2012.10

Monograph Series

No.35

The Uneven Distributionof the Benefits of Growth
Impeding the Expansionof Asiaʼs
Middle-Income Stratum
Akio EGAWA

Senior Researcher, National Institute of Research Advancement

The Uneven Distribution of the Benefits of Growth Impeding the
Expansion of Asia’s Middle-Income Stratum

Akio Egawa

Abstract•

As high growth continues in the Asian countries, the middle-income stratum in each country is
expanding, and this can be expected to add to the ranks of purchasers and consumers. At thesame time, since income redistribution mechanisms are poorly developed, an uneven
distribution of the benefits of growth is seen, in which high income earners can enjoy higher
income growth.

•This paper offers a quantitative analysis of the effect of continuance of the uneven distributionof the benefits of growth on the pace of expansion of the middle-income stratum and theconsequent degree of loss in the level of human development. This analysis was conducted aspart of the NIRA’s research project “Japan’s New Role in Supporting Economic and Social
Development in Asia.” The analysis produced the following results:
1) If income inequality neither worsens nor improves against its 2011 status, theexpansion in the future scale of the population of the middle-income stratum will begreater than has previously been estimated.
2) If the uneven distribution of the benefits of growth continues (if income inequality
continuously worsens), the pace of expansion of the middle-income stratum will slow
significantly, checking the growth of consumption.
3) At the same time, since the effects of income redistribution policies will appear only
gradually, long-term efforts will be necessary.
4) If there is no improvement in income inequality against its present status, the level ofhuman development will not be improved so much as the middle-income stratum
expands.

•

The expansion of the middle-income stratum in Asian countries presents opportunities not only
for the countries concerned, but also for Japan as their partner country. However, if aworsening of income inequality leads to a weakening in consumption, the destabilisation ofsocieties, and a loss of opportunities for capacity-building among the low-income stratum, thepartner countries like Japan may lose the opportunities. In other words, partner countries are
required to collaborate with Asian countries in order for them to realise the expansion of theirmiddle-income strata compatible with the achievement of stable economic and social
development by means of income redistribution policies.

1The Uneven Distribution of the Benefits of Growth Impeding the
Expansion of Asia’s Middle-Income Stratum
Akio Egawa
1. Introduction
Until the middle of the 2000s, consideration of the importance of Asia in the world
economy focused mainly on production activities, with Asia representing one segment of the global
supply chain as a supplier of low-wage labour. The main investor in Asia and the main provider of
support for development was Japan, which actively conducted investment and provided ODA to aid
the development of core industries which support numerous parts supply industries and theconstruction of the infrastructure essential to this.
On the other hand, continuing economic growth in Asian countries has expanded the ranksof domestic consumers and purchasers rapidly, and provided related business opportunities both
domestically and internationally. In response to these opportunities, Europe and the U.S. joined
Japan as major suppliers of investment, as did China and Asian NIEs, making use of their rapid
growth in economic power.
The expansion of new ranks of purchasers and consumers is identified as an expansion of
the “middle-income stratum”, and in Japan both the National Institute for Research Advancement(NIRA) and the Ministry of Economy, Trade and Industry have conducted estimates of its future
scale. Since the growth of Asia’s middle-income stratum will continue even if the present level ofhigh economic growth declines somewhat, it has been indicated that the positioning of Asia as a“domestic market” will be important to Japan’s future growth.
However, since high growth in Asian countries is being driven by industrialisation in thecities, and it is chiefly workers in the cities who are entering the middle-income stratum, against thebackground of inadequate income redistribution mechanisms, we have a situation in which highincome earners can enjoy higher income growth, i.e. there is an uneven distribution of the benefits ofgrowth 1. At the same time, since the needs of the agricultural population and the low-income
stratum, which are not sufficiently sharing in the benefits of growth, come powerfully into conflictwith those of the urban population and the middle- and high-income strata, a worsening of income
inequality between households and regions produces the potential for destabilisation of society.
The uneven distribution of the benefits of growth also robs the low-income stratum of opportunities
for capacity-building, and by this means may act as a factor impeding the improvement of the levelof human development in the country in question.
It will be essential for Asian countries to overcome these problems if they are to realisesustainable economic development stemming from the expansion of their middle-income strata. In
doing so, we may consider that Japan’s accumulated experience will provide hints towards theresolution of problems, and also that Japan will be able to smoothly offer co-operation in fields inwhich win-win relationships have been fostered. Based on this understanding of the issues, NIRA
1

A great deal of literature focuses on the mechanisms of development of urban/rural income disparities in the courseof Asian development and the rapid growth of the manufacturing industry with industrialisation (for example,
Cabinet Office [2010]), and discussion of these mechanisms will therefore be omitted in this paper.

2

launched its fiscal 2012 research project “Japan’s New Role in Supporting Economic and Social
Development in Asia.” Offering quantitative analyses of the magnitude of the potential effect of an
uneven distribution of the benefits of growth (a worsening of income inequality) on the pace of
expansion of the middle-income stratum and the degree of loss this would entail in economic andsocial opportunities, this paper is allied to this basic understanding of the issues.
In conducting these analyses, it is necessary to advance a stage further on methods
previously used by NIRA, and to estimate the status of income distribution and changes in that statusseparately for each country. First, Section 2 estimates the income distribution in each of thecountries concerned, and calculates the future population of the middle-income stratum in the eventthat income inequality neither improves nor worsens, based on the results of these estimates. Using
the results of these calculations as the baseline scenario, Section 3 measures the degree of slowing in
the pace of expansion of the middle-income stratum which would occur if the pattern of worseningof income inequality observed in the 2000s was to continue until 2020. Based on concerns thatwhen income inequality is high, the level of human development which a country actually achieves
will be low in comparison to its latent potential for human development, Section 4 measures theeffect on the level of human development if income inequality does not improve against its present
status. Bringing these analyses together, Section 5 emphasises the fact that the achievement of abalance between the expansion of the middle-income stratum and stable economic and social
development is essential not merely for the countries concerned, but also for Japan as their partnercountry, following which it offers a conclusion.

2. Estimation of Income Distribution by Country and Calculation of MiddleIncome Population(Previous research)
Using the income distribution for each of the countries under consideration, this section
will estimate the future middle-income population assuming that income inequality neither improves
nor worsens in future. Prior to doing so, it will offer a brief overview of how income inequality andincome distribution coefficients have been treated in previous research.
Estimates of the future scale of Asia’s middle-income population have been conducted inJapan by NIRA [2009], Yanagawa and Mori [2010], and the Ministry of Economy, trade andIndustry [2010]. Each of these studies employed cross-country data, and, using GDP per capita,
calculated the ratio of middle-income (and high-income) households to all households based on the
results of regression analyses. In this method, the regression equation is calculated based on theassumption that the form of the income distribution in all of the countries forming the subject of theanalysis is identical; in addition to this, when the future population of each income stratum in eachcountry is determined, the error in estimation for each country as calculated in the regression
analysis is simply added as is to the composition ratio of each stratum calculated on the basis of theregression equation. Since, under these conditions, information concerning the differences in theincome distributions of each country is incorporated in the error term (the difference between actual
values and estimated values), it is not possible to determine the forms of the income distributions or
their changes over a time series, or to analyse the effect of the uneven distribution of the benefits ofgrowth on the future scale of the middle-income population.
Overseas, Kharas [2010] derived Lorenz curves from income decile data for the countries

3

under study using Povcal, the poverty and income disparity analysis software provided by the World
Bank, and determined their future middle-income populations from the information on the curves.
This method is equivalent to estimating the income distribution for each country under study andconducting future estimates with consideration of the differences between the countries in the statusof their income gaps. However, Kharas calculated future estimates only on the basis of theassumption that “the Lorenz curve remains constant over time, i.e. that growth is distributionallyneutral” (Kharas [2010: 49]); no estimates were conducted on the assumption of change in theincome distribution.
(Method of calculation of income distribution function for each country under study andcalculation results)
In order to examine the significance of the expansion of the middle-income stratum underconditions of a continuing worsening of income inequality in the future, it is necessary to allow
income distribution functions to take on different forms for different countries, and to calculate thefuture population of their middle-income strata using these income distribution functions; in addition,
it is also necessary to investigate the effect on society and the economy of the worsening or
improvement of income inequality.
Accordingly, the present income distribution function for each of the countries under study
is estimated below, and the results of these estimates are used to calculate the future populations of
the middle- and high-income strata for a scenario in which there is distributionally-neutral growth.
First, in estimating the present income distribution functions (cumulative density functions) for eachcountry, based on 2011 data for each country published in Euromonitor International’s World
Consumer Lifestyles Survey, distribution functions which allow breadth in the tails of the
distribution curves were assumed. (For further details, see Technical Note 1 at the end of the paper).
Figure 1 shows the results of these estimations in graph form. Note however, that for each country
a scale adjustment has been applied to make the average income unity on the horizontal axis.
For the income distribution functions shown in Figure 1 (in the forms of probability
distribution function), the closer the peak of the curve (the mode) is to the average income, and thelower the peak, the lower the degree of income inequality. At the same time, the wider the tails of
the curve are on the right-hand side, the greater the income inequality. Of the 12 countries shownin Figure 1, Japan’s income inequality is the lowest. Taking Japan as the standard, it can be seenthat there is almost no difference between the forms of the distributions for Korea, Taiwan, India andIndonesia (This represents the low income inequality group). In the results for Singapore, Hong
Kong, Thailand and Vietnam, the mode is positioned further to the left than for Japan. The peaks
are higher for Singapore and Hong Kong than for Thailand and Vietnam, and the modes are also
positioned further leftward. In other words, income inequality is higher in Thailand and Vietnam
than in Japan, but can be considered still higher in Singapore and Hong Kong. The peaks of thecurves for Malaysia and the Philippines are the same height as for Japan, but their modes are
positioned further to the left, and income inequality in these countries can therefore be considered to
be greater; in the case of the Philippines, relatively higher frequency around the average income canbe considered to indicate that income inequality has eased to this extent. In the case of China, themode is the same as for Malaysia, while the peak of the curve is higher, and income inequality canbe considered to be greater to this extent.

