Income Inequality in Chinese Society - Literature review Example

Running Head: Income Inequality in Chinese Society Income Inequality in Chinese Society [Institute’s INCOME INEQUALITY IN CHINESE SOCIETY Economic Explanation of Income Inequality According to Simon Kuznets, for a country, during the early phase of growth, the presence of income inequality promotes the economic development by reallocating the resource to the individuals who save as well as invest most. He furthermore hypothesized that general inequality will increase at first because individuals move from the low-income stratum towards the high-income stratum. Later on, inequality will decrease, because the majority of the people reside in the high-income (or urban) stratum. The Kuznets Curve depicts that the link between income inequality and economic development seems to pursue an inverted U shape, with the measure of economic development on X-axis, as gross domestic product; and the measure of income inequality on Y-axis, as Gini coefficient. Figure 1: Kuznets Curve During the last 30 years, the striking economic development changed China from a centrally planned low-income nation to a middle-income market economy (Woo et al, 2012). However, equality has quickly dropped in China from reasonably high levels during the late 1970s. From 1989 to 2010, “China went from being among the most equal societies around the globe with a Gini index of 29, to among the least equal with a Gini index of 42” (Li et al, 2011, p. 23). Inequality has gone up as China has shifted from a democratic and planned financial system to a market focused financial system where people can gain acquire capital. Although Gini Coefficient shows information regarding various income groups, in the case of China, where urbanization as well as industrialization are far from being completed and urbanization falls behind industrialization, criteria applied to the economy which have finished the processes may not provide a clear picture. Hence, the Gini Coefficient will initially increase and then decrease. So, it can be considered normal for China to have higher Gini figure than countries while urbanization and industrialization process has been completed. Figure 2: Gini Index and Gross Domestic Product of China (1984 - 2014) (Source: Knight, 2014) It is essential to take the dualistic nature of the Chinese population and economy in consideration, whereby there exist extraordinarily diverse urban and rural people. The urban inhabitants of China are significantly more affluent as compared to the rural inhabitants and have obtained the majority of the ten percent yearly GDP increase. A significant factor in why this raise in capital has been limited to the urban parts are constraints on rural-urban resettlement, together with financial backing as well as assured public sector jobs for individuals residing in urban parts. This has indicates that only the urban inhabitants have been capable of directly gaining from the urban economic development. To decrease the inequality, the capital of the urban parts has to be brought into the rural parts. Figure 3: Gini Coefficient of China (2003 - 2013) (Source: Knight, 2014) With capital concentrated within urban parts, it would seem that China is presently on the peak of the inverted U shaped relationship of the Kuznets Curve. Whether or not the government of China modifies its approach towards inequality and economic growth will have a significant effect on whether or not China can lessen inequality and go to the second part of the Kuznets Curve. Consequences of Economic Reform The big income gap among urban and rural inhabitants is an extremely serious issue in China’s economic growth. During the year 2009, the gap was 3.33 times, the maximum in the history. The gap lessens to some extent during the year 2010 and arrived at to 3.23. In addition, the rural urban income gap has been expanding constantly from the mid of 1980s. A number of studies has even indicates that China’s rural urban income gap is maximum in the world. Nonetheless, latest research efforts shows that China’s “official household review method has failed to successfully include the ‘rural to urban’ migrants” (Lee, 2014, p. 192), which exaggerates the income of urban inhabitants and devalues the income of rural inhabitants, and subsequently exaggerates the urban rural income gap within China. Figure 4: Rising Urban Rural Gap in China (Lee, 2014) Decreasing this income gap will involve alterations within economic strategy - intensifying government revenues “beyond taxes on wages to include levies on property, as well as on income earned from capital gains on real estate and stocks, is one step” (Cheng, 2014, p. 65). The variation among average incomes within rural and urban parts is a significant determinant of general national inequality within China and has shown a slight drop recently. The scope of this variation is mostly high in China and had