CHAPTER-4

INCOME INEQUALITY BETWEEN SELECTED ASIAN COUNTRIES

4.1 Introduction
Since 19th century, the world has been witnessing a wide differences in national
income across nations which in turn producing unprecedented levels of inequality
across economies (Berry et al., 1983; Schultz, 1998; Goesling, 2001). Also the
present scenario of the world economy witnessing high and rapid growth that gives
rise to inequalities between nations where developed nations have achieved the
steady state of growth while developing countries are trying hard to catch up with the
advanced nations. And, some countries, earlier known as poor countries, have shown
the growth miracle and have joined the category of high income and upper middle
income countries. Therefore, this scenario has shifted the attention of economists and
other social scientists from income differences within nation to income differences
between nations.
The concept of between-nation inequality looks for the differences in average
annual national incomes of nations under the assumption of equal individual income
within nations (Goesling, 2001). In this connection, another issue is whether the
average national incomes between nations are converging over time (Romer, 1986;
Lucas, 1988; Barror & Sala-i-Martin, 1992; Jones, 1997; Schultz, 1998). The
converging average incomes indicate a decline in between-nation income inequality
and thus, infer about rising levels of economic growth. The attention of policy circle
has thus, been to reduce the levels of income inequality between nations that is
crucial for ensuring balanced sustainable growth.
The rising income inequalities have been observed on an average in every region
where Asia is no exception and also inequality is highest in Asia. Although the Asian
economies have presented remarkable achievements in growth and poverty reduction
in recent decades, but a clear rise in inequality has also been noticed between these
nations. Zhuang et al. (2014) observed that the Asia-wide Gini coefficient has
increased from 0.39 in the mid-1990s to 0.46 in the late 2000s (about 1.4 per cent per
year). This study further observed that the between-country inequality grew faster
than the within-country inequality in contributing to Asia-wide inequality. The
contribution of between-country inequality increased from about 22.6 per cent in the
mid-1990s to 29.6 per cent in the late 2000s while the contribution of within-country
inequality declined from about 77.4 per cent to 70.4 per cent in the same period. This
observation is critical for policy makers as rising inequality often hampers poverty
reduction.
Zhuang et al. (2014) argued that the rapid growth of Asia as fostered by
technological progress, globalization and market-oriented reforms in last few decades
favoured skilled labour, capital, urban and coastal areas which to a great extent
explain a large part of the rising trends in inequality in the continent. Kanbur et al.
(2014) also argued that the main drivers of Asia’s rapid economic growth are the
basic driving forces behind the rising inequality, both income and non-income, in the
region. The study specifically mentions the significance of increasing skill premiums,
returns to human capital, falling labour income shares, emergence of vast economic
opportunities due to trade and financial integration, technological progress, market-
oriented reforms, rising spatial inequality due to agglomeration economies, and rising
unequal access to opportunity to earn income and to build human capital primarily
caused by institutional weakness, market distortions and failures and social exclusion
as the main contributing factors of rising inequality in Asia. This high inequality could
undermine social cohesion, political stability, and sustainability of growth which are
detrimental to efficiency and growth. Hence, appropriate policy options are at least
warranted to reduce the levels of inequality between countries in Asia.
It is with this backcloth, the objective of this chapter is to measure the between-
country income inequality in selected Asian countries and to find whether these
countries are in the convergence path or not. Thus, the rest of the chapter addresses
the measures and measurement of between-nation income inequality, and the
empirical observation on the convergence possibility in Asia.
4.2 Measures of Between-Nation Income Inequality
The review of extant literature on regional inequality clearly infers that there are
three groups of inequality measures, viz., dispersion, Gini and entropy indices (Fan &
Sun, 2008). Furthermore, these may be population-weighted and not population
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weighted. Although the population-weighted measures of regional inequality have
been used by researchers of regional inequlaity, the findings of Gluschenko (2018) is
noteworthy. Gluschenko (2018) concluded that the application of the population-
weighted indices of measuring regional inequality is nothing but a fallacy because it
yields an estimate of interpersonal inequality among the whole population of the
country rather than an estimate of regional inequality. Prior to Gluschenko (2018), the
studies by Lyons (1991), Fujita & Hu (2001) and Fan & Sun (2008) also had similar
conclusions. Therefore, in this chapter we preferred to use the measures of between-
nation inequality not weighted by population. These measures are briefly introduced
as under:
1. Measure of Dispersion: The measure of dispersion that is used to capture the
between-country inequality is the unweighted Coefficient of Variation (CV) for
per capita GDP. The following formula is used for the purpose:

 y  y 
2
i
i 1

CV  n
y

where yi is the per capita GDP of country i ; n is the number of countries under

consideration (12); and y is the arithmetic mean of yi .

2. Measure of Gini Coefficient: The second measure of between-country

inequality used in this study is Gini Coefficient not weighted by population. This
Gini Coefficient (G) is calculated by the following formula:
n
2 i. yi
1
G i 1
n
1 
n yi
n
i 1

where n is the number of countries under consideration (12); and yi is the per

capita GDP of country i arranged in ascending order.

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 3. Measure of Entropy: Also we used the Theil index to measure the between-
country income inequality weighted by income share (not population share)
which is given by the following formula:

n
y 
I   yi ln  i 
i 1  pi 

where pi is the proportion of population of county i to the total population of all

the 12 countries selected from Asia; and yi is the proportion of per capita GDP

of country i to the total per capita GDP of all the 12 countries.

In this study we use these three measures of between-country income inequality

because no measure is free from limitations. For example, the measure of dispersion,
CV, is sensitive to outliers; the measure of Gini coefficient is unduly affected by high
values; and Theil index is sensitive to observations with low income. Thus, a common
practice is to use a variety of measures and compare their results. The next section of
this chapter presents the results of these three indices of between-country income
inequality.

4.3 Economic Disparity in Asia

Asia has achieved a remarkably high growth along with the reduction in poverty
rates. Over the period of ten years i.e. from 1990 to 2010, the developing Asia has
attained 7 percent average annual growth rate of GDP in terms of 2005 purchasing
power parity dollars (Kanbur, 2014). With the rapid growth of highly populated nations
of the region such as China, India, and Indonesia, the number of poor people in
region as a whole also declined. Although, developing Asia has attained the rapid
growth but still it is far behind the developed nations and it is also a home to 60
percent of world’s poor population (Lee et al., 2012).
The rapid growth of Asia and significant poverty reduction in the region is also
accompanied by the rising income inequality. However, income inequality has been
increased on an average in all regions of the globe but it is highest in Europe and
Common wealth of Independent States (ECIS) and in Asia with 35 per cent and 13
percent increase respectively (UNDP, 2013).
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 It is observed that economic disparity is rising across Asian nations (Jain-Chandra
et al. 2016; Balisacan et al., 2006; IMF, 2016). The 14 out of 37 countries are
considered as with high inequality because they are having the Gini coefficient of
0.40. Until 1990, Asia grew strongly with an equitable distribution of income which
became possible with the rapid growth of Hong Kong, Singapore, South Korea and
Taiwan accompanied by an equitable distribution of income (well known as Growth
Miracle). But this equitable society of Asia did not sustain for a long time because in
early 1990s, Asia witnessed a rising level of income inequality although it maintained
the growth rate of six per cent a year till 2015 (ADB, 2016; Jain-Chandra et al., 2016).
The level of Gini coefficient is higher for Asia relative to the average of rest of the
world (Jain-Chandra et al., 2016). This inequality comes into picture with the
presence of countries with two different extremes in terms of growth performance,
i.e., on the one extreme, there are countries like Japan, South Korea, and Taiwan
which maintained the decade long high economic growth with equitable level of
income while on the other extreme, there are countries like Bangladesh, and Pakistan
which experienced low growth with high inequality. The inequality in Asia is not the
homogeneous one and Kuznets’s hypothesis of inverted-U relationship between
growth and inequality does not fit for Asia (Balisacan et al., 2006).
4.4 Empirics of Between-Nation Income Inequality in Asia
In this study, 12 countries of Asia, viz., Japan, South Korea, China, Iran, Malaysia,
Thailand, Turkey, India, Indonesia, Pakistan, The Philippines, and Nepal are
considered as representatives of high-income, upper-middle-income, lower-middle-
income and low income countries. We have taken the per capita GDP at constant
2010 USD as the measure of well-being of nations for the period 1975 to 2016 from
the WDI of World Bank. The Table 4.1 presents the average growth rates of per
capita GDP.
It is observed from Table 4.1 that the average annual growth rate of per capita
GDP for high-income countries was initially high during 1970s and then declined over
last two decades. This means their economic growths have been slowed down
gradually.

