A publication of the Asian Development Bank No. 2     December 2008
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“Should growth or inequality be prioritized in the design and execution of economic policies?”
—Guanghua Wan
Senior Research Fellow and Project Director of World Institute for Development Economics Research, United Nations University
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New Publications

Nature and Causes of Inequality

Guanghua Wan, editor. 2008. Inequality and Growth in Modern China. Oxford University Press.

Understanding the poverty–growth–inequality triangle is crucial to policy makers

Inequality and Growth in Modern China, a collection of essays edited by Wan Guanghua, is an ambitious attempt to explain the nature and causes of inequality in post-reform People’s Republic of China (PRC), where inequality continues to grow despite significant gains in poverty reduction amid the high growth of recent decades.

The book will be most useful to those interested in deconstructing inequality (“decomposing” is the term the book uses) in terms of the various factors affecting it, such as disparities in approaches to development, advantages arising from regional location, resource endowments, financial development, extent of innovation, and educational opportunities.

Although the essays cover new ground and pose interesting observations, the emphasis on quantitative and macrolevel analysis fell short of my hope that the volume would substantially improve the qualitative understanding of noneconomists or general social scientists of the poverty–growth–inequality nexus as experienced by different social sectors in different parts of the PRC.

The few essays that did provide a historical background and review of the policy framework—those by Justin Yifu Lin and Peilin Liu, Kai-yuen Tsui, and Min-dong Paul Lee—were more informative in this regard but all too brief.

Among the interesting observations is that even “equalizing” factors, such as education and social security systems, may have “disequalizing” effects in the short run. Examples are when access to education in good institutions is in the first place available only to those in more developed urban areas, or when low coverage of social security results in bias against the rural poor. Kuznet’s hypothesis had indeed long drawn attention to the differences in the impact of growth on inequality, with inequality tending to rise with increasing growth if one looks at the short term, but eventually declining if one uses longerterm growth timelines.

To some extent, the essays appear to argue circuitously, such as when a claim is made that interprovincial or interregional inequality can be attributed to differences in resource endowments (leading to a rich coastal east, but a poor central region and an even poorer western region). Then several other places in the book point out that location itself (spatial convergence) can account for advantages in access to foreign direct investment, financial services, and access to quality education, among others. True enough, there appeared to be much more focus on interregional (coastal versus interior) or interprovincial inequality than other manifestations of inequality in this collection of essays, which presents findings from a research project.

Largely ignored, it seems, were inequality between foreign/multinational and local industry sectors, between the formal and informal economies, between migrants and hukou (residency permit) holders, between rural and urban property rights, or even interethnic and gender inequality insofar as these may also have been compounded by reform-era growth and the globalization of the PRC economy. In Shanghai, the face of inequality may well be the disheveled rural migrant sleeping on a park bench in front of grand malls displaying the most exclusive western signature clothes along Nanjing Road—and this is a face that is all too familiar in cities across the developing world.

Even in terms of examining inequality between coastal areas and the interior, more comprehensive and historically contextualized explanations would have been helpful. The authors, for instance, could have pointed out that Beijing, Tianjin, Shanghai, Guangzhou, and Xiamen, which experienced the fastest pace of growth among PRC cities, were not only incidentally coastal. Beijing, being the capital, received preferential treatment from the central government; Shanghai, being the frontrunner in opening up to the West, was far ahead in openness of attitudes; and Guangzhou and Xiamen/Fujian, being traditional sources of international migration, were also more linked to global forces.

Several essays, in fact, put forward recommendations that would address locationbased disparities, such as calling for the restructuring of existing industries in the provinces to comply with the principle of comparative advantage; moving to expand access to capital by poorer regions, especially those in the interior; and promoting innovation and nurturing high-tech companies for inland provinces. For the more general issues of poverty and inequality, one author also recommended expanding the coverage of social security systems for the poor.

As Wan Guanghua rightly points out, the impact of growth on inequality (more growth leading to greater inequality in the short run), and of inequality on growth (greater inequality ultimately suppressing growth) in the PRC will have repercussions for the country’s major trading and investment partners, to the extent that domestic demand and capacity for absorption may be affected. However, the direction pursued by this research is undoubtedly vital to understanding not only the PRC economy or how it will affect other economies but also in pointing the way forward for other developing countries still grappling with the issue of whether growth or redistribution takes precedence, if indeed the goal is the eradication of poverty.

Aileen Baviera is Dean of the Asian Center of the University of the Philippines.