Four Keys To Equitable Growth

Monday, March 26, 2012

By: Adam McCarty (Chief Economist of Mekong Economics)

In 1955, Simon Kuznets, a development economist, presented a theory of the relationship between income inequality in a country and the path to becoming a rich developed country. He argued that income inequality increased in the early decades, when countries were “taking off” at catch-up rates of GDP growth (6-10% per annum), and when countries became rich, income inequality decreased (the Kuznets Curve). This idea stuck, and thus income inequality came to be seen as “a price to pay” for rapid growth. The problem, however, was that it was wrong. Mr Kuznets had little data, which was really only collected since about 1962 for developing economies. Hans Rowlings has shown us that the data since 1962 tells us to throw out many pre-conceived ideas (see, and one of them is the Kuznets Curve.

So Myanmar can and must have balanced and equitable growth, and it can do so while growing rapidly. Equitable growth is the foundation for sustained development with social stability, which is particularly important in ethnically diverse countries. Many East Asian countries have achieved these dual objectives in recent decades and Myanmar can look to them for basic policy lessons. Here I would highlight four:

1. Land reform
Rapid growth begins with some decades of people moving from farms to factories. That stage has finished in China, is about to finish in Vietnam, and is about to start in Myanmar. On the farm, as there are fewer people, labour productivity increases (particularly if combined with family planning campaigns). Rural households save more, and so living standards increase – not as fast as urban households, but not too far behind either. This happy story only works if households own their land, otherwise they become contract or salaried farmers to landlords (or large foreign investors) who reap the profits while rural household incomes stagnate. Some Latin American countries (and the Philippines, and maybe soon Cambodia) have that problem.

2. Universal education
Basic primary education for the whole population is the foundation upon which to build an equitable society. Fortunately, Myanmar, has a literacy rate of over 90% (2010 survey data) which puts it up there with China and Vietnam, not down with India (74%), Cambodia (76%), or Bangladesh (56%).

3. Progressive fiscal transfers and rural development programmes
The Government can play a direct role to promote equality by raising funds in rich areas and giving them to poor areas. China and Vietnam do that, firstly by budget transfers to poor provinces, and secondly by funding sub-national governments to implement specific poverty, education and health projects. Vietnam does this more than China, and it has been argued that this alone explains why Vietnam’s growth path has been more equitable than China’s[1]. In 2006, Vietnam spent 5.6% of GDP in equalizing transfers to provinces (China 2.2%), and a further 8.8% of GDP in provincial development investments (China 2.2%). Ho Chi Minh City, for example, raised revenues of $640 per person, but spent only $194 per person – the balance paying for the large transfers.

4. Household-friendly and pro-competition industry policies
Rapid growth is driven by urban area employment creation and the emergence of a high-saving middle class. Letting households and companies do business, with clear regulations, transparent and fair taxation, legal protection, and working infrastructure are aspects of the package of policies and expenditures needed to make that happen. Policies that limit competition (including from imports) are harmful and are invitations to corruption. Broad-based business development is far more important than attracting a small number of large foreign investors.
Income inequality harms societies[2] and can lead to civil unrest even if the economy as a whole is growing rapidly. The above policies will help Myanmar achieve rapid growth with equity. မွ ကူးယူ ေဖာ္ျပျခင္း ျဖစ္သည္။


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