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 Table 4.1: Growth of Per Capita GDP in Selected Asian Countries (% per
annum)

Countries 1970s* 1980s 1990s 2000s 2010s** 1975-2016

High-income
Japan 3.88 3.74 1.34 0.41 1.57 1.99
South Korea 9.49 7.45 6.13 4.09 2.91 5.73
Upper-middle-income
China 4.85 8.17 8.76 9.68 7.56 8.25
Iran -5.44 -4.58 2.27 3.86 2.02 0.19
Malaysia 6.11 3.11 4.53 2.80 3.56 3.75
Thailand 6.24 5.34 4.05 3.58 3.20 4.32
Turkey 1.37 1.95 2.31 2.56 5.12 2.67
Lower-middle-income
India 0.03 3.35 3.74 5.20 6.02 4.03
Indonesia 4.86 3.54 2.68 3.67 4.25 3.61
Pakistan 2.03 3.45 1.33 2.32 1.74 2.22
Philippines 3.41 -0.70 0.37 2.50 4.60 1.65
Low-income country
Nepal 1.27 1.75 2.34 2.64 2.65 2.22
Descriptive Statistics
Mean 3.17 3.05 3.32 3.61 3.77 3.39
SD 3.77 3.40 2.33 2.25 1.82 2.11
CV 1.19 1.12 0.70 0.62 0.48 0.62
Source: Calculated from WDI Data
* For 1970s, we have considered 1975 to 1979
** For 2010s, we have considered 2010 to 2016

Among the upper-middle-income countries, China registered rapid growth over the
decades; Iran managed to overcome the negative growth rates of 1970s and 1980s;
Malaysia witnessed relatively fluctuating growth trends; Thailand have been slowed
down; and the growth rate of Turkey has registered an increasing growth trend.
Among the lower-middle-income countries, India depicts a rising growth trend over
the decades; Indonesia relatively stable growth trend; Pakistan shows a slow growth
pattern; and The Philippines has been showing an increasing growth from 1990s. The
low-income country Nepal has been depicting a rising and relatively stable growth
pattern of per capita GDP of the decades. The Table 4.1 indicates certain pattern of
income inequality between these countries of Asia in terms of C.V. It is inferred that
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the C.V has been declining over the decades consistently. This means the disparity in
per capita GDP across the selected Asian nations has been on declining trend which
indicates that these economies are on the convergence path.
However, this prediction needs more empirical support. For this purpose, we have
calculated the Maximum-Minimum Ratio (MMR) which captures the maximum level of
real per capita GDP compared to the minimum for the 12 countries considered in this
study, for each given year throughout the 42-year period. If MMR is close to 1, then it
would mean that the different countries have relatively equal per capita income.
Fig. 4.1: Maximum to Minimum Ratio
(Per Capita GDP at constant 2010 USD)

Source: Calculation from WDI Data

It is observed from Fig. 4.1 that the MMR started in 1975 at 79.0, rising to over the
maximum of 106.12 in 1990, and then ending at 69.51 in 2016. It is interesting to note
that the nature of MMR fits to a parabolic trend having a high R-square. It means that
the gap between highest and lowest per capita income countries is narrowing down
after 1990. This is a result which indicates the convergence possibility among the
selected nations in our study.

