Income Disparity In China: Crisis Within Economic Miracle

Crisis within Economic Miracle

Dianqing Xu, Xin Li

• Publisher: WSPC
• Year: 2014
• ISBN:
  9789814525268
• Topic: Biological Sciences
• Subtopic: Science General
• Index: Biological Sciences

China has achieved remarkable economic success in the past three decades and has become the second-largest economy in the world after the United States. However, accompanying this rapid economic growth is an increasing income inequality. In recent years, China's income disparity has reached an alarming level, making it one of the countries with the most unequal income distribution in the world.

The widening income gap is the root cause of many issues in contemporary China. How should China step up distribution system reform? How should China deepen the reforms to its fiscal and tax systems? Should the government increase wages to achieve the income multiplication plan? What is the fundamental measure to tackle income disparity issues in China? With in-depth analysis and empirical studies on these questions, this book provides comprehensive perspectives on China's income disparity issues that most international scholars are concerned about.

Contents:

• The Widening Gap between the Rich and the Poor will Inevitably Divide the Society
• Lewis Turning Point
• Surplus Rural Labor
• Story Behind the Labor Shortage
• Rule of Industrial Transfer
• Consumption and Expansion of Domestic Demand
• How Long Can the High Savings Ratio Last?
• The Proportion of Labor Compensation
• Is the Gap Between Urban and Rural Areas Widening or Narrowing?
• The Minimum Wage Law is a Double-edged Sword
• The Population Trap and the Demographic Dividend
• Tax Reform and the Gap between the Rich and the Poor
• Preparing for Danger in Times of Peace to Prevent a Financial Crisis
• Populism Experiment of Latin America
• Who Divides Thailand?
• Criticizing Populism and Depending on Market Mechanisms to Narrow the Gap between the Rich and the Poor

Readership: Graduates, professionals, academics and researchers who are interested in Chinese economy, especially in China's urban-rural gap and income disparity.

Chapter 1

THE WIDENING GAP BETWEEN THE RICH AND THE POOR WILL INEVITABLY DIVIDE THE SOCIETY

Since the 1990s, the degree of inequality in China has increased and has become more serious. Therefore, more attention should be given to eradicating this problem.

The income distribution gap among Chinese residents is mainly reflected in three aspects, namely, the income gap between urban and rural residents, the income gap among residents in different regions, and the income gap among all classes of society. The growth rate of income differs among Chinese residents according to six combinations of geography, city, and countryside.

Narrowing the geographical gap mainly corresponds to the government’s investment policy. The geographical gap will not become severe as long as the people are given the freedom to migrate. The mobility of the labor force can effectively narrow the geographical gap.

Narrowing the income gap among all classes of society mainly corresponds to the government tax and transfer payment policies. By strengthening its tax reforms, transfer payments, and social security system, the government will be reaching out to the poor and bridge the gap between the rich and the poor among all classes of society.

Employment is another solution to bridge the gap between urban and rural areas. The poorest people in China are not the low-income workers in the cities but the unemployed peasants in the countryside. Therefore, the only way to modernize the rural areas is to quickly shift the surplus rural labor to the manufacturing and service industries in the urban areas.

The Gini coefficient measures the income gap between the wealthy groups in the eastern cities and the destitute groups in the western rural areas. Among many factors, the gap between urban and rural areas is the main reason for the increase in China’s Gini coefficient.

In recent years, the gap between the rich and the poor neither has gone beyond the warning line nor expanded significantly. Therefore, the Chinese society could continue to maintain the basic social stability structure.

The Gini coefficient has its limitations. First, the Gini coefficient does not have much of a relationship with economic development. Second, it has no relationship with people’s living standards. Third, the change in the Gini coefficient is not necessarily related to social stability.

1.1. Facing the Fact of the Widening Gap between the Rich and the Poor

The widening gap between the rich and the poor may divide the society, which is the greatest threat faced by China.

According to the measurement indicators of the inequality status of income distribution, provided by the World Bank’s World Development Report 2006, China is tied with several Latin American and African countries in the 95th place. Only 29 countries have a higher degree of income inequality than China, including 27 Latin American and African countries. In Asia, only Malaysia and the Philippines have a higher degree of income inequality than China. China is listed as one of several countries with a very high degree of income inequality in the reports of many international organizations.¹

More than a decade ago, the central government proposed to narrow the gap between the rich and the poor. However, after many years, instead of being narrowed, this gap has widened. As a slogan has been shouted for many times without any effect, should the central government begin to reflect and determine where the problem lies?

China has achieved significant reforms in the past 30 years. In the early 1980s, China and India stood on the same starting line. India’s many indicators, such as national income per capita, output of major industrial products, transportation, and infrastructure, were slightly better than those of China. In 2012, China’s per-capita GDP was 2.3 times that of India.² Comparing the conditions in the urban and rural areas between China and India, the average standard of living of the Chinese is significantly higher than that of the Indians. However, many Chinese are increasingly becoming dissatisfied with the society. Despite the improved living standards, their grievances have increased even more. The Chinese enjoy the benefits that the society brings but accuse it of its ineffective system at the same time.

Wealth and material comforts do not necessarily equate to happiness.

Before the economic reforms, people needed coupons to buy items because of material deprivation. They lived in poverty without adequate food and clothing. Earlier, when getting married, young people greatly pursued four things: three wheels and one speaker (i.e., wrist watch, bicycle, sewing machine, and radio set). Nevertheless, most people could not afford them. At that time, even without these items, people could live peacefully. With the rapid economic growth, people began to live a more materialistic life. In the 1980s, the necessities for marriage were a television set, a refrigerator, a washing machine, and an audio system while after 2000 the necessities included a full set of electric appliances, a car and a house. Recently, news has been circulating on the Internet that a mother will not allow her daughter to marry if the potential husband cannot provide a house. Compared with present times, life in the past was simpler, and the people seemed to have few complaints. Now, even when the people have the wherewithal to lead a comfortable life, live in a new house, drive a new car, and have increasing bank deposits, they are full of resentment and express extreme displeasure. The main reason for the dissatisfaction is the widening gap between the rich and the poor. Against the context of the traditional Chinese culture, people generally sense that inequality is worse than being poor. The widening gap between the rich and the poor is the root cause of the various contradictions in the current society.

