Speech by Rajat M.

Nag Managing Director General Asian Development Bank Toward a Sustainable Path: Ensuring Inclusive and Green Growth

at

Indian Institute of Technology Bombay Mumbai, India 02 September 2013

I.

Introduction

Distinguished guests, faculty and students thank you very much for your warm welcome. It is an honor to be here at the Indian Institute of Technology Bombay. Thank you for inviting me to speak to you on the challenges for emerging economies in balancing the economic growth aspirations with inclusive and green growth. Today, I would like to share my humble thoughts with you in the context of Asias growing economic and political weight amidst increasing challenges to cope with in pursuing sustainable growth. Asia has pretty much consistently been in the fast lane. From the green revolution in agriculture in the 1960s and 1970s; to the period of rapid industrial development through the creation of joint-ventures and technology transfer; to the blossoming of external trade and investment via market-oriented reforms, particularly in the Peoples Republic of China (PRC); and the huge leaps in productivity and efficiency brought on by the information age; Asia has pretty much been in the fast lane for the last 50 years. But Asia has now reached the point in its ongoing economic transformation where the quality of growth is as important or in some cases more importantthan the quantity of growth.

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II. Confronting Asias Disparities: Toward Inclusive Growth

Asia has witnessed some of the most rapid decline in poverty in recent times. While during the 1970s one in every two individual was living in poverty, the 1990s saw this ratio improve to one in three and by the 2000s only one in five individual was living in poverty. However, despite very substantial reductions in poverty, Asias rising tide has not lifted all boats. By some estimates, about 830 million people in developing Asia were still living below the $1.25/day poverty line in terms of purchasing power parity in 2008. As of 2010, 368 million people in developing Asia did not have access to improved drinking water; nearly 1.7 billion did not have access to improved sanitation; and 20 million children in developing Asia were not enrolled in primary schools; while 3 million children died before reaching the age of five. Further, 83 million children under the age of five in developing Asia are estimated to be underweight and are likely to be disadvantaged for life due to stunted growth in their childhood. Women and girls are disproportionately represented amongst Asias disadvantaged. More girls than boys are still out of school in some countries, such as Afghanistan, India, and Pakistan; more girls than boys will not complete secondary education in Cambodia, the Lao Peoples Democratic Republic (Lao PDR), and Nepal; and more girls than boys will never be born due to pre-natal sex selection and cultural son preference. Maternal mortality remains stubbornly high in some countries. In the Asia region, gender equality remains an unfinished agenda. These conditions are the result of a growth process that has been uneven and what we mean when we speak of the two faces of Asia. This reality is in stark contrast to the growth with equity story that characterized Asias newly industrialized economies in the 1960s and 1970s. This also contrasts with Latin America, where income inequality, though generally higher than in Asia, has declined with a significant economic recovery from the late 1990s. Between early 1990 and late 2010 a period of very rapid growth in Asia a large number of developing Asian economies saw Gini coefficients increase, with particularly large increases in the PRC, Indonesia, Sri Lanka, Lao PDR, and Bangladesh. In India, the Gini coefficient increased from 32.5% in 1993 to 37% in 2010. In the PRC, it increased from 32.4% in 1990 to 43.4% in 2008. These widening gaps are accompanied by visible changes in consumption patterns and lifestyles, which could lead to political tensions and undermine social cohesiveness an obviously troubling prospect in an already tumultuous world.

