The Extent of the Income Disparity in China between the Rich and the Poor - Term Paper Example

The Income Gap between the Rich and the Poor in China Introduction China, just like any other capitalistic state has experienced a widening gap in term of earning between the rich and poor. It is saddening that as the country economy keep growing the rich become richer while the poor continue languishing deep poverty. This can be seen perfectly in the city of Beijing where the rich live in luxurious estates living in close propinquity with the slum dwellers. This disparity in earning has been associated with various factors such as the effects of capitalism, corruption, poor leadership, high social insurance taxes and the weakening labor markets. Over the last decade, China has exceeded the Gini coefficient index threshold by 0.4 close to the warning level given by the United Nations (Cai, 128). This article analyzes the extent of the income disparity in China between the rich and the poor, it cause and effect and the plausible solutions to this problem. Statement of the Problem: Cause to Effects Research has shown that income disparity in China between the rich and the poor have continued to increase since 1978 when China opened it boundaries for trade with the rest of the world. According to the China national bureau of statistics, the standard income earning of the 10% richest people in china was 10.9 times higher compared to that of the 10% poorest in the year 2009. In 1985, the figure was just 2. 9 times ((Anon, 148). It can be seen that the gap between the poor has thus increased incredibly. Since 1978 when China opened it door to international trade, per capital income has increased unbelievably. For instance, within the period of 1985 to 2010, the per capital income has increased by 55 times. This has however come from the urban area with the rural area experiencing lesser growth. The earning gap between the rural and city dwellers had reduced from 2.6 to 2.5 times in the 1970 and from 2.3 to 1.9 times in the 80s. However, it widened to 3.3 times in 2009. This is disregarding the fact that there are some social amenities such as good roads, health care house subsidies and other amenities enjoyed by the city dweller which are not available to the rural people further increasing the disparity (Cai, 130). This thus implies that the disparity many even be more than six times larger. The major obstacle in overcoming the income disparity issue is because the affluent have a greater opportunity of increasing their wealth compared to other people. For instance, from 1985 to 2010, the rich recorded a 38 fold increase in their earnings; the people in the middle class register a 21fold increase while the poor only recorded 12 folds increase in earnings. This is minimal considering that the cost of living is always increasing. This implies that since the rich have had a huge increase in earning compare to the poor, they are better prepared to cope with the rising living standards. A major source of the income disparity in China is the rural urban gap. This has notably escalated since the year 1978. For instance, in the year 2004, the rural area income accounted for only 30% of the GDP. Although the disparity in earning between the urban and the rural areas is a common phenomenon in many countries of the world, the situation in China is grim. This is by considering the fact that the largest of the Chinese population live in the rural areas. Another common feature in earning inequalities is regional earning gap. Different regions in china have shown distinctive disparities in earning with province and municipalities along the east coast having greater earning compared to those from the mainland. For instance, in 2004, Shanghai, which is a municipality in the coastal area had a per capital income of 16,682.82 Yuan which is quite high compared to the earnings from other province in central, eastern and western china whose per capital income did not exceed 10, 000 Yuan. Regional disparity in earnings main cause is the location. Coastal regions are the most favored with rich agricultural land and proximity to international market such as Korea, Taiwan, Hong Kong and Japan. The infrastructure and human resource available are also better. Another feature is intra-urban, intra-rural disparity. There are not only disparities in earning between the urban and rural area but also within these demographics (Anon, 140). The cause of this disparity has been associated with changes in economic policies which have increased the opportunities of selected people to make money. A major cause of the increase in income disparity among the Chinese population is the transformation from an egalitarian society to letting a few individual get rich first. Before 1978, China was an egalitarian society where the government monopolized most of it institution ensuring that all the citizens got an almost even income. During this communist period, the income differences between the rich and the poor were minimal. However, the government realized that this policy was not stimulating economic growth. In 1978, it embarked on a revolutionary economic policy that would see to that a limited number of the population got rich first and this would stimulate increase in earnings in the rest of the population through their entrepreneur and leadership skills. This policy was implemented across all industries in China and resulted with privatization of public ventures. As such employment and remuneration were now controlled by the owner of the company resulting in major changes in return to human capital. This is because the company owners who were in control of the capital would get their profit by compensating the workers though wages that were lower than the value of their contribution to the company. An additional policy that has contributed to the increase in earning disparity among the rural area is the Household Responsibility System (HRS) ((Renwei, 632). This allowed the household owners to get more return on their entrepreneurship skills and labor in managing their farms. This made them to earn more than their neighbors creating a major disparity in earning between farm owner and nonfarm owner in the countryside. Another notable cause of the imbalance is the government policy bias against agriculture. Chinese government since 1978 made policies that leaned more to industrial development. To enhance the industrialization of cities, the government utilized a lot of resource from the agricultural sectors. This was through measure such as reduction of agricultural product prices and restricting mobility of labor. Because of this biased sector policies, there has been major disparities between different regions in china. The regions which were mainly agricultural based got lower earnings at the expense of the development of industries which did not directly benefit them. This was the major cause of the difference in earning between the rural and urban dwellers. Another issue is that even