4

Figure 1: Income distribution functions for Asian countries (Results of estimations)
1.2

Japan
TaiwanIndonesia

1

1.2

Korea
India

Singapore
Thailand
Japan

1

0.8

0.8

0.6

0.6

0.4

0.4

0.2

0.2

0

Hong Kong
Vietnam

0
0

0.5

1

1.5

1.2
1

2

2.5

3

China

Malaysia

Philippines

Japan

0

0.5

1

1.5

2

2.5

3

(Source) Formulated by the author.

0.8
0.6
0.4
0.2
0
0

0.5

1

1.5

2

2.5

3

(Estimates of future populations of middle- and high-income strata)
Using the income distributions estimated for each of the countries under study, as
discussed above, this section calculates the future populations of the middle- and high-income strata
in each country assuming distributionally-neutral growth. Future incomes for each household were
calculated with prices fixed at 2011 levels; the dollar exchange rate was also fixed at 2011 levels.
This makes it a simple matter to study the results based on present criteria for the judgment of value.
For the growth rate, real growth rates measured by the local currency unit of each country were used;in addition, taking the income convergence hypothesis into consideration 2, the calculations were
performed so as to have the growth rate for each year decline progressively with the level ofdevelopment until 2030. To enable comparison with the results of the previous NIRA and Ministryof Economy, Trade and Industry estimations, middle-income households were defined as having
annual incomes of between $5,000 and $35,000, and high-income households were defined ashaving annual incomes higher than this (See Technical Note 2 at the end of the paper for details of
the estimation method, including the above).
Figure 2 shows the results of estimates conducted by means of this procedure. Looking
at Figure 2, we see that the middle-income population of Asia as of 2011 was 1.67 billion (53% of
the population), and the region’s high-income population was 110 million (3%). In 2020, themiddle-income population will have increased significantly to 2.42 billion (72%), while the2

The income convergence hypothesis states that while poor nations are able to learn from the political and economic
systems, methods of business management, and technologies of rich nations and thus achieve rapid development,
there are no systems for the rich nations to learn from, and they are therefore unable to achieve this rapid
development. For this reason, the income levels of all nations will tend to converge (Barro and Sala-i-Martin[1995]). When this happens, the relationship between the income level and the growth rate becomes adownward-sloping one. In fact, if we consider the 10-year period from 1999, when recovery from the currency
crisis began, to 2008, when the Lehman shock occurred, and look at the relationship between income per capita(GNI) at purchasing power parity and the growth rate, despite the fact that the coefficient of determination is low,
the relationship can be considered to describe a downward-sloping asymptotic line to a certain extent, in particular
for lower-middle-income and higher countries (see Figure A3 in Technical Note 2 at the end of the paper). For thisreason, the income convergence hypothesis has been assumed in this paper in relation to the growth rates used in
conducting estimates for the future middle-income stratum. It may be noted that the countries whose growth rates
deviate from the asymptotic line have been assumed to display growth rates which approach a gently asymptotic
line. For details, refer to Technical Note 2 at the end of this paper.

5Figure 2: As of 2020 there has been a rapid expansion in the middle-income stratum; as of 2030
there has been a rapid expansion in the middle-income stratum (Estimation results)
2011

2020

1.35 bn (43%)

0.61bn (18%)(Against
2011)

2030

(Against(Against
2020)
2011)

0.24bn ( 7%)-0.73bn-0.37bn-1.10bn
-55％
-61％
-82％
1.67bn (53%)
2.42bn (72%)
2.49bn (71%)+0.75bn+0.08bn+0.83bn
+45％
+3％
+50％
0.11bn ( 3%)0.32bn (10%)
0.79bn (22%)+0.21bn+0.47bn+0.69bn
High-income stratum
Rate of change
+199％
+147％
+638％
3.12 bn
3.35bn3.53bn+0.23bn+0.18bn+0.41bn(Reference) Population
Rate of Change
+7％
+5％
+13％
(Notes) 1. Here, Asia is defined as 10 countries: China, Korea, Hong Kong, India, Singapore, Malaysia, the Philippines, Indonesia,
Thailand and Vietnam.
2. The figures in parentheses show the percentage of the total population represented by each income stratum.
(Source) Formulated by author.
Low- income stratum
Rate of change
Middle-income stratum
Rate of change

high-income population increases to 320 million (10%); in 2030, the volume of the high-income
population increases, with the middle-income population reaching 2.49 billion (71%), against ahigh-income population of 790 million (22%). These results calculate the middle-income
population significantly higher than the previous NIRA studies, at the same time as calculating thehigh-income population in 2030 slightly lower (see Figure A5 in Technical Note 2) 3. However,these results and the results of the previous studies concur in predicting a future expansion of the
middle-income stratum against the background of continuing dynamic growth in Asia.

3. Uneven Distribution of the Benefits of Growth and the Slowing of the Pace ofGrowth of the Middle-Income Stratum
The calculations discussed above are based on the assumption that in the future thebenefits of growth will be shared equally by each citizen of the countries concerned. However,even as the world is giving increasing attention to the growth of the middle-income stratum, income
inequality is worsening in most Asian countries. The worsening of income inequality functions to
rob the low-incomes of opportunities to enter the middle-income stratum. This has the result of
dampening the burgeoning of consumption due to the new members of the middle-income stratum,in addition to reducing the desire to invest in the relevant consumer goods markets.
Given this, below, this study investigates the degree to which income inequality worsenedin the 2000s, and seeks to understand quantitatively the effect of a continuance of this trend into the
future on the pace of growth of the middle-income stratum.
(Uneven distribution of the benefits of growth)
The worsening of income inequality and the uneven distribution of the benefits of growth3

A number of factors may be considered as to why the estimates for 2020 in particular significantly exceed theestimates in National Institute for Research Advancement [2009] and Yanagawa and Mori [2010]. The main
factors may be summed up as follows:(1) The actual figure for the ratio of middle-income households in 2011 significantly exceeded projections
estimated in 2009 (i.e. the rate of income growth in this three-year period greatly exceeded predictions;however, general appreciation due to the exchange rate between 2008 and 2011 was probably also a factor),
resulting in significant differences for the middle-income populations of countries with large populations, suchas China and India.
(2) The growth rates used in this paper are based on the annual average real growth rates in the period between the
Asian currency crisis and the Lehman shock, and because of this, growth rates, in particular growth rates to2020, would have been predicted high for most countries.

6

can be indicated as being the same phenomenon under different names. First, considering trends inincome inequality in all of the countries under consideration using the Gini coefficient (Figure 3), we
find that the Gini coefficient has risen for all countries other than the Philippines, Thailand, andVietnam for each year during the 10-year period from 2000. In other words, most Asian countries
displayed growth in combination with a worsening of their income inequality. The pace ofworsening of income inequality was particularly high in China and Indonesia, each characterised byhigh populations and high growth rates 4.
Figure 4 shows differences in the rate of growth of real disposable income per capita
between the income strata for each country. Consistent with the trends shown in Figure 3, we seethat the benefits of growth were unevenly distributed in the 10-year period from 2000 in the
countries which displayed increases in their Gini coefficients. Despite the fact that India and Korea
displayed high growth, during this 10-year period the first income decile received only
approximately half of the benefits of growth, and in China, the first income decile received less thanhalf of the benefits of growth. In Singapore, the rate of income growth in the second to ninth
income deciles was negative, while the rate of growth was positive in the top decile, indicating amonopolisation of the benefits of growth. In the cases of Vietnam, Thailand, and the Philippines,
Figure 3: Income inequality has worsened in most Asian countries (Changes in the Gini coefficient,
2000-2010)(Gini Coefficient)
0.55(Gini Coefficient)
0.55
China
0.5

0.5
Hong Kong
Singapore

Philippines
Thailand

0.45

0.45
Malaysia

Vietnam
0.4

0.42000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

India

(Source) Formulated from data published in Euromonitor
International “World Income Distribution” and“World Consumer Income and Expenditure Patterns”
for each year, and the IMF World Economic Outlook
Database (April 2012 update)

0.35
Korea
Indonesia
0.3

0.25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

4

With regard to growth in Asian economies, it is possible to indicate that the relationships shown in Figure 3 appear
as a result of the worsening of income inequality and the uneven allocation of limited resources during the
low-income country stage (the Kuznets hypothesis). In order to generate a Kuznets curve, a regression of the
S5/S1 ratio (Average income of the 20% of the population earning the highest incomes divided by average incomeof the 20% of the population earning the lowest income: Multiplication rate) on per-capita GDP (in purchasing
power parity term (logarithmic expression)) is performed. The value at the maximum of the curve was US$ 3,836(nominal PPP). In other words, the Kuznets hypothesis is supported for countries with income levels below
US$ 3,836. However, the only countries matching this condition in the left-hand graph of Figure 3 are China (onlyuntil 2004), India and Indonesia. Of these, Indonesia’s per-capita GDP exceeded this level in 2010, India’s isexpected to exceed it in 2012. Given this, Asian countries will, at least, not be able to legitimise the pursuit ofgrowth through the uneven allocation of resources in future using the Kuznets hypothesis.

