Even as Asia and the Pacific continues to be the fastest growing region in the world, economic growth has been slowing since the 2008 global financial crisis. Add the COVID-19 pandemic to the mix, and it becomes obvious why the issue of inequality has been put in the spotlight of macroeconomic policies. The Asia-Pacific region is home to 1.3 billion informal workers, comprising 65 per cent of the world’s informally employed, most of whom do not have access to any form of social security. This leaves the region extremely exposed to the social impacts from economic downturns and shocks. ESCAP estimates suggest that the pandemic has pushed an additional 89 million people back into extreme poverty, further adding to the existing vulnerability. Thus, building resilience to these shocks is now not just an economic imperative but also a political one.
To probe further on how new economic thinking can help solve the age-old problem of inequality, ESCAP organized an expert group meeting (EGM), Building Forward Fairer –Economic Policies for an Inclusive Recovery and Development, from 1 to 3 December. The meeting brought together over 30 policymakers, experts and leading academics from around the world. The outcome of the discussions will inform the Economic and Social Survey of Asia and the Pacific 2022 focused on building resilient and more inclusive economies, to be published in March 2022.
As the experts discussed the multifaceted nature of inequality and its policy implications, there was broad consensus on a few issues:
- The COVID-19 pandemic will leave long term scars. Research shows that inequality experienced today has long-term consequences for tomorrow, as it directly impacts future income prospects, learning and productivity. The pandemic has exacerbated the existing digital divide and disproportionately affected those already struggling. Because it deepens the skills gap between income groups, the learning loss resulting from lockdowns further increases the risk of long-term human capital loss and economic opportunity. Hence, more attention is needed on redistribution and policies that promote inclusiveness.
- Shrinking fiscal space calls for improved efficiency and targeted spending. While fiscal policies play a central role in decreasing inequality, the diminishing fiscal space - due to an increase in public spending and government debt during the pandemic - may force countries to move towards austerity. Discussions at the EGM reconfirmed that fiscal consolidation increases inequality, a phenomenon that would be hard to reverse later. Hence, governments will have to be more efficient and targeted in allocating their limited resources for greater impact.
- The role of monetary and financial policies can be stepped up to support inclusive development. In fact, many central banks in Asia and the Pacific already foster inclusive finance through enhanced financial access, literacy and consumer protection. Of course, they can do more. As changes in monetary policy affect various groups differently, more analyses and communications of such distributional impacts are important. Existing monetary policy tools can also be tailored to support green development, which will disproportionally benefit poor and vulnerable populations. On the financial side, the potential of innovative instruments to leverage private finance for social development, such as sustainability-linked debts and social/development impact bonds, remains largely untapped.
- Structural policies should flatten the growth-equity tradeoff as new technologies change the development paradigm. Structural transformation and premature deindustrialization have contributed to rising and persistent inequality in the region’s largest developing countries in recent years. Even as the COVID-19 pandemic has an asymmetric impact on informal workers, labour-intensive manufacturing, and face-to-face services, it may accelerate industrial restructuring with paradigm shifts driven by automation, digitalization and artificial intelligence. This will likely amplify skill divides and job polarization. EGM participants agreed that governments need to both learn from the past and prepare for the future to make the structural transformation inclusive.
As global forces are compelling us to rethink our development paradigm, inclusion has to be at the center because its absence hurts everyone’s long-term prospects. We also need to think more holistically as economic inequality is shaped by many factors and can be affected by both redistributive and pre-distribution policies. Such an approach calls for a whole-of-government approach, keeping people at the center of policymaking. As Minouche Shafik, the keynote speaker at the EGM put it – “we need to think of a new social contract which is less about me and more about we.”
Stay tuned for the 2022 Economic and Social Survey of Asia and the Pacific, which will be launched in March 2022.
