An Equal Right to Inequality in China

An Equal Right to Inequality in China

By Khalid Umar

As China completes once-in-decade leadership transition the new leadership faces uphill task to narrow yawning income gap that carries immense potential to destabilize hard-earned economic growth and disrupt already fragile social fabric.

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China enjoys the company of the United States as World’s two biggest economies but in terms of distribution of income her company is not so exciting. Though China has been able to lift 600 million people out of poverty between 1981 and 2005, it is still ranked among poor and small countries of Central America and Africa in terms of income inequality. Economists use Gini Index for measuring income inequality – value of zero means perfect equality while value of one means one individual controlling hundred percent of income. China’s Gini value was 0.412 in 2000 but reached close to 0.50 in 2010. Top 10 percent of the rich Chinese have 23 times more income than low 10 percent of the poor, up from 7.3 times in 1988. The same rich 10 percent controls 32 percent of the income. Rural and urban (rising ratio from 3.4 to 3.8 during 2002-07) inequalities are very high; however, the regional inequalities have come down to the level of 1990s after rising sharply during the mid-2000s. The video explains the situation in China.

Deng Xiaoping – the architect of economic reforms – foretold the consequences of economic growth where some people would become rich faster and that will lead to prosperity for all. The first part of his prophecy proved exactly true but the second one still struggles. It is intriguing to note that despite the fact that China’s economic development model was not based on the idea of “Big Bang” reforms rather it was an incremental process, it generated in its wake income inequalities similar to the reforms in a big bang model. Income inequality increased between 1980s and early 1990s but declined from mid-1990s to early 2000s, then rising again after 2005. Several factors are attributed to widening gap between haves and have-nots in China.

Though Chairman Mao’s famous Cultural Revolution was an attempt to uprooting and dismantling traditional mechanism of land, capital and schooling which bequeathed advantage of opportunity to offspring of rich, the successive leadership has fallen short of introducing comprehensive and inclusive reforms for providing equal opportunity to all. The Economist states that 63 percent of inequality in outcomes was due to inequality of opportunity. Political elite, cronies and employees of state-run monopolies are the privileged ones enjoying benefits and wages far above the wages earned by average workers. These elite groups receive spectacular gains from property and asset prices without being taxed. Around 150 million rural migrants seeking work in urban centers are denied access to health care, education and pension. This omission from benefits increases their spending on health and insurance, further depressing their chances of moving up the income ladder. Andrew Batson in his Wall Street Journal blog mentions gray income among higher-income groups that understates the actual income gap in China. Widening income gap calls for imminent policy reforms.

Jiang Zemin, the Chinese President during 1993-2003, embarked upon an ambitious plan to include western regions into the development mainstream with a fancy slogan of “Go West”. Later, Hu Jintao introduced “Revive the North East” and “Rise of the Central Region” in 2005. All these initiatives focused on reducing regional inequalities by abolishing agricultural taxes, compelling central and local governments to fund first nine years of education, provide minimum income, health care, and low-income housing. These policies helped in reducing regional income disparities and brought them back to the level of 1990s. However, income inequality between different income groups increased from 2005 to 2010. National Development Reform Commission (NDRC), the main economic policy making body, has produced various blueprints for income distribution but each of them met strong opposition from the powerful State Council. Vested interest groups and monopolies have thwarted any attempt to legislate for income distribution. Optimism was reigning high in the run up to the 18th National Congress that Income Distribution Reforms will be launched during the session but there has not been any discourse on the issue.

As the new leadership takes charge in China, it finds its hands full with issues like repositioning growth strategy from investment to consumption-led growth, political reforms, widening income inequality and dealing with a fast changing Asia. This is high time that the government initiated policies aimed at redistributing income. A starting point could be to cut taxes for low-income groups, taxing real estate and capital gains, regulate executive pay in high-profit state industries, break monopolies and include migrant workers into mainstream employment benefits. Current level of income inequality might not be sustainable in the long run. Li Shi of Beijing Normal University believes that Gini in excess of 0.4 is socially destabilizing.

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