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Emerging Income Inequalities in China

Before China implemented reform and open-door policies in 1978, its income distribution pattern was characterized as egalitarianism in all aspects. The Gini coefficient for the urban-rural inequality was only 0. 16.

Since 1978 when China started to implement reforms and open-door policies, however, income distribution in China has been exhibiting increasing inequalities.

First of all, the gap between urban and rural areas has widened. According to 1999 statistics, rural residents, which account for 69% of the nation’s total population size, had a share of only 45.7% of the total income, roughly 12 percentage points lower than in 1988. It is believed that the ratio of urban–rural income in most of other countries in the world is about 1.5; but in China it is between 2.5 and 4.

Second, while income inequalities within either the urban or the rural areas have Become worsened, it is even more conspicuous within the latter. According to a sample survey conducted by the economists from the Institute of Economics at the Chinese Academy of Social Sciences, the Gini Coefficient rose from 0.338 in 1988 to 0.416 in 1995. Statistics based on rural family income compiled by the National Bureau of Statistics also indicated that the Gini Coefficient has not exhibited improvements since 1995.

Third, the whole picture of unequal income distribution for the nation is alarming. By 1999, the richest 20% of households accounted for 48.5% of total national income, whereas the poorest 20% had a share of only 7.1%. Their ratio was almost 7:1. At the same time, the richest 20% of the urban households possessed 55.4% of the total financial assets in the hands of all the urban residents, while the poorest 20% had only 1.5%. Their ratio was 37:1.10

In its 2001 Human Development Report, the World Bank put China’s Gini Coefficient at 0.403 in 1998. According to Chinese economists’ calculation, China’s Gini coefficient stood at 0. 45. Judged by international standard, a country with Gini coefficient higher than 0. 45 would be considered as being greatly unequal.

However, scholars have different understandings and explanations about China’s Gini coefficient. For instance, the well-known Beijing University professor Li Yining argues that Gini coefficient is better applied to nations with a market economy system, and not very suitable for China, which is in the process of transition and also characterized as being a dualistic economy, meaning that the way of life in the urban and rural areas are so different. Li goes on to suggest that, for China, there should be two Gini coefficients, one for the urban and the other for the rural. Therefore, it is not proper to calculate China’s Gini coefficient by placing the richest in the urban on one end and then the poorest in the rural on the other. Rather, the urban rich should be compared with the urban poor and the rural rich with the rural poor. According to Li, the urban and rural coefficients were 0. 32 and 0. 35, respectively, and the weighted coefficient for the nation as a whole stands at roughly similar levels.11

A. Causes of the Emerging Inequalities

The causes of rising unequal income distribution are related to many factors, including the impact of reforms and effectiveness of government policies to deal with emerging inequalities.

Since the 1980s, ownership system in China has witnessed significant changes. The public sector’s share has declined from 78% in 1978 to 40% in 1999, whereas the non-public sector grew from 22% to 60% during the same period (See Figure 1). During this transformation of ownership, some people have accumulated a huge sum of wealth. It is reported that a private business, owned by what is known as the Liu Brothers, possesses more than $1 billion, and one of the brothers has appeared on the cover of Forbes journal. As a matter of fact, even the workers in the non-public sector earn more than those in the public sector. It is estimated that the income Gini Coefficient for the former was 6.4 percentage points higher than the latter.

Evidence from everywhere in the world has proved that education has its most important influence upon income inequality in the medium and long run. Indeed, education plays an important role in explaining the widening income gap in China today. Generally speaking, a worker with higher education background is much less likely to “leave the workplace” than a worker with less education. 12 In the countryside, a farmer who has completed high school education (12 years of schooling) is much easier to locate sources of income from non-agricultural activities than his illiterate counterpart, whereas a closer look at the poor households shows that their members have had little education.

China’s pattern of income distribution is also influenced by the reform process of the state-owned enterprises (SOEs), the back-bone of the nation’s former central planning economy. In the reform process, some SOEs have made great achievements in terms of raising productivity and efficiency, thus making it possible to raise wages and expand bonus for their workers. Other SOEs, however, have been slow or even unable to make adjustment to adapt to the changed market conditions and cannot afford to provide the workers with higher wages or more bonus. Even worse are those enterprises, which are forced to close down, leaving their workers unemployed.

While some workers are afraid of being laid off, others are lucky enough to gain wealth through all means, legal or illegal. For instance, some people can acquire state assets by “buying” or “leasing” a SOE at a low price and runs it as a family business; others enrich themselves by smuggling, making faked goods, obtaining funds through bribery, monopolizing the market, evading taxes, etc. As a matter of fact, this way of getting rich is hated by everyone and voices are loud to call upon the government to take effective measures to stop them from accumulating more wealth.

As some economists have noted, the tax regime in China is not effective at improving income distribution. For instance, wages and salaries are levied progressively at rates between 5% and 45%, and private business at rates between 5% and 35%; but savings interests, returns from stocks exchanges, dividends and profits from property leasing or transferring, among others, are taxed at a fixed rate of 20%. That is to say, tax rate for incomes from work are the highest (45%), then comes the incomes from semi-work (35%), and the lowest rate is for incomes from non-work (20%).

