Inequality in India and China: Is Globalization to Blame?

Pranab Bardhan
YaleGlobal, 15 October

BERKELEY: Economic inequality is on the rise around the world, and many analysts point their fingers at globalization. Are they right?

Economic inequality has even hit Asia, a region long characterized by relatively low inequality. A report from the Asian Development Bank states that economic inequality now nears the levels of Latin America, a region long characterized by high inequality.

In particular, China, which two decades back was one of the most equal countries in the world, is now among the most unequal countries. Its Gini coefficient – a standard measure of inequality, with zero indicating no inequality and one extreme inequality – for income inequality has now surpassed that of the US. If current trends continue, China may soon reach that of high-inequality countries like Brazil, Mexico and Chile. Bear in mind, such measurements are based on household survey data – therefore most surely underestimate true inequality as there is often large and increasing non-response to surveys from richer households.

The standard reaction in many circles to this phenomenon is that all this must be due to globalization, as Asian countries in general and China in particular have had major global integration during the last two decades. Yes, it is true that when new opportunities open up, the already better-endowed may often be in a better position to utilize them, as well as better-equipped to cope with the cold blasts of increased market competition.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

The other reaction, usually on the opposite side, puts aside the issue of inequality and points to the wonders that globalization has done to eliminate extreme poverty, once massive in the two Asian giants, China and India. With global integration of these two economies, it is pointed out that poverty has declined substantially in India and dramatically in China over the last quarter century.

This reaction is also not well-founded. While expansion of exports of labor-intensive manufacturing lifted many people out of poverty in China during the last decade (but not in India, where exports are still mainly skill- and capital-intensive), the more important reason for the dramatic decline of poverty over the last three decades may actually lie elsewhere.

Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people – below the admittedly crude poverty line of $1 a day per capita – in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices – mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

The Indian pace of poverty reduction has been slower than China’s, not just because growth has been much faster in China, but also because the same 1 percent growth rate reduces poverty in India by much less, largely on account of inequalities in wealth – particularly, land and education. Contrary to common perception, these inequalities are much higher in India than in China: The Gini coefficient of land distribution in rural India was 0.74 in 2003; the corresponding figure in China was 0.49 in 2002. India’s educational inequality is one of the worst in the world: According to the World Development Report 2006, published by the World Bank, the Gini coefficient of the distribution of adult schooling years in the population around 2000 was 0.56 in India, which is not just higher than 0.37 in China , but higher than that of almost all Latin American countries.

Another part of the conventional wisdom in the media as well as in academia is how the rising inequality and the inequality-induced grievances, particularly in the left-behind rural areas, cloud the horizon for the future of the Chinese polity and hence economic stability.

Frequently cited evidence of instability comes from Chinese police records, which suggest that incidents of social unrest have multiplied nearly nine-fold between 1994 and 2005. While the Chinese leadership is right to be concerned about the inequalities, the conventional wisdom in this matter is somewhat askew, as Harvard sociologist Martin Whyte has pointed out. Data from a 2004 national representative survey in China by his team show that the presumably disadvantaged people in the rural or remote areas are not particularly upset by the rising inequality. This may be because of the familiar “tunnel effect” in the inequality literature: Those who see other people prospering remain hopeful that their chance will come soon, much like drivers in a tunnel, whose hopes rise when blocked traffic in the next lane starts moving. This is particularly so with the relaxation of restrictions on mobility from villages and improvement in roads and transportation.

More than inequality, farmers are incensed by forcible land acquisitions or toxic pollution, but these disturbances are as yet localized. The Chinese leaders have succeeded in deflecting the wrath towards corrupt local officials and in localizing and containing the rural unrest. Opinion surveys suggest that the central leadership is still quite popular, while local officials are not.

Paradoxically, the potential for unrest may be greater in the currently-booming urban areas, where the real-estate bubble could break. Global recession could ripple through the excess-capacity industries and financially-shaky public banks. With more internet-connected and vocal middle classes, a history of massive worker layoffs and a large underclass of migrants, urban unrest may be more difficult to contain.

Issues like globalization, inequality, poverty and social discontent are thus much more complicated than are allowed in the standard accounts about China and India.

Pranab Bardhan is professor of economics at the University of California, Berkeley, and co-chair of the Network on the Effects of Inequality on Economic Performance, funded by the MacArthur Foundation. He was the editor of the “Journal of Development Economics” for many years.