrition is stark in the region.

Some of these inequalities have receded over time. For instance, the coverage of primary education has become almost universal in the region and there is solid progress in secondary education as well. Inequalities in education are increasingly related to the quality of learning, and to access to education in the case of teenage girls.

It is the opposite in health, where the gap in outcomes between the better-off and the worse-off is widening. As for monetary indicators, the metric emphasized in the report is the Mean Log Deviation, which can be interpreted as the distance in income or expenditure between a person randomly chosen and the average person. Based on this metric, inequality is gradually increasing in most of the region, but decreasing in the richest (and smallest) countries in it.

Why do most countries in the region perform poorly on the Human Opportunity Index, which ranks access to services like clean water, electricity, vaccinations and schooling?

The Human Opportunity Index (HOI) can be interpreted as a measure of aggregate access to basic services adjusted for the inequality in access across key groups. A high HOI means lower inequality. Aggregate access can be reliably measured in comparable ways across countries; for instance, we have statistics on the share of children who get their full set of vaccines.

But inequality in access across groups needs to be interpreted with caution because the relevant groups are different across countries, and not all studies account for the same groups. The idea is to capture inherited disadvantages, also called circumstances: characteristics that define a person and cannot be changed by that person. In South Asia's case, the report focuses on gender, rural or urban place of birth, parents' education and – depending on the county – caste or religion, as the key determinants of opportunities in childhood.

For key health outcomes as well as for sanitation the HOI is low in most of the region – except in Maldives and Sri Lanka. It is also low for secondary school completion – except in Bhutan. Low levels of aggregate access to basic services are partly behind these mixed outcomes.

Indeed, countries in the region spend considerably less in health and education than other countries at similar development levels. But inequality in relation to inherited circumstances matters as well. Children born in rural areas have a clear disadvantage in access to sanitation; those whose mothers have limited education face a disadvantage in access to health; girls are disadvantaged in access to secondary education.

Based on your report, what are the main factors driving inequality in South Asia?

The report adopts a lifelong approach to inequality, considering not just the dispersion in people's incomes and other key outcomes at a specific point in time, but also the ways in which people can advance through their own efforts, or be knocked down by adverse shocks.

This entails looking at three key drivers of inequality: opportunities in childhood, mobility in adult life, and support throughout. Opportunities relates to health and education; mobility is shaped by jobs and by migration – internal and external, temporary or permanent – and support is structured through transfers and social protection programs.

The report tries to assess how South Asian countries perform on each of these three counts. Not surprisingly, the region fares poorly on opportunity, especially in relation to health. But it does unexpectedly well on mobility. Despite high informality and messy urbanization, jobs and cities are helping offset the effect of disadvantages inherited at birth.

Mobility is also increasing over time, and benefitting people from lower castes. The verdict is more mixed on support. The region has some remarkable social protection programs, but it also spends part of its meager resources on subsidies which are regressive and prone to leakage.

Several countries such as Indian and Bangladesh have launched vast subsidy programs to address this issue. Are social programs like these effective and efficient?

Subsidies and social protection programs are not effective or ineffective in general. It all very much depends on their objectives and design. The region has been extremely innovative in this respect. The Secondary School Stipend Program of Bangladesh is the global precursor of much-praised conditional cash transfer programs.

The Rural Employment Guarantee Program of India is operating as an effective minimum wage for rural areas, and has helped farmers cope with adverse shocks such as droughts. The Benazir Income Support Program of Pakistan is in many ways a model for social assistance in a large scale. These programs can all be strengthened in different ways, but they are very good platforms to improve opportunity, or to help people cope with shocks.

On the other hand, subsidies to fuel or electricity are often regressive. The large share of the population that lacks connections to the electricity grid is excluded from the benefit, and many in this group are poor. Similarly, many among the poor commute by foot or by bicycle, implying that fuel subsidies benefit the middle class and the better off to a much larger extent.

Subsidies for food are less clear-cut. Food security is critically important for the poor but leakages and waste can be substantial in food distribution programs. Better targeted support – either explicit or through the quality of food resulting in a self-selection of beneficiaries – is needed. And there is agreement that cash transfers are preferable to transfers in kind. But some countries still lack the infrastructure to provide cash transfers on a massive scale.

What are the side-effects of such programs for the region's economies?

Fiscal space is limited in most of South Asia. The ratio of tax revenue to GDP is lower than in other countries at similar development levels. In some countries in the region, the ratio is among the lowest in the world. Meanwhile, infrastructure development needs are enormous. That means that the amount of public resources left to support access to health and education, or to provide adequate support to households, is very limited.

In this context, spending dramatically scarce public resources in regressive or leaky programs amounts to a big social waste. But of course, there are political economy forces behind both the low tax revenue and the high spending in regressive transfers, so that addressing these problems is not easy.

What could be more effective tools to reducing inequality?

Better designed social protection mechanisms and higher spending on education and health are obvious ways to strengthening outcomes on both the opportunity and the support fronts. But one of the contributions of the report is to highlight the importance of jobs and cities as drivers of mobility. A majority of the South Asian population is already adult, and a large fraction of them will be moving out of farming and into cities over the next couple of decades.

These are people who are unlikely to go back to school and whose malnutrition in childhood cannot be easily undone. For them, the best chances to progress in life and provide better opportunities to their children are through jobs providing growing incomes and building up their skills.

Which kinds of jobs they will find in cities will determine whether South Asia can build a solid middle class. And the middle class is the trademark of inclusive societies. Wage employment – formal or informal – offers the best chances to durably lift people out of vulnerability. But with a few exceptions, wage employment has been slow to develop in South Asia.

A strong investment climate, vibrant cities and integration into global value chains, are needed for South Asia to build on its already remarkable mobility story. Basic services and social protection programs are thus part of the story, but they are not the whole story. Those who care about inequality must pay attention to jobs and cities.

Martin Rama is the World Bank Chief Economist for South Asia.

The interview was conducted by Gabriel Domínguez.