Is there really such a thing as "good inequality"? It's the question of the moment for observers of the Chinese economy. The devil's bargain, according to defenders of the Chinese strategy of pushing breakneck growth, is that inequality must grow in some sectors before it declines overall -- that to sow the seeds for widespread social affluence in the future, one must grit one's teeth and accept the reality of uneven development in the present. But to critics both within and without China, rising income equality doesn't just betray the fundamental goals of a socialist state; it puts in peril the stability of the entire country. While Shanghainese dance the night away, the rural poor are struggling to survive. And even if millions of people are escaping extreme poverty, the much greater gains made by well-educated urban dwellers set the stage for a classic revolution of rising expectations. No wonder tensions appear to be reaching the boiling point, judging by the constant news reports of riots and other public disturbances.
That inequality is growing in dramatic fashion is without question. The most detailed discussion of what's happening that I've seen so far comes courtesy of a draft release of a new book from the World Bank, "Dancing With Giants: China, India, and the Global Economy." Chapter 6, "Partially Awakened Giants: Uneven Growth in China and India," by World Bank economists Shubham Chaudhuri and Martin Ravallion, surveys the available data and concludes that widening income inequality is indisputable, both in China and in India, but particularly so in China.
But Chaudhuri and Ravallion add a new twist to the debate by distinguishing between "good" and "bad" inequalities. "Good inequalities are those that reflect and reinforce market-based incentives that are needed to foster innovation, entrepreneurship and growth." Such incentives reward those who have more education, or access to capital, for example. Bad inequalities, such as "geographic poverty traps, patterns of social exclusion, inadequate levels of human capital, lack of access to credit and insurance, corruption and uneven influence ... can all conspire to simultaneously fuel rising inequality and prevent certain segments of the population from making the transition out of traditional low-productivity activities."
Both India and China, write the authors, should be concerned about the rise of "bad inequalities." But China's predicament is more severe. So far, "Chinese authorities have been able to compensate for rising inequality by achieving high growth rates," but "the 'Catch 22' is that the emerging bad inequalities in China will make it harder to promote the growth that will be needed to compensate for those inequalities."
That paradox adds a relatively new gloss to the debate. You can't just grow your way out of trouble, because accelerating inequality (of the bad kind) will put that growth in peril.
The World Bank economists recommend that the Chinese government devote resources to narrowing the inequality gap by addressing problems afflicting the rural poor. Among their proposals, strengthening the rural infrastructure, expanding access to education, lowering taxes on agriculture, and "better policies for delivering quality health and education services to poor people, and policies that allow key product and factor markets (for land, labor and credit) to work better from the point of view of poor people."
In its public statements and policy proposals, China's central government has been pursuing an agenda that sounds remarkably similar. There is every indication that at the very top, China's leaders are just as concerned about widening inequality in China as are the most vociferous left-wing critics savaging China from afar. As well they should be, if they are mindful of how previous Chinese authoritarian dynasties ultimately lost their power.
But the real Catch-22 lies elsewhere. The authors write: "maintaining sufficient growth will require even greater efficacy of the policy levers used to promote growth." But there's reason to believe that the reforms that have been instituted thus far are steadily reducing the central government's power to push through policy changes, particularly insofar as applied to getting local governments to kowtow to Beijing's dictates. But that brings us to the crucial question of "governance" -- which is Chapter 7 of "Dancing With Giants."