Commentary / Japan

Why fast economic growth is not enough

by Vinod Thomas

Contributing Writer

Economic success and living longer go hand in hand. Both Scandinavian and East Asian countries, especially Japan and Singapore, are blessed with both. But when it comes to measures of happiness, Scandinavian countries lead the world, according to the United Nations’ World Happiness Report 2018.

Social inclusion, a key ingredient of happiness, seems to lag in the Asian countries that made a dash for economic growth decades ago — South Korea and Singapore, and Japan even before that, and in the more recent sprinters, China and India.

Asia is arguably the most diverse region in the world and country differences in incomes, history and institutions limit generalizations. A defining feature is that the region, especially East Asia, saw much faster income growth and poverty reduction than any other part of the world in recent decades.

Furthermore, the high growth in the two most populous countries, China and India, has also meant that population-weighted country differences in per capita incomes across the region would have improved since the 1980s.

But growing income differences within countries underlie the happiness index. The scale ranks 156 countries by criteria linked to the concept of happiness, hard as this is to pin down. The happiest tend to have high values for attributes that foster well-being, such as income, a long and healthy life, social support, freedom, trust and generosity, all of which contribute to an inclusive society.

Income distribution is not directly considered in the happiness index, but it is often used as a proxy to gauge inclusion. Income disparities are relatively low in economically successful Europe and Canada, but not so in Asia. Indeed, a worrying trend is that income disparities have been widening in developing Asia since the early 1990s, particularly in China and India. Against this backdrop, some of Asia’s most successful economies got middling rankings in the happiness index.

Tackling widening income disparities needs to be a greater economic and social priority in most Asian economies, especially the ones where the gaps are widest. Beyond income, social protection interventions in Asia often trail the average of OECD countries, particularly on pension systems and social safety nets that contribute to greater inclusion.

To this end, Japan is encouraging the increased participation of women in the workforce, and greater access to higher education for young people and those already working.

East Asia compares well with other regions in some aspects of governance that are linked to well-being, such as political stability and government efficiency. Japan has well-governed institutions and its democracy is healthy. But some countries in South and East Asia do not have favorable rankings in surveys on whether people have a voice and can participate in all economic and political processes.

Furthermore, gains in improved livelihoods — vital for improving well-being — are being undermined by widening skills gaps in many Asian countries that are increasing the vulnerability of lower-income groups. Smart investments are needed by governments and businesses that can reduce skills gaps — the difference between what employers need and what the labor force can deliver — that in the region are especially evident in India, Indonesia and the Philippines.

Better access to skills are vital for enabling the transition that will affect large numbers of workers displaced by rising automation in industry. Their prospects in a dynamically changing workplace can be strengthened by raising productivity and work flexibility through education, lifelong learning and healthier lifestyles. The economic payoffs are potentially enormous, especially for emerging economies.

Also, much stronger social protection systems will be needed in these riskier times. Asia has been hit by two financial disasters in the last 20 years and is now bearing the brunt of a marked global rise in weather disasters, with lower-income groups invariably at the sharp end because they are least able to cope with these events. Japan is a world leader in building disaster-resilience but also one of the world’s most disaster-prone countries.

The other big risk to greater social inclusion is demographic. The social and economic implications of aging populations will require meaningful public pension programs. Improving access to financing will also be vital for social integration, though this has also yet to attract the attention it deserves. The focus here should be on improving access to financial services to low-income earners, the young, elderly and small businesses, who are disadvantaged.

Gaps in social inclusion in many Asian countries are taking the shine off their strong economic performance. Governments across the region are increasingly recognizing that the quality of growth matters. But that understanding, welcome as it is, needs to be backed up by investments and explicit policies to promote inclusive growth.

Vinod Thomas is a visiting professor at the National University of Singapore and a former senior vice president, independent evaluation, at the World Bank.