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Rising inequality is not only a social threat it also hampers poverty reduction. For example, Indias poverty headcount rate in 2008 was 32.7%. But had inequality not risen in the 1990s, that rate would have been closer to 29.5%. In PRC, extreme poverty would have fallen to 4.9% instead of the actual 13.1%; and in Indonesia, the figure would have been 6.1% as compared to the actual 16.3%. And Lao PDR would have a rate of 26% rather than 34%. Overall, we estimate that if inequality had not increased, an additional 240 million people would have been lifted out of poverty. So how should governments respond? In order to answer that, it is important to distinguish between inequality of outcome and inequality of opportunity. Inequality of opportunity arises largely from differences in individual circumstance, while inequality of outcome, such as income disparities, often reflects some combination of differences in effort and in circumstance. If policy interventions can ensure equality of opportunity, inequality in outcome would reflect only differences in effort, and could be viewed as good inequality, inherent to any growth process. What we need to concern ourselves with in Asia is bad inequality, where policy interventions have not yet fully levelled the playing field. Equalizing access to opportunity should be at the core of the inclusive growth concept. Thus, when we talk about inclusive growth, what we are talking about is economic growth coupled with equality of opportunity. Since equality of opportunity will be attained by reducing inequality of opportunity over time, inclusive growth also means "growth coupled with declining inequality of opportunity". Let me touch on what we see as three essential pillars of an effective inclusive growth strategy. The first may be obvious: high and efficient economic growth needs to be sustained to create sufficient levels of productive jobs and expand economic opportunity for all. In developing Asia, for instance, about 500 million people are unemployed or underemployed, and 15 to 20 million more will join the labor force each year over the next 20 years. Growth that fails to provide decent jobs for a wide spectrum of the population cannot be considered inclusive. The second pillar is social inclusion. In developing Asia (and other parts of the world), many are excluded from benefiting from economic opportunity created by growth for reasons beyond their control. Ensuring equal access to opportunity means investing in education and health to expand human capacity, especially for the disadvantaged, and eliminating market and institutional failures and social exclusion to level the playing field.

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The third pillar consists of social safety nets to mitigate the risks and vulnerabilities associated with economic shocks that may be caused by ill health, economic crises, economic restructuring, or natural disaster, and to cater to the special needs of the disadvantaged and chronically poor. All three pillars, of course, must be supported by good governance and sound institutions. Good governance, effective delivery of service and control of corruption have significant positive impacts on growth. Competent and honest governments that efficiently deliver administration, education and health care raise the countrys productivity while p romoting inclusion, political stability and investment. Increasingly, an important dimension of strong governance and institutions will be the capacity to deliver inclusive growth, which spreads the fruits of growth to the wider population. Gender equality must be at the front and centre of all the three pillars. Gender equality and womens empowerment is critical in its own right for a just and equal society, and for inclusive growth, poverty reduction, Millennium Development Goal (MDG) attainment, and other broader development outcomes. Without harnessing the talents, human capital, and economic potential of women, the region risks significant economic and social costs. On the policy front, the dilemma is that there can be policy level tradeoffs between equity and growth in the short-run, even though there is complementarity between greater equity and long-run prosperity. In this context, a balance between pro-growth and pro-inclusion policies should be stricken against two contours in formulating policy responses. First, a countrys individual choice between different policies should be shaped by its objective functionincluding its tolerance for and aversion to inequality and the rate at which it discounts long-term sustainable growth against short-term growth spurts. The cost-benefit calculus that policymakers use to assess the merits of various policies too often ignores the long-term, hard-to-measure but real benefits of greater equity, and costs of greater inequity. Second, even when there is a broad agreement on what a country needs to do if it wishes to promote inclusive growth, country-specific diagnostics that are cognizant of the constraints must prioritize and shape policies to fit country needs. Targeting the most binding constraint, and therefore the largest direct welfare impact, is usually a good alternative. For example, with low public spending on social sectors in many Asian developing countries relative to international standards, there is scope to improve the quantity and quality of social spending.

