examining the economic underpinnings of social unrest in China, Keidel (2005) makes the point that dissatisfaction with the economic dislocations caused by reforms, which are a necessary part of engendering good inequalities, have been amplified by corruption and malfeasance within state-owned enterprises and local governments. Police records reported in official bulletins cited by Gill (2006) indicate that the number of collective protests, violent confrontations and demonstrations deemed to be incidents of social unrest has risen nearly tenfold from 8,300 in 1993 to almost 80,000 in 2005. Pei (2006) argues that these indications of social discontent have made it that much more difficult for China to undertake the reforms needed to address remaining structural weaknesses, notably in the financial system—reforms that a study by the IMF (2003) suggest might be critical to sustaining growth. Thus, Pei (2006) talks of China’s “trapped transition.” In India, the political failure of the “Shining India” electoral campaign of the BJP in 2004 has been widely attributed to its neglect of the emerging inequalities in the wake of pro-growth reforms. Such attributions are always questionable, but there is also evidence from attitudinal surveys suggesting that rising inequality is a popular concern in India. In a 2004 National Election Survey, three quarters of the respondents indicated that the reforms of the past decade and a half had only benefited the rich (Suri, 2004). Within India’s democratic polity, such sentiments have resulted in political pressures that have forced the government to postpone needed reforms (Bardhan, 2005). For instance, last year the government had to withdraw plans to privatize 13 leading industrial public-sector undertakings. The concerns about rising inequality and slow progress against poverty have also led to various new antipoverty programs, which we return to.

# **4.  Preserving the good inequalities and reducing the bad ones**

Putting in place the right mix of policies and institutions to ensure that growth is sustained and broad-based is now high on the policy agenda of both governments. While inequality has been prominent in (at least) the rhetoric of Indian politics for decades, it is a relatively new concern in China, although it has emerged as a major concern in recent years.<sup>24</sup> Should policy makers be so worried about rising inequality? Possibly it is inevitable to some degree. Over five decades ago, Arthur Lewis (1954) observed that the defining feature of structural transformation in economies with large pools of surplus labor is the gradual transfer of surplus labor from “traditional” low-productivity activities to “modern” high-productivity activities. Lewis argued that this process is inevitably accompanied initially by rising levels of inequality as some make the transition and others are, at least temporarily, left behind.<sup>25</sup> As

> 24 Han and Whyte (2006) quote results of a survey in 2004 of senior public officials done by the Communist Party’s Central Party School which found that income inequality was the highest expressed concern, dominating all other issues.. 25

> The dimensions along which this productivity divide are manifested—rural vs. urban, traditional vs. modern agriculture, agriculture vs. industry, etc.—will naturally vary from context to context, even within a country. And which dimensions are most relevant will clearly matter for thinking about policy. The larger point, however, is that there is some axis along which the dualism is manifested.

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