WB Recommends Strategy for Guangdong to Reduce Inequality for Shared Growth

What can China do with the rising inequality in its fast growing economy? A new World Bank report advises the government to adopt a three-pillar strategy: eliminating absolute poverty, reducing inequality of opportunity, and containing inequality of outcome.

Although "inequality" is often discussed in terms of income, this Bank report considers it in three dimensions: first, absolute poverty, which refers to a condition whereby people are deprived of the minimum means for basic living; second, inequality of opportunity, which denies people equal opportunities to pursue their life goals, which is the case, for example, when individuals have unequal access to education, health services or job opportunity, finance and land; and thirdly, inequality of outcome, referring to the disparities among households and individuals in terms of income and wealth.

The report entitled Reducing Inequality for Shared Growth in China: Strategy and Policy Options for Guangdong Province, focuses on this pioneering province in China's ongoing reform process. "Guangdong is at a critical juncture in its transition to a trajectory of scientific development", said Mr. Wang Yang, Party Secretary of Guangdong Province at an earlier workshop when the findings of the study were presented to the entire leadership of Guangdong. "The study provides significant guidance and inspiration for our efforts to reduce urban-rural disparities. Many comments and suggestions in the report are very pertinent and insightful". The study was initiated by Mr. Robert B. Zoellick with Mr. Wang Yang during his first visit to China as President of the World Bank in late 2007.

The report begins by assessing Guandong's situation. Despite remarkable economic growth in the past few decades, absolute poverty remains a significant concern in rural Guangdong, inequality of opportunity is widespread, and inequality of outcomes has risen to an alarming level. The report warns that, while some inequality of outcomes – particularly when inequality of income reflects uneven performance among individuals – is inevitable and even good for efficiency and growth, too much inequality can be harmful to growth and generate substantial inequality of opportunity and distortion in market and public institutions, threatening social stability.

The report then stresses the role of the government in tackling inequalities in the above dimensions. First, the government needs to assume responsibility for eliminating absolute poverty. This can be done largely by expanding and improving the minimum living allowance (dibao) system to protect the extreme poor and vulnerable. The Dibao system can be implemented with more fiscal input, better defined financing responsibilities, improved targeting mechanisms, clearly defined eligibility threshold and benefit structure, and a more transparent governance approach.

Second, the government can help boost rural income by ensuring more equal opportunities for all. The report focuses on measures to promote and facilitate rural labor transfer to non-farming jobs, and to improve investment climate in less developed regions. It recommends a set of measures to deepen rural finance reforms, including launching a pilot of village-level, member-based financial cooperatives in selected rural and mountainous areas, and redesigning fiscal incentive programs to promote access to finance for rural households and micro- and small enterprises. In addition, the report highlights the need to better protect the rights of rural population over land, by establishing a land registration system, granting land rights certificates, adopting a new farmland protection system that maximizes the overall economic value of land, and piloting the land transferrable development rights mechanism.

Third, the government has an important role to play in expanding the opportunity for all, especially for the disadvantaged poor. Particular focus should be placed on investing in people by ensuring more equal provision of services in basic education, skills development and health care. Building on the recent progress in reforming compulsory education financing, the report argues for an increase of the subsidy to phase out miscellaneous fees, and for an enhanced focus on measuring and monitoring multiple dimensions of educational performance. In skills development, it proposes that performance-based budgeting, vouchers and training funds be adopted to make financing work for results. To deepen rural health reform, the study recommends strengthening of the role of the medical aid system, and piloting greater pooling for the New Rural Cooperative Medical Scheme beyond the county level to the provincial level.

The Bank study also notes that though it would be more desirable if economic growth itself is more evenly spread across regions, concentration of economic activities in some locations is indeed inevitable, as also evident in experiences worldwide. While the concentration of economic activities in the Pearl River Delta region of Guangdong is a key factor behind the regional and urban-rural disparities within the province, agglomeration economy resulting from the concentration is also an important source of productivity growth and competitiveness. Guangdong will need to reduce inequality and promote development on the basis of spatially unbalanced growth.

"While the report analyzes Guangdong-specific data and sets forth measures for the consideration of the Guangdong authority, the lessons can be easily applicable for many other provinces in China and indeed can be useful for other developing countries," said Xiaoqing Yu, World Bank's Sector Manager and Lead Economist for Social Protection in the East Asia and Pacific Region.

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