been increasing progressively until recently. By the year 2009, the ratio had arrived at 3.3, which is a lot more higher as compared to in other developing economies. However, after that, the rural-urban income gap within China has begun to drop and by the year 2011 had fell back to its level of 2003 (Li et al, 2014). The drop has been facilitated by a quick raise in the amount of migrants whose earnings is considered as being rural income, even if their job is within urban parts given that their family units stay in the rural area. There has as well been a huge increase in the level of government shifts to the less affluent in rural parts. Besides income inequalities, there are huge differences in access to essential facilities - for instance, education - among rural and urban populations. According to Gradient Theory, China is divided into three geographic regions, which are eastern (coastal), central and western (Wang & Hu, 1999). The coastal-inland growth gap is one of the key factors of overall inequality within China. Coastal to inland GDP per capita ratio goes up by more or less 50 percent from 1.7 times during the late 1980s to 2.4 times during 2005. The Gini coefficient has as well goes up by more or less 50 percent, from around 30 to 45 during the last 30 years. Few could have imagined during 1978 the extent of economic as well as social development China would make during the next 30 to 35 years owing to the decision of initiating its economic reforms as well as to bring in open-door policies. The basis of China’s reform was to increase ‘communalism with Chinese traits’. Because of these reforms, China’s financial system has been changed. It has altered from a financial system within which market forces had practically no part in systematizing economic activity to one where these forces have a key part. China has as well gone from a situation where “it had almost no foreign investment and a low-level of global trade and exchange to a place where it is a main international receiver of foreign investment and its business and foreign exchange reserves are exceptionally high” ((Sun et al, 2014). A number of indicators reveal that economic interest within China has shown a rise during the last three decades. A progressing aspect of China’s modifications would be additional support for economic openness via global economic collaboration, “investment, trade and exchange” (Bhattarai & Chen, 2014, p. 87). Deng’s recommended new institutional arrangements were attempted wherever feasible only within a specific region of the economy initially. The economic as well as social outcomes were then examined. If the policy seemed to be a success, it was then expanded more extensively to other parts of the economy, amending it if needed, taking into consideration the knowledge gained. It should be noted that this is the policy approach that China carries on to apply. After promulgating the reform and open-door policy during 1970s, Chinas real GDP has increased at 9.7 percent each year and real per capita GDP has gone up by nine fold till 2007. Other, more practical approximations that have global evaluation place yearly development at more or less six percent. However, in addition to this sustained development, income inequality has as well increased quickly. According to some analysts, Gini coefficient has been definitely increasing and may currently go beyond 0.5. Chinas Gini coefficient has been estimated as the maximum within Asia. Simultaneously, a number of restrictive policies put on migrant workforce and a lack of responsive political institutions raise the question of whether the population is being utilized as “cannon-fodder in the efforts for economic development” ((Xue et al, 2014, p. 33). 21st Century Causes The notion of rent-seeking was first used by “post-classical economists to cover the magnetism of rent as the proper source of public revenue” (Wang et al, 2014, p. 77). The term rent-seeking is currently used to exemplify all types of benefits. However, the key rent-seeking activity starts with the de-socialisation of property and the privatisation of the rents that people generates by means of mutual activities. The beginning of the rent-seeking traditions can be observed inside China in detail. During the last two decades, the conventional assets of farmers were “appropriated” (Wang et al, 2014, p. 78) by corrupt governmental representatives who traded packs of low priced land to builders. This put the margin of profit back into the hands of bureaucrats. Land in China is marked as either rural or urban, and both places have good land rights. In urban parts individuals can conveniently sell their property, or mortgage them for borrowing. In rural parts, peasants have continuing term “as long as they sow the land” ((Xia et al, 2014, p. 31), however, they cannot mortgage or trade the rights to use. Nonetheless, the largest problem is linked with moving land from rural use