Inclusive Growth Dynamics and Determinants in Emerging Markets*

Shanaka Jay PeirisIMF Resident Representative to the Philippines

ThFederation of ASEAN Economics Association Conference, Manila

* Based on IMF’s Regional Economic Outlook for Asia and Pacific (October 2011), IMF country report 2012 and forthcoming IMF Working Paper by Anand, Mishra and Peiris. The views expressed are those of the authors and do not necessarily reflect those of the IMF.

2

STYLIZED FACTS EMS AND ASIA’S

EXPERIENCE OVER THE LAST TWO

DECADES

3

In the last two decades, Asia has grown rapidly, enabling significant reductions in poverty…

0

2

4

6

8

Developing Asia

NIEs ASEAN-5 Middle East and North

Africa

Sub-Saharan Africa

Latin America and the

Caribbean

Central and Eastern Europe

Source: IMF WEO database.

Emerging Markets: Real GDP Growth (annual percent change, 1990-2010)

Average for all emerging economies

-60 -50 -40 -30 -20 -10 0 10

China (2008, 13.1/29.8)Vietnam (2008, 16.9/43.4)

Nepal (2010. 24.8/57.3)Indonesia (2010, 18.1/46.1)

Bangladesh (2010, 43.3/76.6)Lao PDR (2008, 33.9/66.0)

Cambodia (2008, 22.8/53.3)India (2010, 32.7/68.7)

Thailand (2009, 0.40/4.60)Philippines (2009, 18.4/41.5)

Sri Lanka (2007, 7.00/29.1)Malaysia (2009, 0.00/2.30)

Mongolia (2005, 22.4/49.1)

$2/day

$1.25/day

Sources: World Bank; and IMF staff calculations.1 At 2005 PPP prices. In parentheses, the latest available year and corresponding

poverty headcount ratios at $1.25 and $2 per day, respectively.

Asia: Change in Poverty Headcount, Last Two Decades1

(in percentage points since 1990)

4

However, inequality has increased sharply, contrary to Asia’s history of equitable growth

-10 -8 -6 -4 -2 0 2

Nepal (1976-84, 30.06)

Bangladesh (1973-92, 28.3)

Sri Lanka (1963-90, 30.1)

Thailand (1971-89, 43.8)

Philippines (1971-88, 44.5)

Taiwan, Province of China (1964-85, 29.0)

India (1960-90, 29.7)

Japan (1962-90, 35.0)

Singapore (1973-89, 39.0)

Malaysia (1970-89, 48.4)

Indonesia (1964-87, 32.0)

Korea (1965-88, 33.6)

Hong Kong SAR (1971-86, 42.0)

China (1978-90, 34.6)

Sources: Milanovic (2010); and IMF staff calculations.1 In parentheses, the time period and end-value for the Gini coefficients.

Asia: Change in Gini Index, Pre-19901

(in Gini points)

[-20.2]

5

Inequality has risen more sharply in Asia than elsewhere and is now approaching global highs

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0

Central and Eastern Europe

Latin America and the Caribbean

Middle East and North Africa

Sub-Saharan Africa

ASEAN-5

NIEs

Advanced Asia

South Asia

East Asia

Population-weighted average

Simple Average

Sources: CEIC Data Company Ltd.; World Bank, PovcalNet database; WIDER income inequality database; Milanovic (2010); national authorities and IMF staff calculations.

Emerging Economies: Change in Gini Index1

(in Gini points)

20

25

30

35

40

45

50

55

Advanced Asia South Asia Middle East and North

Africa

NIEs ASEAN-5 Central and Eastern Europe

East Asia Sub-Saharan Africa

Latin America and the

Caribbean

Sources: CEIC Data Company Ltd.; World Bank, PovcalNet database; WIDER income inequality database; Milanovic (2010); national authorities and IMF staff calculations.

Latest Gini Index1

(population-weighted, in Gini points)

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HOW PRO-POOR IS ASIA’S GROWTH?

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Empirical Strategy: Data

• Growth is pro-poor if it reduces poverty (Ravallion and Chen, 2003)

• Data Sources: World Bank Povcal database, household surveys for NIEs, and Penn World tables.

• Sample: Unbalanced panel of 105 developing and emerging economies, covering 1971-2010.

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Empirical Strategy: Model

• Estimate following regression:

P is poverty headcount below the $2 line in country i at time t,

y is real per capita income in country i at time t

GINI is the Gini coefficient in country i at time t, and γ and ρ are country and decade dummies

• Equation in logs, so β and δ are elasticity of poverty reduction

with respect to growth and inequality, respectively.

𝑙𝑛𝑃𝑖,𝑡 = 𝛾𝑖 +𝛽𝑖,𝑑𝑙𝑛𝑦𝑖,𝑡 +𝛿𝑖,𝑡𝑙𝑛𝐺𝐼𝑁𝐼𝑖,𝑡 +𝜌𝑑 +𝜀𝑖,𝑡

9

Growth is generally pro-poor, but relatively less so in most of Asia and Latin America…

-3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0

Indonesia

India

Latin America (excl. Brazil)

Other Asia

Brazil

China

South Asia (excl. India)

Baseline

Figure 3. Income Elasticity of Poverty Reduction1

(impact on poverty headcount of a 1 percent increase in per capita income; in percent)

Sources: World Bank, PovcalNet; Penn World Tables; and staff calculations.1 The elasticity is set to that for baseline countries when null of a significant difference

cannot be rejected.2 Includes Cambodia, Malaysia, Philippines, Thailand and Vietnam.