7

Figure 4: The benefits of growth are unevenly distributed in countries in which income inequality
has worsened (Growth rate of disposable income by income stratum)(Income growth rate, real dollar term, %)14(Income growth rate, real dollar term, %)
14

12

12

10

10

China (10.25)

Vietnam (8.28)

88India (5.80)

6

6
Thailand (3.92)

Indonesia(2.89)

4

4

Korea (2.67)

2Philippines(2.19)

2
Malaysia (2.68)
00Hong Kong(0.95)

‐2
1st

2nd

3rd

‐2
4th

5th

6th

7th

8th

9th

Singapore (‐
0.11)
1st

10th

2nd

3rd

4th

5th

6th

7th

8th

9th

10th

Low income <‐‐‐‐‐‐‐‐‐‐‐ Income decimal ‐‐‐‐‐‐‐‐‐‐‐‐> High Income

Low income <‐‐‐‐‐‐‐‐‐‐‐ Income decimal ‐‐‐‐‐‐‐‐‐‐‐‐> High Income(Notes) 1. The growth rate for average real disposable income (1995 prices) for the 10-year period from 2000 to 2010 was
calculated for each of the income deciles.
2. The figures in parentheses following the country names are the average growth rates for disposable income on the macrolevel.
(Source) Same as for Figure 3.

income growth for the lowest income decile was equivalent to or greater than the average figure on
the macro level, and uneven distribution of the benefits of growth can therefore not be observed.
However, rather than this representing the success of income redistribution measures, the fact that
agriculture, an industry with a high proportion of low-income workers, is an export industry forthese countries, and that the rate of growth of agricultural incomes increased at a faster pace than
was the case for other industries with the surge of price of primary products in the second half of the
2000s, can be considered to have contributed to this result.
(If the uneven distribution of the benefits of growth continues, the middle-income populationof Asia as a whole will decline by 170 million)
This section quantitatively considers the effect in limiting the future growth of the
middle-income stratum of a continuance until 2020 of the situation of uneven distribution of thebenefits of growth existing in the 2000s in each of the countries under study. In doing so, it wasnecessary to conduct estimations using a new income distribution obtained by multiplying theincome distribution function estimated in Section 2 by a formula modelling the status of the uneven
distribution of the benefits of growth which was actually experienced in the 2000s.
If the ratio of income earners earning less than the average income is calculated using theincome distribution functions shown in Figure 1, the figure is in the range of 67-73% for eachcountry (i.e., the seventh and eighth income deciles represent the average wage). Turning to Figure
4, we find that the rate of growth of real disposable income in the seventh and eighth income deciles
is almost exactly the same as that of real disposable income on the macro level. A “multiplier”
function producing the effects of (1) having the income growth rate increase as income increases,and (2) having earners of the average wage experience income growth of the same level of growth asdisplayed at the macro level is therefore calculated, and the change in effect produced by multiplying
this function by the original income distribution functions are observed. To do so, it is also
necessary to assume an income growth rate for the lowest income decile. The assumption in this8Figure 5: If the uneven distribution of the benefits of growth continues into the future, Gini
coefficients worsen significantly in 2020
HK
Indonesia
Philippines
China
India
Malaysia
47.6 Æ 51.5
50.8 Æ 55.1
51.5 Æ 57.4 50.9 Æ 54.2 43.1 Æ 47.8 41.6 Æ 45.4(+4.0)(+3.8)(+3.3)(+4.3)(+4.7)(+5.9)
Singapore
Korea
ThailandJapan (ref.)Taiwan (ref.)Vietnam
39.1 Æ 40.7
39.3 Æ 42.2
2011 Æ 2020
48.2 Æ 51.2 41.1 Æ 44.2 48.5 Æ 52.0 47.2 Æ 51.6(+1.6)(+2.9)(Magnitude of worsening)(+3.0)(+3.1)(+3.4)(+4.4)(Note) 1. For ease of legibility, the Gini coefficients are shown as fractions of 100 (100 is the highest value).
2. Countries for which the increase in the Gini coefficient was greater than four points are shown in bold.
3. The figures employed for 2011 and 2020 were calculated based on the income distribution coefficients estimated in Section
2; readers should bear in mind that the method of calculation differs to that for the figures up to 2010 published byEuromonitor International (also referenced in Figure 3).
(Source) Calculated by the author.
2011 Æ 2020
(Magnitude of worsening)

paper is that (3) the rate of growth in the lowest income decile is half the rate of income growth on
the macro level. Looking at Figure 4, India and Korea correspond to this scenario. China displays
a higher level of unevenness of distribution of the benefits of growth than this; for Malaysia, Hong
Kong and Indonesia, while income growth is positive, income growth in the lowest income decile isnegative 5.
The income growth rate function formulated in this way is multiplied by the income
distribution functions for each country for 2011, formulated in Section 2, in order to calculate newincome distributions (for details of this multiplier function and the method of multiplication
employed, see Technical Note 3 at the end of this paper). Using the new income distributions, Gini
coefficients for 2020 are then calculated (Figure 5; the Gini coefficients take values between 0 and
100 from considerations of legibility). Reviewing these results, we find that income inequality
worsens by three points or more compared to the case in which there is distributionally-neutral
growth. Naturally, countries for which a high growth rate is projected in future and countries forwhich the peak of the income distribution curve (Figure 1) is high or for which the mode is skewed
to the left displayed a high level of increase in the Gini coefficient. China (+5.9 points), India (+4.7
points), and Vietnam (+4.4 points) correspond to these scenarios. The increases in the coefficientsfor Malaysia, the Philippines, and Indonesia were also high at around +4 points.
If the income distribution changes, the scale of the middle- and high-income strata changes
even if the real economic growth rate on the macro level is the same. Looking at the magnitude of
the change in 2020, we find that as a result of the worsening of income inequality due to the uneven
distribution of the benefits of growth, there will be 170 million members of the low-income stratum
unable to enter the middle-income stratum; this figure corresponds to 5% of the future population of
the countries in study (Figure 6). With the worsening of income inequality, in addition to an
expected decline in purchasing power with the contraction in the number of people entering the
middle-income stratum, it is also possible that a keener sense of the risk of future downward trends
in incomes will cause people to forgo consumption and direct more of their income towards savings.
From this perspective also, it is possible to see the importance of introducing income redistribution
policies which will have the effect of controlling fluctuations in present incomes, and policies tomitigate the risks generated by income fluctuations by means, for example, of enhancing the social
security system, as measures to ensure future income stability.

5This is to say that if a model of the uneven distribution of the benefits of growth had been formulated on the basisof conditions in China, Malaysia, Hong Kong, or Indonesia, it is possible that an even more severe worsening ofincome inequality would have been predicted.

9Figure 6: As a result of the effects of the uneven distribution of the benefits of growth, in 2020 there
will be 170 million people throughout Asia unable to enter the middle-income stratum2020 (Uniform growth)2020 (Uneven distribution)

Difference in

2011(Compared(Compared comparison to
Scale
Scale
to 2011)
to 2011) uniform growth
Low-income stratum
1.35bn (43%)
0.61bn (18%)-0.73bn
0.78bn (23%)-0.57bn+0.17bn
Middle-income stratum 1.67bn (53%)
2.42bn (72%)+0.75bn
2.24bn (67%)+0.57bn+0.18bn
High-income stratum
0.11bn ( 3%)0.32bn (10%)+0.21bn
0.34bn (10%)+0.23bn+0.02bn(Note) Figures in parentheses show the proportion of the population represented by each income stratum.
(Source) Calculated by the author.

