Distinguished participants, dear colleagues
I would like to express my appreciation to the National University of Singapore for inviting me to the distinguished Nobel Prize Dialogue and I am pleased to share my perspectives on economic growth, wellbeing and inequality.
Let me start the conversation with a topic on the linkage between economic growth and wellbeing.
Economic growth, when inclusive, is fundamental for reducing poverty.
The fast economic growth in Asia and the Pacific helped to lift more than 1.1 billion people out of extreme poverty and bring down the overall poverty incidence to less than one tenth of its 1990 level.
Moreover, economic growth is not just associated with reducing poverty but also other broader measures of wellbeing.
Economic growth increases a government’s revenue including tax revenue, making it possible to spend more on key public services such as health, education and social protection. On the other hand, improved human capital also increases productivity and accelerates economic growth.
However, the region’s economic success has not been enjoyed equally by all. It has not contributed to the creation of decent employment for all and has even deepened informal and vulnerable employment in many countries. Income inequality actually increased in the Asia-Pacific region between the 1990s and 2010s when it was generally decreasing in other parts of the world.
Rising inequality in income and wealth has led to scarring effects, especially during the pandemic, which brings the issue of inequality to the fore. The poor and vulnerable groups, including youth and women, were disproportionately affected by the COVID-19 pandemic.
When we talk about the workforce, we also need to look at the impact of youth unemployment.
Fewer job prospects, lower pay and fewer opportunities to develop skills have a major effect on the future productivity and earning potential of youth, resulting in poverty and income inequality.
Furthermore, not only could youth unemployment result in missed opportunities in terms of economic growth and development, persistently high levels of youth unemployment may also lead to social unrest and political instability.
Therefore, active labour market policies targeting youth, such as trainings, job search and facilitating reallocation of workers, would be vital to realizing the full potential of youth in labour markets.
The question is how we can reduce inequality?
High levels of inequality constrain economic growth, generate political and socioeconomic instability and lower trust and solidarity in society.
While COVID-19 has created a generational opportunity to build a more equitable and sustainable world, global megatrends such as climate change, digitalization and urbanization may widen inequalities in the absence of targeted policy action.
To reduce inequality, I would suggest a three-priorities of the “Building Forward Fairer” policy agenda.
The first priority would be on: Structural policy: addressing the root cause of inequality
Governments should address the root cause of inequality through structural policy.
Our analysis shows that the rise in inequality in Asian and Pacific countries was primarily driven by changes in pre-distribution. Therefore, government strategy for inclusive development should steer towards a job-rich path, support job-friendly technological innovation and empower labour in the job market through decent employment.
Second priority is: Central banking: through a new lens
I urge central banking to move beyond its traditional role and share the onus of promoting economic inclusiveness, not least because high and persistent levels of inequality can reduce monetary policy effectiveness.
Right now, only half of central banks in the region have taken up inclusive finance concerns. This is a missed opportunity. While ensuring inflation stability is the core mandate of central banks, they should also consider the impact of monetary policy on inequality.
Additionally, central banks can support inclusive development through official reserve management, currency issuance and financial sector regulation.
Third priority would be on. Fiscal policy: Tax Fair and Spend Smart
Last but not least, governments should improve the effectiveness of their fiscal policy, which has been traditionally used to reduce inequality.
Developing Asian and Pacific countries must not cut spending on health care, education and social protection. These three areas have the largest impact for inequality reduction and long-term growth but are often the first to get cut in times of crises, as we have seen in the past.
Revenues need to be increased as tax collection remains low in the region. It is time to “tax fair.” This means ensuring that everyone pay their fair share, broadening the tax base and shifting the tax burden from the lowest income households by making corporate and personal tax more progressive.
Moreover, governments should “spend smart” to reduce inefficiencies in expenditures. For instance, while spending on education may reduce inequality, its efficiency in reducing inequality could be much higher when invested at the primary and secondary levels rather than the tertiary level.
By addressing inequality and reducing poverty, we can definitely improve wellbeing of our societies and advance overall economic growth.
We stand ready to support the efforts, and I wish all of you a fruitful dialogue.
Thank you very much.