1 Introduction
Over the past three decades after the introduction of 1978 reforms and social structure transformations (from agricultural society to an industrial one and from a command economy to a market-based one) China has achieved outstanding results. Many factors should be considered while we analyzing this impressive growth of the last 30 years, but the major one lies behind already mentioned economic implementations started in 1978, which lead the country to be the second fastest-growing economy worldwide by its nominal GDP indicator following only the USA.
Apart from economic growth, the poverty rate declined from more than 65 percent to less than 10 percent, meaning that more than 500 million people were removed from the poverty line as well as nearly all the country’s development goals of the second half of the twentieth century have been reached.
However, despite the benefits of that speed economic increase and decrease in poverty rate, China has faced an alarming level of income inequality between social classes. Indeed, the Gini coefficient reached its critical point in 2016, raised almost twice times from 1978 year.
So, the relevance of the topic related to the fact that high level of income inequality restricts the possibility of applying the most important market regulations of the economy, such as market price increase and high taxation rate. Apart from it, political instability and social issues including discrimination in access to areas such as public health, education, pensions and unequal opportunities for the Chinese people arise as a negative effect of widening gap between rich and poor.
The main objectives of this report included the following issues:
- Analyze the probable factors, which lead to the uneven wealth equality in China;
- Determine the current income inequality situation in Chinese mainland;
- Consider potential measures, which could be implemented in order to resolve the wealth gap in China.
2 Main factors that lead to the imbalance gap
2.1 Historical background
Economic reforms in the People’s Republic of China began being carried out in dramatic historical conditions when the theory and practice of socialism underwent a number of curvatures. Just after the Great Leap Forward (1958 -1961), the country plunged into the Great Chinese Famine (1959–1961) which lead to the Cultural Revolution (1966–1976) and finally put the country on the verge of its economic crash.
By 1978 the hunger and devastation were overcame, however the structure of the whole economy continued to remain undeveloped and the level of productive forces was extremely low. In 1978, GNP of China per capita made up 230 US dollars, while in advanced industrial countries this indicator equalled to 8100 dollars, in the countries with the average income it compounded 1160 dollars, in the developing ones it was 520 dollars. Obviously, China was in an economic abyss during that time.
The general economic situation in China before 1978s reforms could be characterized as follows: there were many people, not enough territory and a shortage of natural resources.
In December of 1978 the Chinese government had a decision to completely change the economic construction of the whole country, in other words carrying out a new reform policy.
Actually, the features of many Chinese reforms during these years were quite similar to the ones existed in the Soviet Union, since until 1979, China had almost the same system as existed in the Soviet Union. Basically, the collective farms had to provide the certain amount of goods of agricultural outputs at state prices (the prices of quota) and they got in return fuel, equipment and other industrial products. However, products, which were sold at excess of the supply plan, were charged at higher prices (around 30% more above-quota prices).
The main feature of a new agricultural reform was the shift from the collective farms to the ones based on responsibility of individual households (household responsibility system). And surprisingly, the share of these farms increased from 0.01% in 1979 to 0.99% in 1984.
Reform planning dramatically increased the role of the market and gradually negated the traditional state plan of workpieces of agricultural products, replacing it with a system of some kind of contracts with farmers. Policy of national self-sufficiency was launched on the local (provincial) level. Therefore, each province was supposed to solve the problem of food self-sufficiency on its own.
The result of these reforms was increase in the annual rate of goods produced in the agricultural sector. Especially a high success was achieved in the cotton industry, where the annual growth increased by almost nine times. Animal producing sector began to develop in 2.5 times more than in the pre-reform period. Among all the agricultural branches of economy, the modest progress was achieved in the fish industry, since before it had not been so well developed, but still it grew up at a high level of almost 20% annually.
Undoubtedly, the increase in income inequality was inevitable, since the coastal urban locations benefited first from the new reform policy. People with better education, who were based in urban areas, had more chances to find well-paid jobs with more perspective working opportunities and somehow implement their ideas there rather than only increase their productivity in the rural land.
2.2 Migration to urban areas. Hukou system
The income gap between rural and urban residents primarily connected to the differences in economic activities. Although currently in rural areas of China there have been developed a number of sectors of the economy, agriculture still continues to be the dominating power in the structure of the country’s economy. This is an important distinction of rural areas from cities. Labor productivity in the agricultural and industrial sectors varies considerably.