(Further expansion of the middle-income stratum brought about by economic circumstancesfavouring the redistribution of income)As indicated above, the expansion of the middle-income stratum in a country is recognisedby other countries as representing a rapid growth in the number of consumers in that country, andthis provides opportunities for new investment and profit for the Asian region. Considered fromanother perspective, the worsening of income inequality will exclude a potential purchasing stratum
larger than the population of Japan from these opportunities in less than 10 years’ time, making it
clear that cooperating more actively in correcting income inequality in Asian countries is an issue ofconsiderable significance both for the countries themselves and for investing countries.
Let us attempt to quantify that significance. Assuming the introduction of income
redistributive policies, and using the income growth rate function calculated above, this section
estimates the change in the scale of the middle- and high-income strata if all the countries underconsideration realised the same income growth rates by income strata as experienced by Vietnam(the lower the income, the greater the proportion of the benefits of growth received) until 2020 6. The
results, shown in Figure 7, indicate that further 70 million low-income people would enter the
middle-income stratum 7.
While these results adequately predict that Gini coefficients will worsen by three to five
points by 2020 if the uneven distribution of the benefits of growth continues, ongoing long-term
efforts would be required to correct income inequality, and in particular in the initial stages, results
would begin to appear only gradually 8. Taking this into consideration, it will be important toFigure 7: If the same improvement in income inequality as experienced in Vietnam was realised in
all the countries under consideration, the middle-income stratum would increase by 70
million people throughout Asia
2011

2020 (Uniform growth)2020 (Improvement inincome inequality)

Difference incomparison to(Compared
uniform growth(Compared
Scale
to 2011)
to 2011)
Low-income stratum
1.35bn (43%)
0.61bn (18%)-0.73bn
0.54bn (16%)-0.81bn-0.07bn
Middle-income stratum 1.67bn (53%)
2.42bn (72%)+0.75bn
2.50bn (74%)+0.83bn+0.08bn
High-income stratum
0.11bn ( 3%)0.32bn (10%)+0.21bn
0.32bn ( 9%)+0.21bn-0.01bn(Note) 1. The method of calculation of the population of each income stratum for “2020 (Improvement in income inequality)” wasthe same as the method used in Figure 6.
2. This magnitude was calculated as d=-0.25 in “Income Growth Rate Coefficients” in Technical Note 3.
(Source) Calculated by the author.

Scale

6

For the gi(x) function in Technical Note 3, d=-0.25.
In this case, the magnitude of the improvement in the Gini coefficient is extremely low; the greatest improvement,
displayed by India, was only 0.8 points.
8
Calculating the rate of improvement in China’s Gini coefficient using a hypothetical figure of d=-0.5 produced an
improvement of around 2.5 points. This figure is low compared to the degree of worsening at d=0.5 (+5.9 points),
tending to indicate that the pace of improvement in income inequality is slow, and that considerable effort will be
required in order to correct the income inequality.
7

10

introduce systems which stimulate income transfer to and increased earnings for low-income earners
in order to eradicate the roots of this future increase in income inequality now, to improve income
inequality and at least prevent the situation from worsening in relation to its present status. In
addition, income inequality is not related only to the height and position of the peak of the income
distribution curve, but is also related strongly to the breadth of the tails of the curve. In Figure 4,
while Singapore displays a distribution structure indicating improvement in income inequality up to
the ninth income decile, because the structure at the tenth decile indicates a monopoly of the benefitsof growth, income inequality has increased. As this shows, if the gently sloping areas of theincome distribution curve are broad, the Gini coefficient will be high. From this perspective, it will
be important from this point onwards to reduce the breadth of the tails of the income distribution, in
addition to moving its peak further to the right, by means of rich-to-poor-transfer-type income
redistribution policies.
Column: What an increase in the size of Asia’s middle-income stratum means
The section above has considered the effect of worsening or improvement of income inequality on
the size of the middle-income stratum, the stratum which is expected to represent a new consuming classin Asia. What, though, is the actual relationship between the size of the middle-income stratum andconsumption?
An expansion in the size of the middle-income stratum can be referred with general expectation of
an increase in the number of people moving from the low-income stratum to the middle-income stratum.
In this context, an expansion in the size of the middle-income stratum would represent an increase in thenumber of people able to purchase a small amount of goods over and above those absolutely necessary tolife, and it may be assumed that the associated increase in consumption will result in the production of(low-priced) luxury goods which are able to be purchased with these small amounts of excess funds.
This could be considered to be the first step on the path to a more culturally rich lifestyle for the newmembers of the middle-income stratum. For the government, the reduction in the size of the
low-income population would make it possible to reduce the amount of budget previously allocated tomeasures targeting low-income earners and anti-poverty initiatives, and to allocate a greater amount ofbudget to investment in infrastructure, the creation of a social safety net, and other measures to provide
the foundation for future growth. In other words, it may be more appropriate to regard the phenomenonof an increase in the size of the middle-income stratum as a phenomenon characterized by a period inwhich the groundwork can be laid for more healthy and humane growth in the future for the country as awhole.
Among the diverse arguments surrounding this issue, there is a perspective which discusses anincrease in the size of the middle-income stratum and the possibility of a rapid increase in the
consumption of high-priced consumer durable goods in the same category. However, while it is certainthat high-priced consumer goods will sell in greater numbers in Asia, the phenomenon will result from anincrease in the amount of consumers in any given country able to purchase such goods due to the fact thatthe incomes of the entire population will increase in almost exact parallel with increases in the GDP,irrespective of whether the number of people in the middle-income stratum increases (Figure A). In fact,
if we look at the correlation between the rate of growth of the population earning US$5,000 or more per
year and the rate of growth of consumption (Figure B), we find an upward-sloping relationship: When therate of growth in the population earning at least US$5,000 is high, the rate of growth of consumption ishigh. However, the gradient of the incline is gentle; we do no observe an explosive increase in
consumption in countries in which there is a significant increase in the middle-income population.
Ultimately, in terms of the general argument that an increase in the size of the middle-income
population will result in an increase in consumption, the argument that consumption will increase incountries with large populations because high growth is expected to continue into the future might be said
to be enjoying a free ride on the more rational interpretation that there is a possibility that the low-priced
luxury goods market will expand rapidly in parallel with the expansion of the middle-income stratum (forexample, a rapid growth in the number of convenience stores in Asian countries, etc.).

11

Figure A: Consumption does not increase because
the middle-income population increases, but
because GDP increases
12

Figure B: An increase in the middle-income population
results in only a slight increase in consumption
12

Rate of growth of consumption (%)(Real, Local currency unit; annual average)

Rate of growth of consumption (%)(Real, Local currency unit; annual average)(45 degrees line)

10

10

8

8

y = 0.1582x + 2.551
R² = 0.6063

VietnamVietnam

Malaysia

Malaysia

China

India

6

China

6

India

Indonesia

Indonesia
Philippines

ThailandSingapore

4

4
Korea
HK

SingaporeHK

Phlippines

Thailand

Korea
2

2

Japan

Japan

0

0

0

2

4

6

8

10

12

GDP growth rate (%: Real, Local currency unit; annual average）

0

5
10
15
20
25
30
35
40
Growth rate of the number of households with annual income over 5000USD (%: annal average)(Source for Figures A and B): Formulated from data published in World Consumer Lifestyles Databook 2012, Euromonitor
International, and World Economic Outlook Database, IMF, April 2012 update

This substitution of the concept of population (the expansion of the middle-income population) in
discussions of a phenomenon which should be considered in terms of the details of consumption (theincrease in the purchasing power of each consumer in newly emerging nations, etc.) cannot be considered
unproblematic. However, this substitution can also be taken as an expression of the fact that, while theeffect of the growth of the middle-income stratum on the growth of consumption in a country might besmall, the middle-income stratum in countries with large populations is increasing rapidly enough to givethe entire world the sense of a significant increase in consumption, and Asia is a region which contains a
number of such countries.

4. The Expansion of the Middle-income Stratum and Human Development in the
Event of a Worsening of Income Inequality
Despite the fact that a worsening of income inequality would cause 170 million people tolose the opportunity to enter the middle-income stratum, if we restrict our attention to Figure B in the
Column above, it appears that the momentum of consumption would not be greatly reduced, andfrom this perspective investing countries, including Japan, would presumably recognize no great
merit in contributing to correcting income inequality.
However, it is possible that a worsening of income inequality would not merely weaken
the momentum of consumption, but would further dampen consumption as a result of an increase insaving on the part of the population as a hedge against possible future downward income
fluctuations. This would also retard the preparations for more healthy and humane growth, andmight also slow the growth and development of a country’s economy and society as a whole bydelaying the human development of people in the low-income stratum. We may therefore consider
that there is a good reason for Japan and other partner countries to actively co-operate in improving
income inequality in Asian countries.
Based on this view of the issues, this section attempts to consider what the effect on thelevel of human development will be in a scenario in which the middle-income stratum expands with12

no correction of income inequality, using automatic calculations.
(The relationship between increase in the level of human development and the expansion of the
middle-income stratum)“Human development” is a term employed by the UN 9, and is a concept under whichhumans themselves are regarded as the wealth of a country, and the creation of an environment inwhich each person is able to realise their full potential and lead a productive and creative life, andthe expansion of the range of choice available to each person, is regarded as development. Basedon the concept that the foundation for this expansion of the range of choice is the fostering of humancapabilities, and the minimum essential level of these capabilities is ensured through access to thenecessary resources to realise health and longevity, the acquisition of knowledge and themaintenance of an adequate standard of living, and by participation in society and community, theUnited Nations Development Program (UNDP) formulates the Human Development Index (HDI),
which synthesises several indicators into a single scale.
The HDI takes values of between 0 and 1, and makes it possible to grasp changes overtime. Considering the relationship between the rate of increase in the HDI and the rate of growth ofthe population earning US$5,000 per year or more (Figure 8), we observe an upward-sloping
relationship, and we see that the rate of growth of the HDI for Asian countries is high even if we take
into account the high rate of growth of the population earning at least US$ 5,000 per year. Together
with the increase in the middle-income population, human development in the region has increased
at a rapid pace in the past ten years.
Of the elements making up the HDI (life expectancy, years of schooling, gross national
income per capita), the expansion of the middle-income stratum can be considered to have thegreatest effect on the HDI via life expectancy and years of schooling, factors which have upper
Figure 8: The level of human development has
increased in Asian countries, but…
1.8

Figure 9: Increased income contributes
strongly to HDI increases

Rate of increase of HDI(Average for 2000‐2010; %)

0

India

1.6

40

80

120

0
Japan

China

HK

1.4
30

Indonesia

160

Positioning in terms of disposable
income per capita (GNI) (2011)
Korea

Singapore
Brunei

1.2
Vietnam1

60

Hong Kong
0.8

0.6

y = 0.1505ln(x) + 0.5324
R² = 0.4195

ThailandSingapore

Korea
Malaysia

0.490Philippilnes

China
ThailandJapan

00.03125 0.0625

Philippines

120

Countries in which therelative magnitude ofincome raises HDI

0.2

‐0.2

Countries in which factors
other than income (healthand medicine, education)raise the HDI

Malaysia

Rate of increase of population earning
US$ 5,000 or more (Average for 2000‐2010; %)
0.125

0.25

0.5

1

2

4

8

16
32
64
(Logarithmic conversion)

150

Indonesia
India

Positioning in termsof HDI (2011)

Vietnam
Lao Rep.
Cambodia
Myammar(Note) Positioning in terms of disposable income per capita is based on comparisons at PPP.
(Source for Figures 8 and 9) Formulated from data published by Euromonitor International and published in UNDP [2011]
9This description of human development is a summary by the author of information found on the website of theJapan office of the United Nations Development Program (UNDP) (http://www.undp.or.jp/hdr/).

