NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, July 19, 2013

Across Asia countries are rapidly transitioning from low to middle income status. This transition is enormously positive, pulling millions of Asians out of poverty, massively increasing levels of education, and creating new opportunities for employment and wealth accumulation. But the ‘miracle’ of Asian growth is deeply unequal, with many in middle-income Asia continuing to experience extreme poverty, and exclusion from the benefits of the thriving regional economy.

The reality is that most of the world’s poor no longer live in low income countries. Most of the world’s extreme and moderate income poor now live in lower-middle income countries. In many parts of Asia, economic growth has not alleviated poverty: extreme and moderate poverty have persisted despite higher levels of average per capita income. In Asia, the countries that have achieved lower-middle income status include (in order from lowest to highest income) Vietnam, the Philippines, Indonesia, India, Mongolia and Sri Lanka. Those in the upper-middle income category include China, Thailand, Timor Leste, and Malaysia. Across Asia, the Gini coefficient (the most widely used measure of inequality) has actually increased from 39 per cent to 46 per cent.

Income inequality has even widened in China, India and Indonesia — the very countries that have powered the region’s economic growth. Even in lower-middle income countries where inequality has not increased, it has remained persistently high [pdf] at around 45 per cent for the last 20 years despite overall national economic growth.

This reality has profound implications for where and through which means international development assistance is now delivered.

Middle income countries face the challenge of ensuring stable economic environments, developing human capital, remaining competitive in the global market in the face of rising labour and production costs, improving governance, and tackling growing inequality. Many in the development industry are now focusing on these issues. But many in the development industry are now asking: Is there a role for foreign development assistance in middle income Asia? And if so, in which areas and in which ways can foreign assistance make the most useful contribution?