After the New Year celebration in 2011, the following point of view was read in many newspapers and magazines: “As the most difficult battle during the twelfth Five-year Plan period, the reform of the distribution system involves the relationship among three parties, namely, enterprise, government, and worker. It is necessary to change the current serious absence of synchronism with one big step forward by increasing the GDP, two big steps forward by reforming the fiscal and taxation policies and a half step forward by increasing residents’ incomes. The three parties should together work toward rationalization of the income distribution relationship through government-led tax cuts and enterprise-led profit reduction.”

“Specifically, first of all, reform should consider the coordinated development of the distribution relationship between government, enterprise and resident and synchronize the measures with the economic development to increase the proportions of residents’ incomes and labor remuneration. Secondly, it is necessary deepen the reform to adjust the income gap in the income distribution system of the monopoly industries. Thirdly, the government and the enterprises should work together to promote the income multiplication plan and increase the urban and rural residents’ property incomes. The fourth is to increase the investment in social security, education, health care and other similar spending by the government on people’s livelihood, reduce the incidence of tax payment for enterprises and workers. The fifth is to quantify the reform objectives and set a timetable for the reform of the distribution system to improve the implementation of the policies.”³

Reforming the distribution system is the most difficult battle, therefore, the following questions would need to be addressed seriously:

How should the system be reformed?

Cutting government taxes is a good suggestion. However, which taxes should be cut? How will the government ensure its expenditure after the tax cuts? Should the government reduce its expenditure?

Reducing government expenditure is favorable, but should the central government or local government reduce its budget? Which expenditure should be reduced? If the government cannot reduce expenditure, should the central government incur a budget deficit or increase the currency to cut taxes?

Increasing the income of the people is also a good suggestion, but can it be achieved? Should the government increase wages to achieve the income multiplication plan? Can the government make that plan? The government may increase the wages of civil servants and employees of state enterprises, but how should the wages of employees in the private enterprises be increased? How should the government increase the income of peasants who account for more than half of the population?

In 2010, most cities in China increased the minimum wage standard by 22.8% on average. The minimum wage line is continuously increased. These measures seem to be common, but what is the theoretical basis of these practices? Is it the right time to implement these measures? Will they be effective?

Before discussing the various countermeasures, understanding how to measure the gap between the rich and the poor in China is necessary.

1.2. Gini Coefficient: A Measure of the Gap between the Rich and the Poor

The pairing of efficiency and equity has many contradictions. Under the planned economic system, too much emphasis on equality at the expense of efficiency leads to widespread poverty. Conversely, too much emphasis on efficiency increases the gap between the rich and the poor, which threatens social stability.

Kuznets summarized the variation law on the gap between the rich and the poor in the process of economic development and proposed the well-known inverted U-shaped curve. Kuznets argues that the gap between the rich and the poor will increase in the early stages of economic development. However, the increase in per capita income will narrow the gap gradually.⁴ The inverted U-shaped curve will not appear automatically. Therefore, the income gap should not be allowed to widen. Kuznets advocates the use of financial subsidies, social welfare, and other secondary means of distribution to help the poor. He also recommends implementation of the graduated tax system to target the inheritance and the capital income of the rich to bridge the gap between the rich and the poor. If the government policies fail, the gap between the rich and the poor is likely to continue to widen, subvert the social stability, and terminate the economic growth.

Todaro and other economists analyzed the data of 43 developing countries and found that the benefits of economic growth would not flow automatically to the extreme poverty groups. In many countries, despite economic development, the poor’s absolute income and relative income have declined. However, exceptions exist such as the cases of Taiwan and South Korea. The Gini coefficients in China’s Taiwan region and South Korea did not increase significantly despite economic growth.⁵ In other words, high economic growth does not necessarily lead to the deterioration of income distribution, and low economic growth does not mean equality of income distribution. Some poor countries in Africa have a very low rate of economic growth, but the widening income inequality is a cause of serious concern.

Therefore, at the initial stages of economic development, improvements in efficiency should be emphasized. When the economy develops to a certain extent, concerted efforts should be taken to prevent the widening of the gap ...

Table of contents

• Cover page
• Title page
• Copyright page
• Contents
• Preface
• Chapter 1. The Widening Gap between the Rich and the Poor will Inevitably Divide the Society
• Chapter 2. Lewis Turning Point
• Chapter 3. Surplus Rural Labor
• Chapter 4. Story Behind the Labor Shortage
• Chapter 5. Rule of Industrial Transfer
• Chapter 6. Consumption and Expansion of Domestic Demand
• Chapter 7. How Long Can the High Savings Ratio Last?
• Chapter 8. The Proportion of Labor Compensation
• Chapter 9. Is the Gap Between Urban and Rural Areas Widening or Narrowing?
• Chapter 10. The Minimum Wage Law is a Double-edged Sword
• Chapter 11. The Population Trap and the Demographic Dividend
• Chapter 12. Tax Reform and the Gap between the Rich and the Poor
• Chapter 13. Preparing for Danger in Times of Peace to Prevent a Financial Crisis
• Chapter 14. Populism Experiment of Latin America
• Chapter 15. Who Divides Thailand?
• Chapter 16. Criticizing Populism and Depending on Market Mechanisms to Narrow the Gap between the Rich and the Poor
• References
• Index