13

limits, but in which there is strong potential for standard-raising improvement. However, if we
consider the relationship between the positioning of countries in terms of world HDI rankings anddisposable income per capita (Figure 9), we see that the increase in HDI in India, Thailand, Malaysia,
Singapore and Hong Kong is strongly related to increases in income. This is to say that, in thesecountries, despite the fact that there has been a rapid increase in the standard of living with economic
growth, it is possible that the development of human capabilities with increased health and access to
medical care and education, which might be considered to increase significantly among newmembers of the middle-income stratum, has not kept pace with increases in income (while average
income has increased and the middle-income stratum has expanded, there has been insufficientconsideration of increasing possibilities for the new members of the middle-income stratum).
(The effect on the level of human development if income inequality remains uncorrected)
Eliminating the roots of income inequality is important not merely from the perspective of
its effect on the scale of the middle-income and high-income strata, but also of removing a factor
impeding human development.
The Human Development Report published by the UNDP in 2011 proposes theinequality-adjusted HDI as a new index which considers the rate of loss in the HDI resulting fromincome inequality as an attempt to quantify the effect of a worsening of income inequality on humandevelopment. According to the UNDP, “while the HDI can be viewed as an index of the potential
human development that could be achieved if there is no inequality,” the IHDI can be interpreted as
an index of the actual level of human development, with consideration of inequality and otherfactors 10.
The UNDP has formulated the HDI for the majority of countries, and when we restrict ourattention to this index, even the significant income disparities of Asian countries become “average”
when included in comparisons with data for countries outside the region, and there is no majorchange in the positioning of Asian countries between the HDI and the IHDI. In fact, thepositioning of comparatively low-income Asian countries, including India, Indonesia, the Philippines,
and the CLV countries (Cambodia, Laos, and Vietnam), in the IHDI ranking reflects the fact that
income inequality in these countries are less severe than those of countries with similar income
levels, and they take a higher ranking than they do in the HDI. In addition, in Asian countries there
is little unevenness to be observed in access to health- and education-related services, which are
related to the development of human capabilities and the realisation of an expanded rang of choice.
Figures for these elements are therefore high (the rate of loss is low), and many countries therefore
take a higher position in the IHDI than in the HDI 11.
However, there is a possibility that income inequality may function to reduce the positionof Asian countries on the IHDI if they experience high growth without correcting the present income
inequality. Given this, the author attempted to calculate the position of each of the Asian countries
under study on the IHDI if the HDI followed past trends and increased until 2020 without
improvement in the rate of loss due to income inequality (Figure 10; For details of the calculation
method employed, see Technical Note 4).

1011

UNDP [2011: 169]
Ibid.

14

Figure 10: If there is no improvement in income inequality, the IHDI becomes lower (According tomechanical calculations)
China
India
Indonesia
Philippines
2011
2020
2011
2020
2011
2020
2011
2020
Position on HDI
101→ 91 (+10)
134→ 134 ( 0)124→ 119 (+5)
112→ 114 (-4)
Position on IHDI
102→ 91 (+11)
133→ 130 (+3)
116→ 109 (+7)
108→ 111 (-3)
Position on IHDI with no↓↓↓↓change in rate of loss
92
130-131
111
113
Korea
Thailand
Vietnam
2011
2020
2011
2020
2011
2020
Position on HDI
15→ 5 (+10)
103→ 100 (+3)
128→ 127 (+1)
Position on IHDI
32→ 32 ( 0)101→ 100 (+1)
114→ 107 (+7)↓
Position on IHDI with no↓↓change in rate of loss
101-102107
33～36(Notes and source): Figures for 2011 are taken from the Human Development Report 2011, published by the UNDP. However,the UNDP data does not show relative positioning for the IHDI in 2011, but only the degree of change fromthe HDI. The author calculated relative positioning on the IHDI based on this data. Figures for 2020 are
estimates by the author.

The results show that while Korea reaches fifth position in terms of HDI in 2020, in thecase of IHDI, even if the trend holds and there is an increase, the country will be in 32nd position (thesame position as 2011), and if there is no improvement in income inequality, it will drop to a
position between 33rd and 36th. Similarly for China (91st position for both HDI and IHDI in 2020,
dropping to 92nd position for IHDI if income inequality is uncorrected), Thailand (100th position forboth HDI and IHDI, dropping to 101st or 102nd for IHDI), the Philippines (114th and 111th positionsfor HDI and IHDI respectively, dropping to 113th position for IHDI), and Indonesia (119th and 109th
positions for HDI and IHDI respectively, dropping to 111th position for IHDI). Under theconditions used in these calculations, we see that the development of human capabilities and the
expansion of the range of choice do not reach the level indicated by figures on the HDI for any ofthese countries. In the cases of Korea and the Philippines, if the rate of loss remains unchanged,
the countries’ positions on the IHDI in 2020 will drop below their respective positions in 2011. For
these countries, assuming that income inequality is not improved, the merits of the improvement in
the state of society and the economy generated by the future expansion of the middle-income stratum
may be offset by greater demerits (from the perspective of comparison between countries) 12.
According to the UNDP’s Human Development Report 2011, from the perspective ofhuman development, the worsening of income inequality will, in particular in the poorer strata, notonly restrict the development of human capabilities due to the lack of opportunity for increased
health and access to education, but will also place restrictions on the fostering of the ability of theindividual to expand his or her range of choice while still considering the environment for future
generations. In this way, the failure to correct income inequalities robs people, in particular people
in the low-income stratum, of the opportunity to engage in positive human activities.
Taking the above into consideration, the improvement of income inequality (rather thanmere prevention of its worsening) is essential from the perspective of realising the level of human12

It is also necessary to analyse the IHDI under conditions in which the distribution of the benefits of growth
becomes even more unequal, but it was not possible to obtain the geometric and arithmetic means of income
samples employed by the UNDP in calculating the rate of loss in the IHDI, and it was therefore not possible toconduct calculations which would be comparable with the other calculations shown in Figure 10. Assuming
hypothetically that a worsening in the rate of loss of the same proportion as the degree of worsening in the Gini
coefficients shown in Figure 5 applied to incomes, calculation of the IHDI for 2020 shows China dropping by
seven ranks and Korea by between one and four ranks. Other countries, with the exception of India, drop by two
ranks (India’s positioning does not change).

15

development befitting increased income and building a foundation for future growth, but is also anecessary present task for the realisation of sustainable human development for future generations.
This is to say that it will be important for Asian countries to discover a more positive significance inrealising the steady improvement of income inequality by means of policy measures, and to adopt a
more active stance in co-operating with other countries in these types of initiatives.

5. Conclusion
To sum up, it is predicted that Asia’s middle-income stratum will expand rapidly in future,and that the increase in purchasing power will also continue to be high, presenting the world withnew opportunities. However, the pace of this expansion of the middle-income stratum is also
related to whether or not efforts have been made to correct income inequality in the countries
concerned, and the continuance of the uneven distribution of the benefits of growth which can beobserved for the past ten-year period will represent a considerable impediment to the expansion ofthis income stratum. It is to be feared that this effect will be particularly conspicuous in countries
with large populations which are experiencing rapid economic growth while GDP per capita remains
low, such as China, India and Vietnam, and countries in which there are already major distortions in
the income distribution, making efforts to improve income inequality essential in parallel with therealisation of continuing high growth. If these efforts are not made, and income inequality issimply left as is, more than the lost opportunity for the expansion of the middle-income stratum, theresult could impede attempts to increase the level of human development in Asian countries.
Potentially acting as a factor generating a sense that the lifestyles which should have been realised
by growth have not materialised and reducing the benefits of efforts, for example, to consider theenvironment, it is to be feared that this would promote social instability, impeding the realisation ofsustainable growth and development.
At present, the advantages presented by economic development presumably outweigh thedisadvantages caused by income inequality, but based on the theory of income convergence, thegrowth rate will gradually decline in future as incomes rapidly increase. In times of high growth,
there is little awareness of the necessity for income redistribution policies, and in times of low
growth, the enhancement of income redistribution policies only increases difficulties. Given thatsuch a situation could lead to social instability and political conflicts among stratification of society,
it is essential to implement appropriate policies before it is too late.
This paper has been formulated as a contribution to the NIRA research project “Japan’s
New Role in supporting Economic and Social Development in Asia,” and has attempted to provide aquantitative basis for the necessity of formulating income redistribution policies even as high growthcontinues. It is my hope that this research project will serve to stimulate further thought in theseareas, opening onto the possibility of thinking together with other Asian countries about what lessons
might be learned from advanced nations which have introduced income redistribution policies andachieved further economic and social development, giving consideration to the factors which will
impede the introduction of income redistribution policies in the future in Asia, and the developmentof human capabilities through the realisation of increased health and the provision of access to
medical care and education in order to increase the level of human development and by this means toresolve economic, social and environmental issues related to development.