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 Table 4.2: Income Inequality in Asia, 1975-2016
(C.V., Gini Coeff. & Theil Index)
Count
1970s* 1980s 1990s 2000s 2010s** 1975-2016
-ries
CV Gini CV Gini CV Gini CV Gini CV Gini CV Gini
High-income
Japan 0.06 0.03 0.12 0.06 0.03 0.02 0.03 0.02 0.03 0.01 0.22 0.12
South
0.14 0.07 0.26 0.14 0.17 0.09 0.11 0.06 0.05 0.03 0.58 0.33
Korea
Upper-middle-income
China 0.09 0.05 0.27 0.14 0.27 0.15 0.30 0.16 0.15 0.08 0.96 0.50
Iran 0.15 0.07 0.14 0.08 0.04 0.02 0.13 0.07 0.06 0.03 0.25 0.14
Malays
0.09 0.04 0.07 0.04 0.15 0.08 0.10 0.05 0.07 0.04 0.41 0.23
ia
Thaila
0.10 0.05 0.16 0.08 0.12 0.07 0.12 0.07 0.06 0.03 0.47 0.27
nd
Turkey 0.04 0.02 0.10 0.05 0.08 0.04 0.12 0.07 0.10 0.05 0.34 0.18
Lower-middle-income
India 0.04 0.02 0.09 0.05 0.12 0.07 0.18 0.10 0.12 0.06 0.54 0.29
Indone
0.07 0.04 0.09 0.05 0.11 0.06 0.12 0.06 0.09 0.05 0.39 0.22
sia
Pakist
0.04 0.02 0.09 0.05 0.04 0.02 0.09 0.05 0.05 0.02 0.25 0.14
an
Philipp
0.05 0.03 0.09 0.05 0.04 0.02 0.09 0.05 0.10 0.05 0.20 0.10
ines
Low-income country
Nepal 0.02 0.01 0.07 0.04 0.07 0.04 0.07 0.04 0.06 0.03 0.29 0.16
C.V 1.634 1.776 1.697 1.507 1.320 1.602
Gini
0.651 0.649 0.650 0.619 0.578 0.618
Index
Theil
1.808 1.823 1.870 1.834 1.724 1.818
Index
Source: Calculated from WDI Data
* For 1970s, we have considered 1975 to 1979
** For 2010s, we have considered 2010 to 2016

Having the indication of declining levels of income inequality across the selected
Asian countries over the period 1975 to 2016, we further moved to estimate the
between-country income inequality by the measures of dispersion, Gini Coefficient
and Theil Index. The results are presented in Table 4.2 and also in Fig. 4.2.
It is clear from Table 4.2 and Fig. 4.2 that the Coefficient of Variation, Gini
Coefficient and Theil Index are all depicting a falling level of income inequality among
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the selected Asian countries in recent decades. This further indicates the possibility of
growth convergence among these nations. Therefore, we estimated for convergence
possibility that whether the different growth rates in selected Asian countries would
eventually converge. This is addressed in the next section of the Chapter.
Fig. 4.2: Income Inequality in Asia, 1975-2016

Source: Calculation from WDI Data

4.5 Convergence Possibility in Asia

For the purpose of estimating the convergence possibility in Asia, we used the
Barro & Sala-i-Martin (1992) absolute β-convergence test. The natural logarithms of
initial real per capita GDP of the selected nations for the observation year 1975 have
been graphed alongside their respective average growth rates for the observation
period 1975 to 2016 in Fig. 4.3.
Fig. 4.3 Absolute β–Convergence, 1975 to 2016

