Editor's note:
This is the second of three articles adapted from the World Bank report titled "Reducing Inequality for Shared Growth in China: Strategy and Policy Options for Guangdong Province." Please visit www.worldbank.org/china for the original version.
Given the limited potential to make economic growth more even among regions, what strategy should the Guangdong Provincial Government adopt to reduce inequality?
This study recommends a three-pillared strategy: eliminating absolute poverty, reducing inequality in opportunity, and containing inequality in outcome.
Absolute poverty
Absolute poverty is in fundamental conflict with the social values of most societies and certainly with those of China.
Ensuring that individuals are free of absolute poverty is the responsibility of the government. Therefore, one of the most important policy objectives for Guangdong Province is to eliminate absolute poverty in a limited period of time.
Particularly given the province's leading role in China's development and reform, it is only appropriate that high priority be placed on this policy objective.
The financial and administrative strength of the province rules out any question regarding the attainability of this goal.
Unequal opportunity
Inequality of opportunity conflicts with the value of fairness in most societies. Moreover, it hurts economic efficiency and long-term growth.
Institutions and policies that promote a level playing field - where all members of the society have similar chances to become socially active, politically influential, and economically productive - contribute to sustainable growth and development for two sets of reasons.
First, there are many market failures in developing countries, notably in the markets for credit, insurance, land, and human capital. While correcting market failure is the ideal response, when this is not feasible or far too costly, some forms of redistribution - of access to services, assets, or political influence - can increase economic efficiency.
Second, high levels of economic and political inequality tend to lead to economic institutions and social arrangements that systematically favor the interests of those individuals and groups with more influence.
Both middle and poorer groups of the population end up with talent that is left unexploited. Society as a whole is then likely to be more inefficient and to miss out on opportunities for innovation and investment.
In the case of Guangdong, two main sets of interventions are most important and relevant.
First, public policies should promote more equal access to education, health services, and basic social protection.
Second, public and market institutions should be oriented toward providing a level playing field for individuals.
Unequal outcomes
The nature of inequality in outcomes measured in terms of income and wealth is more complicated.
Some inequality in outcome is "good" for efficiency and growth, so government policy should not pursue a completely equal distribution of income and wealth, particularly when inequality in income reflects uneven performance among individuals. Matching reward with performance is the foundation of market-based incentives and has been an essential element of China's successful reforms.
Urban-rural inequality in outcomes can also be good when it is caused by robust productivity growth in the urban sector, implying that the gap will narrow at some point as urbanization and productivity growth continue.
However, inequality of outcomes can be "bad," making a case for some government intervention.
Even when inequality reflects unevenness of performance among individuals, it can become harmful to growth when it generates substantial inequality in opportunity and distortion in market and public institutions in such a way as to threaten social coherence and stability.
Not all income inequality reflects performance gaps; a great deal of inequality in outcomes may reflect unequal opportunity, an uneven playing field, or a society's failure to prevent theft - not the usual criminal act of theft, but the theft of public property and the abuse of public power through corruption.
The most appropriate government policy toward inequality in income and wealth, therefore, is to contain it to a socially acceptable level with minimum cost in terms of efficiency.
What, then, is an acceptable level of inequality in income for Guangdong Province?
How much of the existing income inequality is "good"?
These questions require another study on the extent to which the existing income inequality reflects performance gaps.
This study focuses more on the elimination of absolute poverty and the reduction of inequality of opportunity, which will both contribute to a more equal distribution of income and wealth.
(To be continued)
