Editor's note:
This is the first 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.
China has just commemorated the 30th anniversary of the launch of its reform and opening up. The three decades since 1978 have been marked with an impressive performance of economic growth and poverty reduction that is unprecedented in human history.
Going forward, however, China faces the serious challenge of ensuring that its strong growth is shared more broadly and equally among the population. Addressing this challenge is a key component of the strategy to pursue more balanced urban-rural development and a higher degree of social harmony.
As China's leading growth powerhouse and a pioneer of reform and opening up for three decades, Guangdong Province is now facing the same challenge and has the opportunity to lead the nation again in paving the way for pro-poor and more equitable growth.
Although inequality is often discussed in terms of income, this World Bank study adopts a broader concept. It defines inequality as having three dimensions: absolute poverty, inequality in opportunity, and inequality in outcomes.
Absolute poverty is a state in which individuals are deprived of the minimum means for basic living. It is an extreme form of inequality.
Inequality in opportunity occurs when individuals do not have the same chances to pursue their life goals due to predetermined circumstances beyond their control (for example, gender, race, place of birth, family situation).
Inequality in outcomes refers to disparity in terms of income and wealth.
Geographical roots
Absolute poverty remains a significant concern in rural Guangdong, inequality in opportunity is widespread, and income inequality has risen to an alarming level.
Inequality in Guangdong Province has geographical roots. The natural geography of the province is such that the Pearl River Delta region is endowed with significant advantages over other regions. The PRD region has also enjoyed proximity to, and historical ties with, Hong Kong and Macau, and through them, the rest of the world. As a result, Guangdong's economic growth has been highly unbalanced in a spatial sense.
Economic activities are concentrated in the PRD region, where per capita GDP is much higher and the growth rate much faster than those of the lagging regions.
If the spatial distribution of economic growth could be made more balanced - for example, through the transfer of industrial activities (industrial transfer) - from the PRD to lagging regions, then reducing inequality would be easier and faster.
The most significant sign of the de-concentration movement is the strong catch-up of two cities close to the PRD, namely Heyuan and Qingyuan. However, more detailed analysis suggests that the rise of the two cities can be attributed only partially to the de-concentration of a few industries (for example, nonferrous metallurgy and mining, as well as nonmetal mining products) from the PRD.
Overall, a clear trend of transfer of labor-intensive industries from the PRD to other regions of Guangdong does not seem to have emerged.
Why has the trend of deconcentration been so weak, despite government promotion since 2005?
One plausible explanation is that PRD firms had only weak incentives to move out, and more new firms still preferred to establish themselves in the PRD region because of the existence of some "pull" forces - that is, economic forces that reward firms for locating in the PRD region.
Concentration
The most important pull force to Guangdong is agglomeration economy, which rewards the geographical concentration of firms. The second pull force is a favorable investment climate, in which the PRD region has a clear advantage over other regions.
A key implication of the existence of the pull forces is that geographical concentration of industrial activity can, contrary to common perception, be both desirable and inevitable.
It is one of the underlying reasons urbanization boosts productivity. Indeed, as the World Development Report 2009 (World Bank 2008) has found, economic growth is seldom balanced, and efforts to spread it prematurely will jeopardize progress.
Two centuries of economic development show that spatial disparities in income and production are inevitable. A generation of economic research confirms this; there is no good reason to expect economic growth to spread smoothly across space.
Industrial transfer from the PRD to other regions will certainly continue, but given the market force of an agglomeration economy, its scale is unlikely to be large enough to alter significantly the spatial concentration of growth in the PRD region.
This trend implies a tougher challenge for the Guangdong provincial government: it must reduce inequality on the basis of spatially unbalanced growth.
One option for Guangdong is to allow the full play of an agglomeration economy in shaping economic geography and shift the focus of policy efforts to improving the investment climate of lagging regions.
(To be continued)