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Therefore, consideration of relative emphasis on growth versus equity in promoting inclusive growth should be contextual upon circumstances a country faces. For example, countries that have seen rapid growth with rising inequality may need to balance their policy choices towards greater inclusion, if inequity is not to become a binding constraint on future growth. Meanwhile, countries that have seen relatively low growth as well as declining inequality arguably need to rebalance towards stronger pro-growth policy, while not losing sight of equity objectives. I have found it very useful to draw on two Sanskrit words which have been widely discussed by Professor Sen. The first is niti, and the second is nyaya. Niti and nyaya both mean justice in a sense in classical Sanskrit, but actually the nuanced difference between the two is critical. Niti refers to organizational propriety, behavioral correctness, the rules how you ought to behave. Nyaya on the other hand refers to realized justice. Nyaya of course recognizes the role of niti the rules and the organizations, the importance of institutions but considers the world as is. The context in nyaya is the world we live in not some idealized state of society. In this context, there is another very interesting Sanskrit word, matsyanyaya, which is really justice in the world of the fish. And this justice in the world of the fish, even with all the rules and regulations, basically allows a big fish to devour the small fish at will. Such a situation is obviously a fundamental violation of human justice, no matter how well laid out the rules, regulations, and institutional structures are. As Professor Sen articulates in his seminal book, Development as Freedom: The greatest relevance of ideas of justice lies in the identification of patent injustice, on which reasoned agreement is possible, rather than in the derivation of some extant formula for how the world should be precisely run. Obviously, it is the reduction of the patent injustices that we are after. And that is very powerful because it talks about the girl child who cannot go to school even if there is a basic primary education act or a central school board which is supposed to implement it. The patent injustice is that this girl child is unable to go to school because she goes to fetch water for seven hours a day. So our effort must obviously go toward preventing such severe apparent injustices to ensure inclusive growth.)

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III. Complementary Growth Paths: Inclusive and Green

Let me turn now to the other key element of sustainable growth, and that is environmental sustainability, or green growth. The need for a greener Asia is undeniable. For decades, the region has taken an approach of grow now, clean up later. This approach is simply untenable; it has wreaked havoc on the environment, and put lives and livelihoods at serious risk. Over the past four decades, about 40 percent of Asias coral reefs have vanished. The PRC has lost 70% of its mangrove forests in the past 50 years, due to pollution, enclosing tideland for cultivation, coastal zone development and other factors. South-East Asia has lost 13% of its forest area an area roughly the size of Viet Nam over the past 20 years, making it a major contributor to global deforestation and adding significantly to the regions carbon emissions. Air pollution in major Asian cities is associated with more than 530,000 premature deaths a year. Highly polluted rivers, inadequate water and sanitation, agricultural and industrial pollution also contribute to freshwater scarcity, poor health, and deaths. In terms of the number of people, Asia is the most severely affected continent from desertification and drought. Land degradation has created economic, environmental, and social hardship for millions of poor subsistence farmers. The Asian and Pacific region is also vulnerable to many types of disasters, including floods, cyclones, earthquakes, drought, storm surges and tsunamis. During the past decade, on average, more than 200 million people were affected and more than 70,000 people were killed by natural disasters annually. Those figures represent 90% and 65% of the world totals, respectively. And the countries and peoples of the Asia and Pacific region are among those predicted to suffer most from climate-related threats. Since 1990, developing Asias share in worldwide energy-related CO2 emissions has more than doubled. Without aggressive efforts towards low-carbon growth, this share will rise to nearly half the global total by 2030. Changes in land use, industrialization, and waste management will add to the regions challenge achieving rapid growth without unduly expanding its greenhouse gas emissions. This environmentally unsustainable path is also incompatible with the pursuit of inclusive growth. I believe that environmental damages are reaching a scale at which they are beginning to threaten both growth prospects and the progress achieved in social indicators. The adverse impacts of environmental damage weighs most heavily on the poor, who most often depend on environmental assets for their livelihoods.

