What is one to make of this? In what ways has growth been uneven? Are the data suggesting rising inequality to be believed? If so, should the fact that segments of the population appear to have been left behind be of concern? And does this pose a risk to the sustainability of growth and poverty reduction?

This paper tries to shed some light on these questions. While of undeniable interest in both countries, these questions also merit attention elsewhere because the impact that the rise of China and India is going to have on the rest of the world—a topic that has received enormous attention in the press over recent years—depends very much on whether these two giants are able to sustain the growth rates they have achieved over the last quarter century. And that in turn hinges on whether the concerns about the unevenness of the growth thus far are legitimate and whether that unevenness poses a risk to future growth.

After noting a number of data issues, we examine the ways in which growth has been uneven in China and India and what that has meant for inequality and poverty. Drawing on analyses based on existing household survey data and aggregate data from official sources, we show that growth has indeed been uneven—geographically, sectorally and at the householdlevel—and that this has meant uneven progress against poverty, less poverty reduction than might have been achieved had growth been more balanced, and an increase in income inequality. We then turn to why growth was uneven and why this should be of concern. Here, we draw on the evidence that is available. But because of the complexity of the underlying issues and the difficulties of settling them in an empirically rigorous manner, the discussion is necessarily somewhat more speculative. We structure the discussion around the idea that there are both “good” and “bad” inequalities—drivers and dimensions of inequality and uneven growth that are good or bad in terms of what they imply for both equity and long-term growth and development.

We argue that the development paths of both India and China have been influenced by, and have generated, both types of inequalities and that while good inequalities—most notably those that reflect the role of economic incentives—have been critical to the growth experience thus far, there is a risk that bad inequalities—those that prevent individuals from connecting to markets and limit investment and accumulation of human capital and physical capital—may undermine the sustainability of growth in the coming years. We argue that policies are needed that preserve the good inequalities—continued incentives for innovation and investment—but reduce the scope for bad ones, notably through investments in human capital and rural infrastructure that help the poor connect to markets.

# **1.  Data issues**

There are always reasons to be skeptical about economic statistics and measures of inequality and poverty are no exceptions. The issues are rather different in these two countries.

A number of data problems have clouded past assessments of what has been happening to poverty and inequality in China. Some of these problems are common to other countries (developing and developed) while others are seemingly unique to China. Comparability between 3