Asia's Perilous Inequality - NYTimes.com HONG KONG - Forget the lines in front of those flashy fashion stores. They don't tell the story. Beneath the shiny surface of Asia's cities, life is far more challenging. As is common in periods of soaring prosperity, rewards are unevenly distributed. Across the region, rising living costs have left many behind. But there is something fundamental going on. Over the last few decades Asia has enjoyed relatively low levels of inequality. This is changing: Income disparities are now rising faster than before and increasing more sharply than elsewhere. Questions over political tensions aside, this matters for growth. First, it's a drag on productivity. Second, it makes harmful populist policies very tempting. Over the last several decades, Asia has delivered unprecedented growth. Never before have so many people been lifted out of poverty - and certainly not in such a short time. Take South Korea. In the early 1960s, the country's per capita income was similar to that of Sudan. Today an O.E.C.D. economy, South Korea turns out smartphones, chips and cars, and a taxi ride from the airport to central Seoul costs as much as anywhere in the world. Other economies, having hit their stride slightly later, are in the process of delivering equally impressive gains in prosperity. There are plenty of explanations for Asia's miracle. But one stands out: The region, at least for the most part, enjoyed at the outset comparatively low levels of income inequality. Unlike, say, Latin America, land ownership was not concentrated in the hands of the few, and access to education and health care, as poor in quality as it might have been in the early years, was relatively broad based. China's run, too, needs to be seen in this light: In the late 1970s when the first reforms emerged, the country had, for better or worse, a far more equal income distribution than many other economies at the same stage of development. India started out a little different, but even here the government's socialist agenda from the 1950s to the mid-1980s curtailed income inequality and broadened opportunities. Available data, however, show that since the early 1990s, income inequality has risen across the region (with Thailand being the lone exception). This, it might be argued, is a natural by-product of soaring prosperity. Indeed, poverty rates have continued to drop, as a rising tide lifted all boats, even if some more slowly than others. For the region as a whole, the number of people living below the internationally accepted poverty line fell from about 50 percent to about 25 percent between 1990 and 2005. Africa, Latin America, the Middle East, and Eastern Europe have delivered nowhere near such improvements. But in terms of income inequality, Asia has seen a bigger increase than others. What exactly is driving this is unclear. It may simply reflect the nature of growth, which has been dominated by manufacturing, while services, an industry of more equal rewards, is not yet fully developed. Demographics may also play a role, with a rapid increase in working-age populations having swelled the ranks of job seekers and thus depressed the rise in wages. Both of these factors should abate over the coming years as the structure of economies matures and populations age. But other drivers appear more permanent, including the relatively scarce provision of welfare programs, such as employment insurance and pensions. What is clear, however, is that as income inequality sharpens, even if more and more people cross the threshold from poverty to relative prosperity, growth may begin to suffer. History, after all, shows that prolonged spells of rapid growth often come to an end when income inequality rises rapidly. First, growing disparities constrict economic participation of the less well-off. The full potential of an economy unfolds only if the gifted can apply their talents with equal opportunity. Income inequality reduces access. Second, and equally important, rising income inequality tempts populist policies. This, over time, may undermine fiscal probity and distorts the allocation of resources. Politicians, feeling sudden pressure, may resort to subsidies and other quick fixes to provide temporary relief. Already, political frustrations - unprecedented national prosperity notwithstanding - are growing louder. Often, debt plays a pivotal role. Governments use to it to spread artificial prosperity and buy temporary calm. Households resort to it to complement disappointing income growth. Subprime debt in the United States was one such ill-fated answer. In Asia, consumers have now started to splurge as well. What can officials do? To sustain economic growth, the region must ensure that the dividends of prosperity are more equally shared. This will require three things. First, tax systems need to aim for a more active redistribution of income, with more generous exemptions at the lower end of the scale and higher contributions at the upper end. Second, quality education and health care must again be made affordable and accessible for everyone. Third, governments need to tame inflation pressures that, more often than not, hurt the poor the most. This requires, on occasion, tighter fiscal and monetary policies. The trouble here is that this hurts growth in the short term. But to ensure Asia's long-term prosperity that is a small price to pay. Frederic Neumann is co-head of Asian economics research at HSBC.