Source: Own Estimation from WDI Data

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 The basic norm is that an absolute β-convergence is predicted, if an inverse
relationship is observed between initial income level and the subsequent average
period growth rate. As seen from Fig. 4.3 that the trend line is negatively sloped with
β = -0.69 which indicates the inverse relationship as desired for convergence
possibility. In other words, initially poorer countries tended to grow at a faster pace
than the initially richer countries. Indeed, the opposite is true: the initially richer states
tended to grow comparatively slower than the initially poorest states. This means the
‘catch up effect’ is operating to predict a convergence path. However, the estimated
R-square value is 0.202 which is very low thereby indicating a doubt in this statistical
finding. Hence, we opted to check for σ–convergence test.
Finally, we evaluated the existence of σ–convergence across the selected Asian
countries over the observation period. The σ–convergence takes place when the
measure of dispersion of the real per capita GDP across countries falls over time. In
other words, if the standard deviation of the logarithm of per capita GDP across 12
selected countries declines over time, then σ–convergence will be said to exist. The
case of σ–convergence is depicted in Fig.4.4.
Fig. 4.4: σ–Convergence, 1975 to 2016

Source: Own Estimation from WDI Data

It is evident from the Fig. 4.4 that the σ–convergence possibility is there as the
real per capita GDP dispersion across selected Asian countries is showing a declining
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trend having the coefficient of -0.002 with R-square of 0.788. The findings of the
converging tendency of average incomes indicate a decline in between-nation income
inequality and thus, infer about rising levels of economic growth in Asia. This
indication is popularly known as the Kuznets curve representing an inverted U-
shaped inequality and economic growth relationship. Since the above estimations of
convergence are for all the selected Asian nations as a whole, it is essential to
estimate further the Kuznets curve for each selected country. This is discussed in the
next section of the chapter.
4.6 Relationship between Income Inequality and Economic Growth
Every nation aims at to attain higher rates of economic growth, but to achieve
higher economic growth with equal distribution of income is an ultimate goal of
development (Lin et al., 2014). Economic theory suggests that the aggregate output
in an economy influences the inequality level, and this relationship differs between
rich and poor countries. Benabou (1996) has explained the effect of income inequality
on economic growth through a case study of South Korea and The Philippines. In a
period of thirty years, both the nations were same in respect of macroeconomic
indicators. The South Korea was more equal than The Philippines; therefore former
has achieved the five-fold growth in output levels whereas The Philippines only
doubled. It predicts that the growth of the unequal nation would be slow. The classical
economists like David Ricardo and Karl Marx also advocated for the fair distribution of
income and wealth after recognizing its importance in the society (Su, 2001).
The theories related to income inequality and economic growth postulate that
inequality affects growth through a micro channel. The unequal distribution of income
among households leads to differences in the aggregate consumption and demand
structure which in turn affect the investment allocations particularly investment in
human capital (Benabou,1996; Galor & Zeira, 1993; Galor & Tsiddon, 1997). The
subsequent theories have augmented the transmission process by analyzing the
effect of inequality on redistributive policies and also as a cause for socio-political
instability or violence (Knack & Keefer, 2000).
In this regard, Kuznets has given the inverted-U curve hypothesis on the
relationship between economic growth and income inequality. Kuznets (1955) claims
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that the growth of per capita GDP has an impact on the level of inequality in a country
such that in the initial stages of growth, inequality increases and in later stages
inequality decreases after reaching a maximum at certain level of per capita GDP.
Thus, the Kuznets curve is inverted U-shaped. This curve links the evolution of the
Gini coefficient as a measure of inequality to the average income level of an
economy. The policy implication is that the higher economic growth may help in
reducing income inequality.
Therefore, in this section, we estimate whether growth of per capita GDP
influences the income inequality in each of the selected countries in Asia. In line with
this objective, the average growth rate of per capita GDP is considered as the
independent variable and Gini coefficient as a measure of inequality is considered as
the dependent variable. The estimation results are presented in Exhibit 4.1:

Exhibit 4.1: Estimation of Kuznets’s Curve for Selected Asian Countries

Japan: G = -3693.0y2 + 345.3y - 3.336 (R² = 0.855) Kuznets Curve

2
South Korea: G = -620.4y + 144.1y - 0.597 (R² = 0.507) Kuznets Curve

China: G = -294.1y2 + 94.04y + 1.491 (R² = 0.890) Kuznets Curve

Iran: G = -7495.0y2 + 607.3y - 7.198 (R² = 0.611) Kuznets Curve

Malaysia: G = 501.7y2 - 46.70y + 4.988 (R² = 0.024) No Kuznets Curve

Thailand: G = -473.7y2 + 73.10y + 1.989 (R² = 0.127) Kuznets Curve

Turkey: G = -1457.0y2 + 150.1y - 0.749 (R² = 0.293) Kuznets Curve

India: G = -1047.0y2 + 182.3y - 2.660 (R² = 0.849) Kuznets Curve

Indonesia: G = 4506.0y2 - 522.2y + 18.26 (R² = 0.756) No Kuznets Curve

Pakistan: G = 5069.0y2 - 299.7y + 5.617 (R² = 0.803) No Kuznets Curve

Philippines: G = 2881.0y2 - 167.5y + 3.777 (R² = 0.054) No Kuznets Curve

Nepal: G = -3606.0y2 + 209.4y - 0.457 (R² = 0.673) Kuznets Curve

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 The Kuznets curve is represented by the following equation:

Gi  0  1 yit  2 yit2

where Gi is the Gini coefficient and yit is the average growth of per capita GDP during

a period. The Kuznets hypothesis holds only if the coefficient of 1 is positive and  2

is negative. In this model, the quadratic term signifies the inverted U-shape structure
of the Kuznets curve.
It is seen from the Exhibit 4.1 that the Kuznets’ inverted U-shaped curve
representing the relationship between average growth of per capita GDP and income
inequality holds for Japan, South Korea, China, Iran, Thailand, Turkey, India, and
Nepal. It means, in these many countries growth of per capita GDP over the decades
has an influence on income inequality. Specifically, there is a tendency of fall in
income inequality with rise in GDP per capita. However, in Thailand and Turkey, such
relationship has been found to be weak as indicated by R-square values. On the
other hand, Kuznets U-shaped curve does not hold for Malaysia, Indonesia, Pakistan
and Philippines. It means, in these many countries the growth of per capita GDP over
the decades does not influence the income inequality.
4.7 To Sum Up
The objective of this chapter was to examine the between-country income
inequality in selected countries of Asia during the period 1975 to 2016, and also to
estimate for the convergence path to predict the catch up effect. The use of the
measures of dispersion, Gini and Theil indices, it is found that the between-country
income inequality has been narrowing down in Asia, and the use of β-convergence
and σ-convergence tests indicate for the catch up effect in Asia, i.e., initially poorer
countries tends to grow at a faster pace than the initially richer countries. This finding
of convergence path in Asia contradicts the findings of Zhuang et al., (2014) that
initially rich countries are getting richer much faster. Such contradictory evidence may
be due to differences in data type, sample period and sample countries. However,
one thing is clear that the relatively poorer nations have been observed to grow
rapidly. In this context, we agree to Zhuang et al., (2014) in citing the reasons of such

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high growth in Asia. The proximate reasons include technological advancement,
globalization and market-oriented reforms. In addition, the policy actions of increased
spending on education, health and other social protection programmes might have
contributed to declining evidence of income inequality. Improved regional
connectivity, more effective fiscal transfers, and removal of barriers to migration might
have also contributed to the reduction in between-country income inequality.
Similarly, the upcoming of small and medium-sized enterprises, removal of factor
market distortions favouring capital and relatively stronger labour market institutions
might be the factors for such evidence of narrowed down income inequality between
selected Asian countries. However, for consistency in such a trend depends on
targeting balanced sustainable growth which in turn requires inclusive growth
strategies that provides equal access to health, education, employment, and other
social protection programmes. Also, Good economic and political institutions can also
go a long way in reducing between-country inequality in Asia.

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