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Furthermore, current patterns of production and consumption waste the earths precious resources, exacerbating resource management challenges and driving up current and future commodity prices. The longer we wait to adopt green growth as the preferred paradigm, the higher the costs of clean-up will be and the more likely significant and permanent losses. Delay in addressing climate change invites potentially catastrophic consequences for the planet and for humanity. Conversely, switching to a green growth strategy now at what is still a stage of rapid development will pay huge dividends through improved quality of life, increased economic opportunity, and mitigation of climate change. Of course, there are large costs associated with greening growth. But many of these costs can be recouped through subsequent savings. According to some estimates, for example, more than half the measures needed to move developing economies to non-carbon fuelled growth would eventually pay for themselves, with the residual cost amounting to $140 billion to $175 billion annually by 2030. Contrast this with the estimated global $1 trillion or more each year that currently goes to subsidies that support the use of fossil fuels and other environmentally harmful practices. The numbers seem to speak for themselves. Evidence is also growing that green growth policies can contribute to growth by increasing natural, physical and human capital; promoting efficiency; stimulating innovation; and increasing resilience to environmental and economic shocks. Unfortunately, the world now seems stuck in an ideological debate around reducing carbon emissions. The fact is, neither developing countries alone, nor developed countries alone, can prevent the worst effects of climate change. Only by working together can this be achieved. A recent study by the Emerging Markets Forum shows, in particular, the potential influence of the G20 emerging markets or GEMs Argentina, Brazil, the PRC, India, Indonesia, Korea, Mexico, South Africa and Turkey on climate change. It says that under a business as usual scenario, the average global temperature will rise by 4.9 degrees by the year 2100. If only the developed countries take action, that figure will drop to 4.4 degrees. But if the GEMs take action alongside developed countries [restrain their emissions to 2005 levels by 2050 and reduce emissions from deforestation by 50%] the average global temperature rise could be limited to 2.7 degrees. It will take considerable statesmanship by all countries to develop the necessary policies and the necessary shift in mindset to contain global warming to this level. But we really have no choice. A business as usual development path will cause sea levels to rise by up to half a meter by the end of this century, exposing large coastal cities to major surge-induced floods. Of

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the 20 cities identified as the most vulnerable based on the population at risk, 15 are in Asia. The region would be further hurt through significantly lower crop yields, decreased GDP growth, and health and other social impacts. An ADB study on the economics of climate change in Southeast Asia found that if the world continues its business as usual approach, climate change could cost Southeast Asia the equivalent of 6.4% of GDP each year by 2100. Clearly, Asia has a major stake and must contribute to ensuring an inclusive and green future for Asia, and for the world. Many Asian countries do recognize this and are taking action. Both India and the PRC are taking a leading role in shifting the energy regime toward low carbon development. In India for example, solar and wind development has seen significant growth. In 2011, India installed more than 300 megawatts of new solar photovoltaic capacity and 3000 megawatts of wind power. The PRC also has become a world leader in wind power and the adoption of electric automobile and high-speed rail transport. In 2011, the PRC had 2200 megawatts of newly installed solar photovoltaic systems and about 18000 megawatts of newly installed wind capacity. Nearly every country in the Asia and Pacific region now has some form of national climate change policy, strategy or action plan, and many have stepped up to pledge voluntary actions to reduce GHG emissions even as they continue to expand their economies. Many also have carried out preliminary assessments of the risks their people and economies face from adverse climate change impacts. During the recent economic crisis, several developing Asian countries led the world in devoting stimulus resources to green growth. These are clear indications of the high degree of attention now being given to this global challenge across the Asia and Pacific region. IV. Concluding Remarks

Ladies and gentlemen, let me close by reiterating that if Asia is to achieve its full potential, it will have to be through sustainable growth. And to have sustainable growth, Asia must have growth that is inclusive, and growth that is green. These are not, nor should they be, separate processes, but rather simultaneous processes that focus on the quality of growth rather than simply the quantity of growth. Is Asia up to the challenge? I believe it is. Many countries have already embraced the concept of inclusive and green growth, and an increasing number are making these a cornerstone of their development strategies. It is imperative for all partners governments, private sector, civil society and development institutions to work together to build prosperous, inclusive societies.

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As a region with more than half the worlds population and two thirds of the worlds poor, what happens in Asia will heavily influence the future of the world. The ongoing support of the international community is vital to Asias ability to address its major development challenges. Success in this will help ensure Asias lasting contribution to global growth, a cleaner future and, ultimately, the elimination of poverty. Thank you.