16Technical Note 1: Methodology for Calculation of Income Distribution Functions 13(Assumptions concerning the shape of income distribution functions)First, in order to conduct an analysis involving cross-country comparison, it is necessary to“reproduce” the income distribution function of each country concerned. Cross-country comparable
data published by Euromonitor International (EI) is available to enable this. The data provide thecumulative density of households earning no less than every income level identified.
According to EI, the data was generated based on the assumption that the income distributionfunction for each country is the Singh-Maddala Cumulative Density Function. This function, F(x), isexpressed as1

1

where x is the income level of each household, α and k are shape parameters, β is a scale parameter and γ
is a location parameter (note that EI assumes that γ=0 in their estimates). Note also that, when k=1, thisfunction is transformed into the log-logistic cumulative distribution function expressed as follows:1
1
Given these preconditions, it is natural that the income distribution function for each country is
estimated with the assumption that it is either the Singh-Maddala function or a log-logistic function.

(Interpolation of Data)
EI’s Databook provides sets of data for only 21 income levels and the corresponding cumulative
density of households which earn no less than each income level. Interpolation of data is therefore
necessary to obtain the parameters of the distribution function. The methodology for interpolation is asfollows.
(1) Because the cumulative density data in EI’s Databook are provided in units of 0.1%, 1000 sets ofdata (income, cumulative density) must be obtained for each country. In order to do so, the income
levels at the pth 0.1% point (0, 1, … , 999 are calculated as the weighted average of two points
from the Databook just below and above that point. If x is the income level for the pth 0.1% point,
xi is the income level just below x (published in the Databook), and xi+1 (also in the Databook) is thelevel of income one step higher than xi and, of course, just above x, then·
(2) Using these 1000 data, a test of the goodness of fit is conducted. The Kolmogorov-Smirnov (KS)test statistics for the Singh-Maddala and log-logistic cumulative density functions are calculated and,by comparing two values, the more appropriate distribution is identified for each country’s
distribution. The parameters of the distribution are also identified.
(3) It is often the case that there is a significant discrepancy between the income distribution for country
j identified above (i.e.
) and the data published in the EI Databook. An additional procedureis therefore employed, and the income level corresponding to the pth 0.1% point is recalculated on
the basis of the following equation.
·
where x0, x500, x

750, … , x

300,000 and p satisfies

13.

The explanation of statistics and income distribution in Technical Note 1 is based on the “Help” command of thestatistical processing software “EasyFit” produced by MatWave. All estimates are conducted with EasyFit, unlessotherwise noted.

17

(4) However, the cumulative density function recalculated via process (3) is skewed at each of the,points. To make the distribution function smooth, the cumulative density function is
identified again, using the 1000 data generated by process (3). The process itself is the same asprocess (2). The cumulative density function identified after this process is used in the analysis.
Note that, even after this treatment, the gaps between identified cumulative density levels and thosepublished in the Databook are not completely eliminated.

(Identification of the distribution function)
Tests including the Kolmogorov-Smirnov test (KS test) and the Anderson-Darling test (AD test)
are available for testing the goodness of fit. The choice of the most appropriate test statistic is important.
It is important for this paper to possess greater testing power for goodness of fit at income levels between
5,000 and 35,000 dollars. The KS statistic is therefore applied, because the KS test is indicated ashaving greater power in testing the goodness of fit of the middle section (the tail) of the distribution 14.
The candidate cumulative density functions (CDF) are 3-value (0) and 4-value (0)
Singh-Maddala distribution functions, and 2-value (0) and 3-value (0) log-logistic distributionfunctions. The function which gives the lowest KS statistic is identified (the results are shown in Figure
A1) and its parameters are estimated (Figure A2). Note that, for each country, KS statistics for 4-value
Singh-Maddala CDF and 2-value log-logistic CDF are not referred to in the figures, because the KS
statistics of 4-value Singh-Maddala CDF are larger than those of 3-value Singh-Maddala CDF, and the
KS statistics of 2-value log-logistic CDF are larger than those of 3-value log-logistic CDF.

Figure A1: KS Statistics (Generated by Process (4) Above)
Singh-Maddala
Log-logistic
Singh-Maddala
Log-logistic

China0.003070.00458
Philippines
0.00673
0.00979

Hong Kong
0.001850.01142Singapore
0.003930.01779

India
0.011210.01058
Korea
0.01300
0.01407

Indonesia
0.01408
0.01321
Taiwan0.016200.01642Japan
Malaysia
0.74498 (rejected) 0.00313
0.00661
0.01186
Thailand
Vietnam
0.01175
0.011080.01549
0.01593(Note) Both the Singh-Maddala CDF and Log-logistic CDF are 3-variable.

Figure A2: Parameters of the Income Distribution Functions for Each Country

k
α
β

γ
k
α
β

γ

China
S-M
1.05401.81436,272--------Philippines
S-M
1.15081.8881
6,236---------

Hong Kong
S-M
1.5433
1.521674,481--------Singapore
S-M
1.98811.4755
119,710---------

India
L-L
-------2.2604
5,330
10.489Korea
S-M
1.19082.173435,283---------

Indonesia
L-L--------2.3576
5,592-29.081
TaiwanS-M
1.19782.276339,969---------

Japan
L-L
--------2.5876
65,863-2,694.7
ThailandS-M
1.49981.6294
11,271---------

Malaysia
S-M
1.1135
1.7862
13,639--------Vietnam
S-M
1.33851.76903,873---------(Note) “S-M” indicates Singh-Maddala CDF, and “L-L” indicates log-logistic CDF.

14

The KS test has the null hypothesis that the pre-specified distribution is the true distribution for the dataset inquestion. Therefore, the null hypothesis cannot be statistically rejected unless the KS statistic has significancegreater than 5%. Moreover, more than one candidate distribution remains unrejected. In this case, KS statistics
for all the candidate distributions are calculated in order to judge the goodness of fit, and to determine the functionthat gives the lowest KS statistic.

18

Technical Note 2: Estimation of the Populations of the Middle- and High-Income Strata
In estimating the populations of the middle- and high-income strata for this study, the exchange
rates have been fixed at the 2011 level and the future growth rates calculated in real terms on a local
currency basis. These conditions enable us to gain a sense of future prospects with a present-day
perspective. In order to conduct these calculations, in addition to the estimated income distribution,
projections of the real GDP growth rate per capita and the population growth rate projection are required.

(Assumptions concerning the Future Growth Rate of Real GDP Per Capita)
As mentioned above, the validity of the income convergence hypothesis is assumed in this paper inthe calculation of the future speed of economic growth for each country. While questions may remain
as to the condition(s) under which the hypothesis is valid, it is at least difficult to assume, for example,
that China and India will display the same rate of growth for the next 20 years (China and India may
possess systems which facilitate long-term economic growth in addition to huge inputs of labour andcapital (as Barro and Sala-i-Martin [1995] argue), but the dominance of these systems would not last long,
because low-growth countries would become eager to imitate them). From this point of view, it isnatural to assume that the growth rate will gradually decline as incomes grow, and the income
convergence hypothesis is used as the basis for calculating the pace of such slowdown.
Figure A3 shows the relationship between the per-capita real GDP growth rate (average for
1999-2008, local currency unit basis) and the per-capita GDP level in 2008 measured in purchasing power
parity for that year, using data for 177 countries.
The following assumptions are made regarding real growth rates after 2011 for the countries being
considered, based on Figure A3.
(1) Of the countries above the asymptotic line in Figure A3,- Vietnam, India and Malaysia are assumed to be on a largely linear growth path (Line A), and will
follow the growth path shown by Line A until the income level at which Line A crosses theasymptotic line. Following this, the three countries will grow at the rate shown by theasymptotic line.
- China and Korea are assumed to be on the same growth path (Line B), and will follow the growth
path shown by Line B until the income level at which Line B crosses the asymptotic line.
Following this, the two countries will grow at the rate shown by the asymptotic line.
Figure A3: Assumed Growth Path for Each Country, Based on the Income Convergence Hypothesis(Per‐capita GDP growth rate: Real, Local currency unit, %: Annual average for 1999‐2008)
16

14

12
Vietnam
10

ChinaLine B
8
India

Line A
Singapore

6

Malaysia

Korea

TaiwanHong Kong

Thailand4

Line DLine Cy = ‐3E‐05x + 4.9944
R² = 0.0209

Indonesia
2
Philippines

Japan

0
0

10000

20000

30000

40000

50000

60000
70000
(Per‐capita GDP in 2008: International dollar)‐2(Source) Estimated by the author, using data from World Bank, “World Economic Data 2011” and Euromonitor International,“Consumer Lifestyles Databook”

