Are two-speed economies now the norm in East Asia? It’s hard not to wonder looking at the World Bank’s most recent report card on inequality.

Asia has known urban/rural wage disparities for decades. For years, economists buzzed about the growing divide between winning and losing sectors from China to Australia. Reading the World Bank’s reality check, something is written between the lines in bold font: the divergence of winners and losers is growing dangerously acute among workers.

Indonesia’s 5% growth rate didn’t stop Sudhir Shetty, chief World Bank economist for East Asia and the Pacific, from highlighting it as one of the “most acute" cases.

Or China, which, despite 6.8% growth, also got singled out for wandering off the egalitarian path Beijing had walked for decades. In his research, Shetty came away with the number 90.

That’s how many Indonesians and Chinese in percentage terms worry their governments aren’t doing enough to narrow income differences. But developing East Asia, in general, is “beginning to unravel a bit," Shetty says. “For the region to sustain inclusive growth, countries will need to address the challenges of fully eliminating extreme poverty, enhancing the prospects for economic mobility, and assuring economic security for all."

That was the programme in the decades before and after the 1997 Asian crisis, and the success rate was remarkable. By 2015, the World Bank says, almost two-thirds of developing Asia’s populations were either “secure" or middle class—up from 20% in 2002. Extreme poverty fell sharply, too—from almost half the region’s people in 2002 to less than one-eighth in 2015.

But something went awry in recent years, perhaps dating back to the 2013 Federal Reserve “taper tantrum" that slammed Indonesia, India and many other growth stars. The chaos had governments hitting the stimulus gas-pedal and pumping the brakes on structural upgrades. The evidence: the percentage of individuals on the edge of falling into poverty—incomes of $3.10 to $5.50 per day—is now the same proportion as in 2002, or roughly 25%.

What happened?


In recent years, the emphasis swung from improving the quality of growth to sheer quantity. Levelling playing fields, managing urbanization flows, training workforces, cutting red tape and corruption, and strategizing over losses of labour-intensive factory jobs took a back seat to stimulus. Asia clearly must begin thinking very differently about more inclusive growth.

That’s easier said than done. Last week, the International Monetary Fund (IMF) urged China to put stability above rapid growth. That’s code for Beijing’s annual growth targets—6.5% this year—are warping priorities and saddling the government with runaway debt. Much of that borrowing takes place at the local government level. The IMF worries China isn’t sufficiently monitoring shadow banks, opaque borrowing at state-owned enterprises and elevated leverage in housing markets.

To date, President Xi Jinping’s pledge to heed market forces and morph China into a tech start-up paradise is more hype than reality. But China’s challenges are making global headlines as Beijing razes migrant-worker villages affecting 8 million of the city’s poorest people. Some call it the end of Xi’s “China dream" of rising living standards. Others, a signal social unrest is heating up.

Indonesia’s Joko Widodo has his own dreams of developed-economy status. He’s only recently found his reformist mojo, accelerating infrastructure upgrades, increasing public accountability and transparency and championing tax amnesty to pull more cash back home. Even so, the World Bank classifies Indonesia along with the Philippines and Cambodia as places with comparably small middle-class sectors. Jakarta must strengthen social safety nets and improve mobility options for workers.

That means relying less on central bank largesse and more on structural changes. Here, Reserve Bank of India governor Urjit Patel deserves a shout-out for holding his fire on 6 December. Despite two members of Prime Minister Narendra Modi’s economic advisory council arguing real interest rates are too high, Patel’s team kept the benchmark at 6%. Cutting rates would’ve taken pressure off Modi to get busy addressing land, labour and tax laws undermining growth.

Asia’s biggest problems tend to be weak institutions. India’s central bank is, thankfully, a credible monetary authority. But weak checks and balances on bad decisions, rent-seeking behaviour and complacency, particularly since 2013, say much about why developing East Asia’s poverty-reduction grade is an underwhelming one.

Things won’t get any easier as the Fed raises rates and the Bank of Japan and European Central Bank mull exit strategies from record-low rates. But, says Shetty, “in this changed environment, particularly given some of the external forces coming along, the region needs to start thinking differently about inclusive growth". The first thought should be on getting Asia back on its pre-2013 reform course. The region has recalibrated speeds before, and it can muster the strength and focus to do it again.

William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.

His Twitter handle is @williampesek