Despite the fact that in recent years China has increased an investment into agricultural sector of its economy, a general tendency of concentrating most of resources towards the development of urban regions, has remained the same. In order to increase the competiveness of the agricultural sector of the economy it is not enough just financially support it, since people need to be more educated in order to be ready to maintain all the implementations, which are introduced to them.
However, not only that fact brought a rising wealth distribution gap. A great number of Chinese who were willing to move to the urban areas could not basically change their place of living, since they were restricted to do so by their household registration, called hukou, which kept rural-urban migration in a quite low path. In addition, a weak tenure over rural land also limited the ability of many peasants to benefit from their primary asset.
Hukou has prevented the development of that region, since migration of extra labor forces towards urban areas was hampered. The hukou system was initially introduced in the 1950s with the arrival to the power lead of the Communist Party under the leadership of Mao Zedong in 1949. The government had a goal to establish an economic stability between the country’s large rural farming population and the growing urban areas. Therefore, they decided to tie people’s access to services to their residential status in order to decrease migration from rural to urban areas considering the fact that residents’ motivation will be significantly decreased as they go far away from all the provided welfare services in their hometowns.
Basically, hukou is a resident permit given by the government of China to every Chinese citizen, which records information about the family members, including name, birth date, relationship with each other, marriage status, address etc. and it prevents migration of an individual to other districts.
In fact, the hukou system functions as a powerful tool of public administration and social control. Under this system, around 800 million rural residents are treated as second-class citizens deprived of the right to settle in cities and to most of the basic welfare programs and government provided services enjoyed by urban residents. The benefits range from small priveleges like being able to buy a city bus pass, to much more important matters such as enrolling their children in public schools in cities, where their parents work.
Medical security turns out to be sensitive issue, since high-income earners enjoy more subsidies than low-income earners as well as rural residents suffer from healthcare inequality in comparison to the better facilities, which provided for the urban ones. In addition, educational gap, which lead to different job opportunities, tend to be inferior in the above indicators, since the quality of basic education of most farmers is relatively low. All the above factors lead to the difference between the average duration of life between urban residents and rural ones, where the former experience the higher lifespan than the latter ones.
All these issues above are growing social instability and potential congestion in China’s development, which could result from the inequalities between different social structures, different social classes and regions. Investment in human capital in the city and rural areas also differ significantly.
2.3 Corruption
Corruption in different forms and in different scales exists in every single country in the world, but the consequences and anti-corruption methods are different are various everywhere. In China, corruption is an old disease, as it already existed in the most primitive and gross forms here long time ago. Therefore, Chinese government tried radical methods to fight against this problem.
The spread of corruption in traditional China is often connected to the Confucian concept of renzhi (government of the people). Profit was despised as preoccupation of the base people, while the true Confucians were supposed to be guided in their actions by the moral principle of justice. Thus, all relations were based solely on mutual trust and propriety. As a result, people initiated overusing their trust and time by time, the corruption spread all around the country.
Corruption thrives in sectors with a high share of state participation and has considerable potential for administrative arbitrariness: the customs, tax department, land distribution sector, infrastructure development, public procurement. In 2008, the most attractive positions in government were not the elite position of the foreign Ministry or the Metropolitan office of the Ministry of Finance. Judging by the number of statements of employment the most popular departments of the country headed by the territorial tax office in the most economically developed coastal regions, where two of these positions were taken by the customs service in Shanghai and Shenzhen. The least attractive were the posts in the provincial statistical offices.
Recently, it was recognized that corruption costs in China took around 10 percent of its gross domestic product (GDP), according to estimates by Shanghai-based independent economist Andy Xie Guozhong.
Chinese government tries to decrease the high level off corruption in the country by implementing different laws and centers who are ought to bee responsible for anti-corruption policy.
The main anti-corruption center in China is the Central disciplinary Commission (CDC), which is located in a discreet contemporary complex in Beijing and has a relatively small amount of employees (only 800 people). The DRC work is decentralized and covers all government departments. All provincial, municipal and county authorities, including any subordinate state organizations formed their own anti-corruption Commission, supervising the behavior of the party members.
Moreover, there is a strict punishment in China for doing corruption, which also includes execution. For instance, in 2000–2008 years there were about 10 thousand officials shot on a charge of corruption. Nearly 120 thousand more officials of different levels were condemned for long years of imprisonment as well. In the list of executed officials, there are some recognized names in China, meaning that currently nobody takes into account even your high position. Totally, in 2009 around 14 thousand cases were connected with financial crimes from which damage is defined by the sum of 3,3 billion yuans.