to urban use. China is a thickly inhabited nation, whose relative gains lies more in production and services as compared to agriculture. The fact that a large number of peasants are unable to make a respectable livelihood as farmers is an indication that their labour is more functional in urban service, for this reason, the millions of individuals have migrated. However, simultaneously, it is efficient to isolate a little of the land from farming for urban use. A reticent economy, powerless trade unions, and corruption and rent-seeking by the affluent and authoritative people have long been accused for China’s radically deteriorating inequality. There are four key ways by means of which income inequality lessens economic development. The first way is because of income inequality’s influence of rising unproductive rent-seeking acts that cause lesser protection of property rights. The second is outcome of the social strains as well as political insecurity that take place as a result of huge income differences, which generate economic uncertainty and discourage investment. The third manner in which inequality hits economic development is by means of politics - when the median voter is comparatively underprivileged, policy-makers are more expected to “pander to the people” (Yao, 2014, p. 949) by looking for income redistribution by means of taxation, which additionally misrepresenting economic performance. Finally, the fourth way covers bigger initial income difference showing that the middle class has a lesser portion of GDP. This transforms into increased population, which consequently causes a lesser accrual of capital per capita. Figure 5: Growing Concerns in China (Source: Yao, 2014) Conclusion Chinas continued swift economic development has caused a considerable enhancement in the living standard of public in addition to declines in poor quality of life, enormous increases in the development of farming as well as manufacturing goods, enhancing openness to the global economy and fast technical growth. Among other things, this economic accomplishment can be largely accredited to the restructuring of organizations, better use of markets, and increased openness to the global financial system, improvement of human resources and implementation of innovative technologies. On the other hand, with this continued development, China has as well faced sharp increase income inequality, which poses queries concerning the type of this inequality, over which there is still some ambiguity. Political leaders of China do observe that there is an extreme income circulation problem. To a certain extent, they have as well attempted to deal with the “legacy” (Bhattarai & Chen, 2014, p. 189) of policies that have aggravated inequalities. This has consisted of the overall elimination of farming related taxation, free schooling for kids up to nine years of age, social protection to low income urban family units and funding for health care to low income urban and rural households. References Bhattarai, K., & Chen, N. (2014). Rural Urban Income and Consumption Gaps across Provinces of China. HR Publications. Cheng, W. (2014). Understanding the Kuznets Process: An Empirical Investigation of Income Inequality in China 1978-2011 (No. 12-14). Monash University, Department of Economics. Knight, J. (2014). Inequality in China: an overview. The World Bank Research Observer, 29(1), 1-19. Lee, S. W. (2014). The Impact of Outward-Oriented Economic Reform on Income Inequality in China. Springer Berlin Heidelberg. Li, S., Sato, H., & Sicular, T. (Eds.). (2013). Rising Inequality in China: Challenges to a Harmonious Society. Cambridge University Press. Li, S., Wan, G., & Zhuang, J. (2014). 15 Income inequality and redistributive policy in the People’s Republic of China. Inequality in Asia and the Pacific: Trends, Drivers, and Policy Implications, 329. Sun, W., Wang, X., & Bai, C. E. (2014). Income inequality and mobility of rural households in China from 2003 to 2006. China Agricultural Economic Review, 6(1), 73-91. Wang, S. & Hu, A. (1999). The political economy of uneven development: the case of China. M.E. Sharpe. Inc. Wang, X., Zhu, Q., & Zhao, H. (2014). Assessing the spatial and temporal differences in the impacts of factor allocation and urbanization on urban–rural income disparity in China, 2004–2010. Habitat International, 42, 76-82. Woo, Wing T. et al (eds) (2012). A new economic growth engine for China: Escaping the Middle-Income Trap by Not Doing More of the Same. Imperial College Press. Xia, Q., Song, L., Li, S., & Appleton, S. (2014). The effect of the state sector on wage inequality in urban China. Journal of Chinese Economic and Business Studies, 12(1), 29-45. Xue, J., Luo, C., & Li, S. (2014). Globalization, liberalization and income inequality: The case of China. The Singapore Economic Review, 59(01), 23-39. Yao, Y. (2014). The Chinese growth miracle. Handbook of Economic Growth, 2, 943-1031. Read More