19

Figure A4: Ratio of Increase of Per Capita GDP for Each Country (in 2020 and 2030, against 2011)
2020
2030
2020
2030

China
2.34
4.18
Philippines
1.61
2.56

Hong Kong
1.52
2.09
Singapore
1.60
2.20

India
1.91
3.48
Korea
1.49
2.11

Indonesia
1.60
2.55
Taiwan
1.45
1.99

Japan
1.13
1.28
Thailand1.58
2.46

Malaysia
1.63
2.46
Vietnam
1.93
3.55- The growth rates of Hong Kong (1.29 times higher than the growth rate indicated by theasymptotic line) and Singapore (1.65 times higher) will decline, while maintaining theirrespective multiplication factors (Hong Kong will follow Line C, and Singapore Line D).
(2) The growth paths of countries on the asymptotic line (the Philippines, Indonesia, Thailand andTaiwan) will continue to follow this line.
(3) The growth rate of the country below the asymptotic line (Japan) will be flat (the same rate of
growth will be maintained) until the asymptotic line is reached.
Figure A4 below shows the ratio of increase of per-capita real GDP in 2020 and in 2030 against
2011 based on these assumptions.

(Methodology for Calculation of the Population of the Middle- and High-Income Strata in2020 and 2030)
The current and future population of the middle-income stratum can be calculated based on theincome distribution function identified in Technical Note 1. When growth is assumed to be⁄
distribution-neutral, households with annual incomes between 5000 ·and⁄35000 ·
denotes the average household income for country i in the year 20XX)(
would be categorised as middle-income households in the year 20XX. Similarly, households with⁄annual incomes over 35000 ·would be categorised as high-income households. Whenthe cumulative density function of country i is denoted by Fi(x), the population shares of the middle- andhigh-income strata are therefore
Population share of the middle-income stratum:⁄
5000 ·

35000 ·⁄

Population share of the high-income stratum:⁄
35000 ·The population of each stratum is easily calculated, by multiplying its population share by themultiplication factor for the total population in 20XX against 2011. Population projections for eachcountry until 2100 are available from the website of the United Nations Department of Economic andSocial Affairs 15. In the calculation of total “population”, the relatively strong assumption that the
average household in each stratum (low, middle and high) have the same number of members has been
applied.
Figure A5 shows the results of calculations for each country, and provides Yanagawa and Mori’s[2010] estimates for reference.

15

http://esa.un.org/wpp/unpp/panel_indicators.htm

20Figure A5: Results of Estimations of the Future Population of Each Income Stratum
Unit: Thousands

This study
Yanagawa
and Mori

Low-income
Middle-income
High-income
Total (=Population)
Middle-income
High-income

China
2011
556,373
736,700
47,836
1,340,910---------

Hong Kong

2020
215,722987,256
178,571
1,381,549
1,007,470

2030
88,229891,180
407,400
1,386,810
435,810

2011
177
2,289
4,659
7,125
-----

134,530

915,097-----

Indonesia

This study
Yanagawa
and Mori

Low-income
Middle-income
High-income
Total (=Population)
Middle-income
High-income

Yanagawa
and Mori

This study
Yanagawa
and Mori

5,923

-----

2020
252,962
1,022,093
67,008
1,342,063
455,4532030
84,203
1,143,986
246,0311,474,220
794,128

10,35920,570Philippines

2020

2030

2011

2020

2030

2011

2020

2030

102,871129,058
3,067
234,996-----

56,991
188,9028,839
254,732
104,906

24,204
220,910
26,198271,312
126,436

4,514
20,486
3,635
28,634-----

2,616
22,036
8,087
32,74022,935

1,491
20,254
15,24336,98821,23642,25751,293
2,159
95,710-----28,51376,257
5,980
110,750
53,84915,917
94,844
16,719127,481
70,560

-----

2,868

3,241

-----

6,884

13,076

-----

1,765

2,117

93
1,239
3,806
5,138
---------

2020

Korea
2030

Thailand

2011

2020

2030

2011

2020

2030

402
17,981
32,06450,447
10,587

195
10,61040,17450,9798,290

20,71145,3083,500
69,519-----12,56251,318
8,262
72,142
48,222

6,738
48,92917,70773,37355,60938,25940,260

-----

2,334

3,542

56
822
4,715
5,592
1,231

39
592
5,343
5,973
1,274

822
26,483
21,684
48,989
-----

3,927

4,122

-----

Vietnam
Low-income
Middle-income
High-income
Total (=Population)
Middle-income
High-income

76
1,220
7,184
8,480
2,103

2011
555,663
628,278
16,832
1,200,772-----

Malaysia

Singapore

This study

5,505

India
2030

2011

2011
Low-income
Middle-income
High-income
Total (=Population)
Middle-income
High-income

2020
112
1,665
6,023
7,800
2,046

Japan (ref.)Taiwan (ref.)

2011

2020

2030

2011

2020

2030

2011

2020

2030

62,96924,324465
87,759---------

42,63550,718
1,928
95,28132,228765

20,941
71,952
7,458
100,351
62,062
2,171

489
23,779102,845
127,114---------

402
18,790106,274
125,466---------

319
14,012
106,525
120,855---------

242
10,983
11,937
23,162---------

116
6,940
16,21923,275---------

56
3,896
18,844
22,796---------

21

Technical Note 3: Methodology for Calculation of the Population of the Middle-Income
Stratum under Conditions of Uneven Distribution of the Benefits of Growth(Kuznetz Hypothesis)
The Kuznetz hypothesis states that relative inequality worsens in the early stage of development
and then improves in the course of development (Meier [1995:20-21]). Kuznetz [1955] shows, using
cross country data, the relationship between the income levels of countries and their degree of income
inequality displays an inverted U-shape, and the hypothesis is also frequently termed the Kuznetz
inverted-U curve hypothesis. This relationship can be interpreted as follows: The need to concentrate
limited domestic resources in prioritised sectors worsens inequality but accelerates economic
development in the early stage of development (at the left of the peak of the Kuznetz curve). In thecourse of development (at the right of the curve), the country begins to consider an equitable distributionof the benefits of growth among the population, and policy measures result in an improvement in income
inequality.
Figure A6 shows the results of regression of the Kuznetz curve, using data for per-capita GDP atnominal purchasing power parity (PPP) in 2010 on the horizontal axis and for the average S5/S1 ratio on
the vertical axis 16. The peak of the curve is at $3,838 (in PPP). In Asia (the scope of Asia consideredhere is indicated in Note 1 for Figure 2 in the text) the only countries which had not reached that level in2011 were India ($3,694) and Vietnam ($3,359). That is, for most countries in Asia, the use of theworsening of inequality as an engine to accelerate economic growth is not supported by the Kuznetz
hypothesis 17.
Figure A6: Kuznetz Curve
45(S5/S1 ratio (times) : Average for 2000～2010)
y = ‐1.1184x2 + 18.458x ‐ 64.726
R² = 0.0712

40
35
30
25
20
15
10
5
0
5

6

7

$ 3,836

8
9
10
11
12
(per‐capita nominal GDP in 2010: in international dollar (logarithm))(Note) The estimate of the coefficient is statistically significant at the 5% level, and estimated parameters for both income
and the square of income are significant at the 1% level.
(Data source) IMF “World Economic Outlook Database April 2012”16

The S5/S1 ratio is the ratio of the average income of the highest-earning 20% (S5) against the average income of
the lowest-earning 20% (S1). The IMF Database offers S5 and S1data for every year from 2000 to 2010 for few
countries. Here, the average of the available data for 2000-2010 is employed. This means that if data is only
available for one year, the data is adopted as is, without averaging.
17
However, it can be argued that the result of a data analysis is strongly dependent on the method of calculating
income disparity and the choice of the base year. For example, Anand and Kanbur [1993] show that differences in
the method of calculation of income inequality and the choice of dataset can produce a U relationship, an inverse-U
relationship, or no relationship at all. This paper uses the S5/S1 ratio as an indicator of income inequality simply
because it is the indicator for which data is available for the largest number of countries.

22

(Estimation of Income Distribution under Conditions of Worsening Income Disparity: Detailsof the “Income Growth Rate Function”)
To establish a model which expresses a scenario in which the economy grows while income
disparity worsens in the future, the original income distribution function is multiplied by the following“income growth rate function” (denoted as
).
1

·

1

· log

Where 、 、are household incomes in country i in 2011 (varies for eachhousehold), the average income of country i in 2011, and the future growth rate from 2011
to the target year, respectively. d expresses the degree of unevenness of distribution of thebenefits of growth (the degree to which the rate of growth of household income for thehouseholds with the lowest income is reduced in comparison to the average rate of growthof household income).
satisfies

·

· log

.

expresses a situation in which the households with the lowest income enjoy only 100(1-d)%of the benefits of growth. The analysis in this paper assumes that d=0.5, and attempts to determine theimpact on the future population of the middle-income stratum if income inequality continues until 2020
for all the Asian countries being considered. Figure 6 in the text shows the results obtained.