China has joined in the WTO. Starting from the January 1, 2002, its tariffs for more than 5300 items of imports will be lowered, and the average rate is being cut from 15.3% to 12%. With its economy more integrated with the globalization, China will probably face new challenges in many areas, including the prospects of income distribution. For instance, while the urban consumers will enjoy more varieties of imported agricultural products, some of the Chinese farmers will face more fierce competition, which will worsen the on-going tendency of declining incomes.

On the whole, WTO membership is positive for its economic development, but the benefits will not be distributed to all sectors and regions evenly. In other words, some segments of the society will be much better off than others, thus causing inequality of income distribution more conspicuous. The government is determined to minimize the social costs of WTO membership by speeding up reforms of the social security system and improving the social welfare safety net.

B. Income Distribution and Poverty in the Rural Areas

As in all the other developing countries, unequal income distribution in China is closely related to poverty in the rural areas. Therefore, in order to lessen income inequality between the urban and rural areas and within the nation as a whole, it is imperative to deal with the poverty issue in the countryside.

It should be pointed out, however, that since the New China was founded in 1949, particularly during the past two decades of reforms and opening to the outside world, the government has made remarkable achievements in reducing poverty in the rural areas.13 Between 1978 and 2000, the number of poverty-stricken people without enough to eat and wear in the rural areas decreased from 250 million to 30 million, and their proportion in the total rural population dropped from 30.7% to about 3%.14

Needless to say, 30 million is not a small number. Therefore, the government has designed an ambitious strategy to tackle the problem in the new century. According to the “White Paper On China’s Rural Poverty-Relief”, published by the State Council Information Office in October 2001, China will meet the following targets and goals :

The Chinese government will persist in taking those in impoverished areas who do not have enough to eat and wear as the first to be helped. Though their number is not large, there are a lot of difficulties in helping them get rid of poverty. At the same time, those who have just reached the level of obtaining enough to eat and wear should be helped steadily to shake off poverty. Because their production and living conditions have not basically changed and they are not strong enough to fight natural calamities by themselves, these people will be easily thrown back into poverty once struck by natural disasters. So our future task is to further help those people become rich after they have shaken off poverty.

China's overall poverty alleviation goal from 2001 to 2010 is as follows: To help the small number of needy people without enough to eat and wear attain that minimum standard of living as soon as possible, and further improve the basic production and living conditions of the poor areas and consolidate the results gained in this regard. At the same time, the quality of life and comprehensive quality of the poverty-stricken people shall be improved, and construction of infrastructure facilities shall be speeded up in impoverished rural areas. In addition, their eco-environment will be improved, and their social, economic and cultural backwardness changed, so as to create the conditions for a future comfortable life.

From 2001 to 2010, the Chinese government will concentrate its poverty alleviation efforts on the ethnic minority areas, old revolutionary base areas, border areas and destitute areas in the central and western regions. Some counties will be designated for special help. The government will use its financial, material and human resources in a concentrated way in the comparatively concentrated poor areas. A unified plan will be drawn up, which will be carried out on a yearly basis. The government will combine separate guidance with a comprehensive approach in the work.

To accomplish the above targets and goals, the government has set up the following policy guarantees:

  1. Target government aids towards the poorest places. The government coined a special term, “Key Poverty-stricken Counties”, to refer to the poorest places for the first time in 1986. The measurement line for these counties were per capita yearly net income under 150 yuan and it was later readjusted in keeping with the economic development, especially the constant improvement of the economic conditions of these poverty-stricken areas. By setting up this kind of poverty line for a whole county, the government hopes to use the national aid funds in a more effective way.
  2. Lay emphasis on the underdeveloped western regions. Regional gaps in economic development is extremely conspicuous. While people’s living standards in Beijing, Shanghai, Guangzhou (Canton) and Shenzhen, among others, are comparable to those of the world’s developed countries at middle income level, many places in the western parts of the country are well lagging behind in economic and social development. Of the 592 poverty-stricken counties designated by the government on its priority poverty relief list in 1994, 82 percent are situated in the central and western regions.