3 Current situation
The rapid growth of China’s economy over the past three decades brougt some people into the florishing position, while others remained under the poverty line.
3.1 The urban-rural gap statistics
In 2010, China’s Gini-coefficient (statistical measure in any country or region showing how wealth is distributed in a society) stood at 0.47 (The Gini coefficient varies from 0 to 1. The closer its value is to zero, the more evenly distributed the wealth in the country) meaning that inequality in China has been exceeded risky point, since 0.4 is generally considered as the international warning level for dangerous levels of inequality. The rural Gini-coefficient increased from 0.35 to 0.38 between 2000 and 2010, also highlighting the rising inequality within rural areas.
The figure 1. Income in China: urban vs rural (1978–2009 years).
The data provided all around the Chinese mainland reveals the growing inequality between both rural and urban areas. For example, in 2010, rural residents had an annual average per capita disposable income of 5,900 yuan ($898), meaning that this amount is almost three times less than an average per capita disposable income of urban residents, which compounded 19,100 yuan ($2,900) in 2010.
In addition, despite the continued growth in urbanization, around 50.3% of China’s mainland population (or 674.15 million people) continue to live in rural areas, meaning that even after thirty years of fast growth of Chinese economy the huge amount of the domination power of the country lies in its rural areas.
The figure 1 reveals the widening gap between urban disposable income and the rural one since 1978, proving the fact that urban residents have better access to various facilities, including house accommodations, basics needs, education, social security etc.
3.2 Unequal wealth distribution in Chinese provinces
Another fact is that wealth has not been evenly distributed all along the Chinese mainland. The south ‘east coast, including richest province like Guangdong, Jiangsu, Shandong, Zhejiang and Henan with cities such as Beijing, Shanghai and Shenzhen are overtaking those poorest ones as Tibet, Yunnan and Sichuan. For instance, in 2009 China’s banking regulator determined the latter ones as those having more than 50 unbanked counties, which meant that they did not have access to the financial services.
3.3 Current state of rural migrants
The Hukou system (it was previously mentioned as one of the reason of wealth inequality) currently plays a significant role in terms of particular concern of the migrant labor. At the end of 2009, China had an estimated 229.8 million rural migrant workers, of which about 149 million are thought to work outside their registered home area. The official average monthly salary for those workers compounded 1,417 yuan, while some unofficial reports regards it to less than 1,000 yuan a month. In addition, since these migrants do not have any registration in urban areas, they cannot have not only the better access to the housing conditions, but what is more important they lose an opportunity to get any benefits from the welfare system as well.
3.4 The government policies
Rising income inequality could likely lead to social instability in China. Therefore Chinese government made a recent emphasis on the importance of “building a harmonious society” and creating balanced economic and social development. The government initiated implimitation of redistribution policies which are obliged to narrow the uneven wealth gap between rural and urban residents.
In 2013 the government announced its latest plan about lifting out as many as 80 million people out of poverty by next couple of years. It also added that it would work towards doubling the average real income of both rural and urban residents by 2020, from the level of 2010 year, raising minimum wages for migrant workers, improving rural incomes through tax cuts and enforce labor contract law.
4 Conclusion
This paper has examined the changes in income inequality in China since the implimenation of economic reforms of 1978. Our evidences indicate that the change in income distribution in China has its own characteristics.
We have analyzed income inequality and its changing pattern between urban and rural areas. Our explanations emphasize not only on the impact of economic development but also the impact of economic transition and government policies on income distribution. Generally speaking, there are many factors leading to increases in income inequality, while there are some that reduce income inequality.
Currently, soem changes could be implemented in order to squeeze the income gap. Firstly, unemployment is a major contributing factor to the growing income inequality, therefore improving employment opportunities for rural migrants can prevent this increase. It has the same significance in increasing urban employment and reducing the amount of rural surplus labour by encouraging development of labour-intensive sectors such as service sector for example.
Another factor which can play a significant role is an income redistribution policy which could be established in order to protect vulnerable groups. These include not only the poor in both rural and urban areas but also other disadvantaged groups such as farmers who have lost their land, migrant workers in the cities etc. These are low-income groups because they lack the potential to earn a certain income. Therefore, the key rationale for income redistribution policies is enhancing the potential earning capability of these groups, which includes creating more employment opportunities, and providing necessary educational subsidies, medical care and other social security measures.