Less pro-poor

•Growth is generally pro-poor.

•On average for our sample, 1 percent increase in real per capita

income leads to 2 percent decline in poverty headcount.

•However, 1 percent increase in Gini offsets it.

•Relationship varies across regions and economies.

MENA, EE, Central Asia and SSA

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HOW INCLUSIVE IS ASIA’S GROWTH?

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Inclusive growth is both pace and distribution

Cumulative share of population, 0≤ i ≤1

i = 100 (when the entire population is covered)

Income per capita (y)

𝑦ത A

B

A1

•Curve AB is a macro social mobility curve. This is, in fact, a generalized concentration curve when the individuals are arranged in ascending order of their incomes. • Growth will be inclusive if it shifts the social mobility curve upward at all points.•The two social mobility curves with the same average income (Ybar) but different degrees of inclusiveness. Social mobility curve (A1B) is more inclusive than the social mobility curve AB, as the average income of the bottom segment of the society is higher.

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Measure of inclusivenessCalculate an index from the area under the curve as in Ali and Son 2007:

The greater the Ystar the greater will be the income available to the population. If everyone in the population has exactly the same income, then will be equal to Ybar.

Thus, we propose a macro income equity index (IEI) as in Ali and Son 2007:

Higher the value of omega (closer to one), the higher is the income equity.

To achieve inclusive growth, we need to increase Ystar, which can be accomplished by increasing the average level of income or increasing the equity index or both.

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Only a few countries have achieved high YSTAR

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As a result of both income and distribution changes

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Macro social mobility curves in EMs and Asia

Brazil Thailand

India China

1992

2009

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1 2 3 4 5 6 7 8 9 10

2009

1992

0

1000

2000

3000

4000

5000

6000

7000

8000

1 2 3 4 5 6 7 8 9 10

2005

1994

0

500

1000

1500

2000

2500

1 2 3 4 5 6 7 8 9 10

2005

1993

0

500

1000

1500

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3500

4000

4500

1 2 3 4 5 6 7 8 9 10

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WHAT EXPLAINS INCLUSIVE GROWTH?

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Some standard growth determinants promote inclusiveness…

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1. Tax and transfer policies are less equitable in Asia, with lower (and more regressive) tax takes and lower (and less targeted) social spending…

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2. Education and health spending are positively correlated with inclusiveness

Other Asia

China

Indonesia

NIEs

South Asia (excl.India)

India

Latin America (excl.Brazil)

Brazil

Baseline

2.0

2.5

3.0

3.5

4.0

4.5

0.3 0.6 0.9 1.2 1.5

Educ

atio

n sp

endi

ng

(in

perc

ent of

GD

P)

Degreeof inclusiveness

Education and Inclusiveness

Other AsiaChina

Indonesia

NIEs

South Asia(excl.India)

India

Latin America (excl.Brazil)

Brazil

Baseline

2

3

4

5

6

7

8

0.2 0.4 0.6 0.8 1 1.2 1.4

Hea

lth

spen

ding

(In

perc

ent

of G

DP)

Degreeof inclusiveness

Health and Inclusiveness

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3. Inclusiveness is positively associated with degree of employment protection and minimum wage levels

Other Asia

China Indonesia

NIEs

South Asia(excl. India) India

Latin America (excl.Brazil)

Brazil

Baseline

0.1

0.2

0.3

0.4

0.5

0.3 0.6 0.9 1.2 1.5Degree of inclusiveness

Min

imum

wag

e/ a

vera

geva

lue

adde

d

Minimum Wage and Inclusiveness

2

Other AsiaChina

Indonesia

NIEs

South Asia (excl.India)

IndiaLatin America (excl. Brazil)

BrazilBaseline

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.3 0.6 0.9 1.2 1.5

Empl

oym

ent

law

s in

dex

2

Degreeof inclusiveness

Employment Laws and Inclusiveness

3

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5. Narrow access to financial services hurts the poor disproportionately

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Conclusions• Macroeconomic stability, human capital and competitiveness are

found to be key determinants of inclusive growth in emerging markets. • The standard growth drivers such as education, initial income and

institutions are also important while technological change and trade globalization has a less discernible impact.

• In terms of financial globalization, foreign direct investment (FDI) fosters inclusive growth but financial depth has a negative impact, as in IMF (2007), highlighting need for financial inclusion. A striking feature is that the distribution of income (both inequality and poverty) does not appear to matter when controlling for economic fundamentals, while inflation and GDP volatility are unambiguously detrimental for inclusive growth.

• Competitiveness, measured by deviations REER deviations from PPP, and infrastructure are also important for inclusive growth

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THANK YOU