    The western region, which consists of more than 12 provinces, covers a total area of 6.85 million square kilometers, accounting for 71% of China’s total area. Its populations size is 365 million, or 29% of the nation’s total size. Therefore, the grand plan to open up the western region, put forward by the government in 2000, will accelerate its economic and social development and narrow the east-west gap.
  3. Allocate more state funds to the anti-poverty program. Over the past two decades, state funds to aid the poverty regions have greatly increased . In 2000, for instance, such funds had totaled 24.8 billion yuan, or 31 times larger than the amount in 1980. Generally, the funds are used to increase production by improving basic agricultural infrastructures as well as to meet basic needs of the poor farmers
  4. Provide the poverty region with special privileges. They include: waiving the mandatory state grain procurement quotas of households whose problem of feeding and clothing has not been solved; appropriately prolonging the utilization time limit of aid-the-poor loans and softening the terms of mortgage and guarantee, according to the actual situation; and reducing agricultural taxes and taxes on special farm produce according to the relevant provisions of the regulations on agricultural taxation.
  5. Strengthening responsibility and supervision over the poverty relief work. For instance, the principal leaders of the provinces, autonomous regions and municipalities are required to personally supervise the work and assume overall responsibility; and relief funds are to be targeted towards the right places.
  6. According to the “White Paper On China’s Rural Poverty-relief ”, the Chinese government will take the following measures to eliminate rural poverty:
    • Advocate and encourage the spirit of self-reliance and hard work, and help poor peasant households overcome the common attitude of “waiting for aid”;
    • Improve infrastructures, such as farmland, irrigation works and highways, by arranging necessary work-relief funds, so as to improve the conditions for developing production;
    • Provide the poverty regions with micro-credit at special interest rates to be used for developing commercial cultivation, aquiculture and poultry raising, food processing industries;
    • Promote training programs for the farmers so as to strengthen their ability to develop by themselves;
    • Combine development-oriented aid programs with soil and water conservation, environmental protection and ecological construction;
    • Supports poor peasant households to move out of areas with extremely difficult living conditions to more favorable areas;
    • Encourage the more-developed provinces and municipalities in the east to support the development of their western counterparts.

Given the fact that poverty and inequality are very closely linked, the larger the percentage of the population living in income-poverty, the more unequal the income distribution. Hence, it is believed that, if the government can raise the living standards of the rural residents, China’s income inequalities will be greatly reduced.

C. The Need to Establish a Social Welfare Safety Net

When the new China was founded in 1949, the priority of the government was to build the economy by carrying out an industrialization drive. It was mistakenly believed that social security would not be a problem if the economy could be developed. So the profits made by the enterprises were required to be handed over to the state treasury, and pension funds were included as part of the production cost of the enterprises.

Moreover, the traditional social security system in China in the old days was predominantly a defined-benefit, pay-as-you-go type, covering the workers in the SOEs and government employees in urban areas. But most workers in collective enterprises in urban areas and most of the population in rural areas were not covered. Coverage was comprehensive, comprising cradle-to-grave wage, job and retirement security benefits, which were primarily financed and provided at the enterprise level. Therefore, it was just “enterprise security”, not social security in its real sense.

Obviously, this traditional system of social security was not compatible with the socialist market economy. The government realized that over-redundancy and the resulting low-efficiency in the SOEs and the emerging expansion of the aging population would make it highly urgent to reform the system.15

When China started to march onto the path towards building a socialist market economy, in 1978, the government incorporated reforms of the social security into the overall restructuring of the SOEs. In the 1980s, experimental work was carried out cautiously in the SOEs regarding social pooling of pension funds. In 1991 the State Council issued a document titled Decisions on the Reforms of the Pension System in the Enterprises, which represented the beginning of a larger scale of reforms in the area of social security. The Third Plenary Session of the 14th Party Congress, held in 1993, approved a historical document titled "Decisions on Issues Relating to the Establishment of a Socialist Market Economy". It designates the establishment of a social security system as one of the most important components of a socialist market economy. It clearly states that the social security system includes four components, i.e., social insurance, social welfare, social assistance and preferential treatment for the disabled servicemen, and family members of revolutionary martyrs and other heroes. The tenth Five-year plan (2001-2005) also stated that it is imperative to carry out comprehensive reforms of the social security system. At a national conference on social security reforms, held in December 2000, Premier Zhu Rongji called for redoubled efforts to step up improving the country's social security system so as to ensure social stability and maintain sustained, rapid and healthy economic development.

It should be pointed out that reforms of the social security system have been moving forward smoothly. At the end of 2000 the State Council promulgated a document (Document No. 42) on the experimental plan of improving the social security for the urban employees.16 The aims of the document was two-fold: On the one hand, it is expected that the personal account should accumulate more funds; on the other, it is hoped that, while efforts would be made to facilitate the re-employment for the laid-off workers, the unemployed workers’ basic needs security, i.e., guarantee for their sustenance like food, shelter and clothing, could be incorporated into the scheme of unemployment insurance.

An unique feature of China's reforms of the social security system is what is known as "two guarantees". That is to say, the laid-off SOEs workers should be provided with basic needs, and the retired workers should get full amount of their pensions on time. The "two guarantees" were put forward by the government in 1998. In April of that year, Zhu Rongji, the newly elected Premier was on an inspection tour to the north-east part of China. He discovered that failure to offer basic needs to the laid-off workers and long delay in distributing enough pensions had been causing social instability. More than three years have elapsed and the government has made great progress in meeting the "two guarantees". It is reported that about 95 percent of the workers laid off from the SOEs have got their basic living expenses and about 98 percent of retirees received their pension in time and in full amount.

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