(Methodology for Calculation of the Future Population of the Middle-Income Stratum when
the Uneven Distribution of the Benefits of Growth continues in the Future)
Based on the assumptions above, the population of the middle- and high-income strata under theconditions of uneven distribution of the benefits of growth can be calculated as follows.
(1) Calculation of the income levels in 2011 which will become $5,000 and $35,000 in 2020 (denoted asand, respectively).
5000

35000

by
does not change the order of households within(2) As long as
1, multiplying
country i in terms of income level. In the situation above, because
0, the calculation process
is the same as described in Technical Note 2. That is,Population of the middle income stratum in 2020:
Population of the high-income stratum: F xxq(3) However, the solutions of the equations in (2) above cannot be directly derived, as the equations are
nonlinear for values above the mean income. Therefore, the second-best method is to generate
1,000 sets of(·g

0, 1, 2, … , 999,,0, 1, 2, … , 999), and observe which values of p result indata for each country·gexceeding 5,000 and 35,000. Using such values of p in the calculation described in (2) above will
give the future population of each stratum.
(4) Note that this second-best method may generate an error (a discrepancy no larger than 0.1% of thetotal population) in the populations of each stratum compared with the results of the first-best
method. However, executing the same calculation for 10 countries offsets the error to some extent,
and there is very little likelihood that the discrepancy between the populations given by the different
methods would exceed 10 million people. This level of error will not fatally affect the analysis
conducted in this paper. Figure A7 shows the results obtained for each country using the method
described in (3).

23

(Methodology for Calculation of the Future Population of the Middle-Income Stratum when
Income Disparity Improves)
The same calculation methodology can be applied to the estimation of the populations of income
strata in a scenario in which income inequality improves, as long as
1 (i.e. as long as thehouseholds with the lowest incomes enjoy a rate of growth of income less than double the rate of growthof mean income for the population as a whole). This paper assumes that
0.25 based on theexperience of Vietnam. The results of calculations of the populations of the respective income strata
under these conditions are shown in Figure A8.

Figure A7: Future Population of Each Stratum when Uneven Distribution of the Benefits of Growth
Continues
Stratum
Low-income
Middle-income
High-income

China

Hong Kong

Malaysia

Population

Loss

Population

Loss

Population

Loss

Population

291,507904,915
185,12875,785-82,342
6,557

140
1,872
5,788

28
207
-236

320,753
946,155
75,156

67,791-75,938
8,147

67,504
177,2939,935

10,513-11,608
1,096

3,339
21,248
8,152

Philippines
33,00371,323
6,423

Singapore

Korea

Thailand

Loss

723
-788
65

Vietnam

Loss

Population

Loss

Population

Loss

Population

Loss

Population

Loss

4,491
-4,934
444

67
962
4,563

11
140
-151

504
19,321
30,622102
1,340-1,442

14,861
48,6968,585

2,300-2,622323

46,211
46,783
2,287

3,576-3,936
359

Japan (ref.)Low-income
Middle-income
High-income

Indonesia

Loss

Population

Low-income
Middle-income
High-income

India

Population

Taiwan (ref.)Population

Loss

Population

Loss

376
19,949105,140-26
1,159-1,134140
7,611
15,525

23
671
-694

Figure A8: Future Population of Each Income Stratum when Income Disparity Improves
China
Stratum
Low-income
Middle-income
High-income

Hong Kong

Malaysia

Population

Loss

Population

Loss

Population

Loss

Population

Loss

185,128
1,020,965
175,457-30,595
33,708-3,114

94
1,560
6,147

-19
-105
123

221,440
1,056,204
64,419-31,522
34,111-2,58951,965
194,361
8,406-5,026
5,459
-433

2,292
22,361
8,087

-325
325
0

Loss
-100
-779
878

Population

Philippines
26,35878,521
5,870

Loss-2,1542,264-110Japan (ref.)Population

Low-income
Middle-income
High-income

Indonesia

Loss

Population

Low-income
Middle-income
High-income

India

Population

376
17,942
107,148

Loss
-26
-848
874

Singapore
Population

45
755
4,792

Korea

Loss
-11
-67
78

Taiwan (ref.)Population

93
6,564
16,618

Loss
-23
-376
400

24

Population

303
17,20332,942Thailand
11,47152,5198,152

Loss-1,091
1,201-110

Vietnam
Population

40,59052,881
1,810

Loss-2,0452,162-117

Technical Note 4: Methodology for Automatic Calculation of Future HDI Values(Automatic Calculation of Future HDI Values)
Time series data for the HDI are available from the UNDP website (database). While varying
from country to country, the database provides HDI data for five-year intervals from 1980 to 2005 andannual data after 2006. Although changes in the HDI can be tracked over a time series, it can only takevalues between 0 and 1, and simple calculation of the rate of increase of the HDI will tend to give a lower
rate of increase the higher the HDI (and vice versa).
I will therefore introduce the notion of “rate of approach”, by means of which we calculate theextent to which the gap between a country’s HDI level and 1, the maximum possible level, has been
narrowed. Looking at the rates of approach for each country from 1980 (five-year intervals), it can becasually confirmed that the rates are moderately stable for almost all the countries. The following
recurrence formula can therefore be derived for a country i’s HDI in 2020, with its HDI in 2011 as thebase. Given that the rate of approach for country i (denoted as ) is the five-year rate, when calculating
the change from 2011 to 2015, the rate must be multiplied by 4/5.
1
where

1

1.8

0.8

1.8

0.8

is the HDI level for country i in the year 20XX.

(Automatic Calculation of Future IHDI values)
The HDI is an index which comprises indicators for three areas: health (life expectancy), educationand income. In the inequality-adjusted HDI (IHDI), the UNDP introduces inequality measures(expressed as “A” in UNDP [2011]) for each of the three indices and calculates the “inequality-adjusted”
life-expectancy index, education index and income index. The IHDI is the geometric mean of thesethree inequality-adjusted indices.
This paper deals with income inequality. Because the status of education and health is only
weakly correlated with income inequality, in calculating the “inequality-uncorrected” IHDI it is assumed
that while the loss rates for the education and life expectancy indices will decrease in accordance with thetrend, the loss rate for the income index will be unchanged. The procedure for calculation is as follows.
(1) First, the IHDI in 2011 is regressed on the HDI in 2011 for each area k (k = health, education,
income), and the coefficient for HDI ( , ) is obtained.
is multiplied by the difference,
between HDI in 2020 and in 2011 (denoted as ∆), , and this figure is added to the 2011IHDI of the specific area under consideration.
(2) The IHDI of country i in 2020 is calculated as the geometric average of the IHDIs for the three areas.
This treatment is applied to each country’s IHDI as long as that country’s IHDI is calculated by theUNDP.
(3) The methodology for calculation of the inequality-uncorrected IHDI is as follows: First,
inequality-uncorrected IHDI for income in 2020 (denoted as) is calculated using the,following equation:,

The geometric mean of
inequality-uncorrected IHDI.

,
,

∆

·

· 1

and the IHDIs for health and education is the(4) Note that IHDIs are not calculated for all countries. Furthermore, figures for the IHDI are
significantly lower than figures for HDI. This paper therefore expresses the influence of lack ofaction regarding income inequality on the HDI not as changes in the figures themselves but aschanges in the country’s ranking. The ranking method follows the UNDP [2011].

25

[References]
Anand, Sudhir. and Ravi Kanbur [1993], “The Kuznetz Process and the Inequality – Development
Relationship”, Journal of Development Economics, 40, 25-52.
Barro, Robert J., and Xavier Sala-i-Martin [1995], “Economic Growth” McGraw-hill, Inc..
Directorate-General for Economic and Fiscal Analysis, Cabinet Office [2010] “World Economic
Trends: The Spring Report in 2010 - Economic Recovery Driven by Asia andContagion from the Greek Fiscal Crisis –“, (In Japanese)
Kharas, Homi [2010], “The Emerging Middle Class in Development Countries”, OECD
Development Centre Working Paper No.285 (DEV/DOC(2010)2), January 2010.
Kuznetz, Simon [1955], “Economic Growth and Income Inequality”, American Economic Review,45, 1-28.
Meier, Gerald M. [1995], “Leading Issues in Economic Development”, Oxford University Press,
New York, 6th edition.
Ministry of Economy. Industry and Trade [2010] “White Paper on International Economy and Trade2010”.
National Institute for Research Advancement [2009] “Asia as a Single ‘Domestic Market’ The
Harmonization of Rules and Systems”, NIRA Report 2009.10 (In Japanese)
United Nations Development Programme [2011], “Human Development Report 2011 Sustainability
and Equity: A Better Future for All” hdr.undp.org/
Yanagawa, Noriyuki, and Naoko Mori [2010] “The Stratum Drawing Asian ‘Domestic Demand’:
Expansion of Middle-Income Stratum Would Be Huge Even If the Economy Slows
Down”, NIRA Monograph Series No.31 (In Japanese)

Profile of Akio Egawa:Senior Researcher, National Institute for Research Advancement (NIRA), February 2012 - present.
Senior Deputy Director, Directorate-General for Economic and Fiscal Management, Cabinet Office,
Government of Japan, 2009-2012.
First Secretary, Embassy of Japan in Thailand, 2006-2009.
Holds an MSc in Economic and Social Policy Analysis from the University of York, UK, and an
MSc in Development Finance from University of London (SOAS), UK.

26

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