though the industries were located in the urban areas, they did not benefit all the urban dwellers. This is because the owner of the factories who were mainly private developer controlled the wages and got the fat share of the profits. The location of the heavy industries was not strategically planned and factors that would give them added advantages such as advanced technologies, human capital and heavy equipment were not considered (Anon, 137). They were mostly located in central and western China for security purposes. This resulted in these industries having major inefficiencies. In order to promote the growth of these industries, the government would intervene by reducing the price of natural resource which came from the area the industries were set up. This move instead of accelerating industrial development slowed it. This is because the companies were not motivated to adopt new technologies and this slowed down productivity. The biases in policies are also notable in other areas which have made the rural dwellers to be seriously disadvantaged. These policies have resulted in the creation of a system that makes it impossible for many of the rural urban immigrant to lack access to healthcare, education, and pensions available to urban residents. Therefore, such migrants have no choice but to save for medical care and for their retirements. The effect of differentiated services to migrants is that they have little or nothing to invest while the rich has a lot to invest. While governments and businesses officials receive enormous kick backs annually such as subsidized housing, migrants have to confront rising prices of food and housing and other social amenities. Differential earnings and lack of access to social amenities and education facilities widens the gap further. Another major cause is the limitations on labor mobility. The immobility of labor is as a result of several factors. One of them is outright restriction such as the Hukou system, poor housing markets, high cost of childcare, preferential employment openings for local residents and poor education provision for migrant countries. Without the spatial labor mobility, the increase in economic earning would only depend on relative economic growth of the different regions. The growth of the urban areas is higher than that of the rural areas. This is because it has more resources and opportunities of growth from its contact with the international markets (Renwei, 690). Moreover, the workers at the rural areas are many and are either unskilled or semiskilled (Anon, 135). Because of this competition it would be hard for the labor price to be raised. China has incorporated a decentralized economic fiscal policy since 1978, which has greatly booted its growth. Although it has shifted to revenue assignment system, fiscal decentralization is still so much in use. The decentralization system has been the force behind China’s economic growth through provision of material incentives that enabled sub national governments to fund local economies. In addition, the system allows less control to banks by sub-governments enabling them to issue loans to state owned enterprises. The system constrained the budget of sub-governments, allowed them to conceal their financial status, thus retaining the capital for investing (Jin and Zou 2-6). Fiscal decentralization has few advantages in that it enables stimulation of revenue from local sources, improving countries overall fiscal position: improving accountability by local governments, and reducing distortion effects. However, decentralization has detrimental effects on a countries economic growth. According to Jin and Zou, the system hinders competitions that encourage efficiency in allocation of resources encouraging protectionist behavior. The effect of this is that poor earners cannot enter the market. In addition, the system is subject to corruption because local politicians and bureaucratic are more susceptible to influence decisions of local interest groups (3-5). This system has discouraged small enterprise owners but favored those in positions in the government, further widening the gap between poor and rich. Review of the Solution That Have Already Been Implemented In trying to overcome the income inequality problem, the government has tried to remove the barrier that limit the mobility of labor from the rural to the urban areas. However, even though a large portion of the people is able to move to the urban areas, most of them are unskilled with limited formal education. This make them unfit for white collar job with most of them ending up working in the factories which pay them low wages ((Chen & Yunbo, 157). With the high cost of living in the urban areas, their life are still a bad or even worse than live in the rural areas. Nevertheless, there are some policies which have been seen to work. The Deng reform of the 1980s benefited may rural farmer in China. These reforms had allowed the price of agricultural product to rise without government restrictions which saw many people drawn out of deep poverty. Most peasants who had previously lived in poor housing structure were able to construct better houses, got better health care and generally had their living standards uplifted (Renwei, 642). However, the income of these workers reached it optimum in the 1985 while that of the urban dweller continued to increase. Proposed solution to the Earning Inequalities in China One way that China can overcome the income inequalities I through redistribution of income. This does not mean that they should take money from the rich and give it to the poor. It is through ensuring that those with higher financial needs are helped out by those without such huge need. For instance, couples with children, the jobless, the old should be exempted from some form of taxation which the childless, the young and the employed get to pay. The benefits should not be based on the individual but the circumstance his family is in (Zhou &Qin, 541). This can work if implemented in China since it has worked in other countries such as American and Australia. The country also needs to restructure its strategy of fighting the income disparity. In the past, the policies that have been implemented have focused on reducing the rural-urban income disparity. However, it has already been discussed there are other forms of disparity that need to be addressed such as the regional inequalities, intra-urban and intra-rural disparity. It should thus find a way of reducing poverty in general using broad based measure. In order to alleviate poverty, the government needs to develop strategies with middle and short term goals of bringing about social and economic development (Renwei, 642). In order to ensure that the imbalance is eradicated, the strategies and program need to be adapted for the needs of the specific region or sectors. In addition to the aforementioned strategies, the Chinese government could develop a sound social security system that benefits the susceptible people in the rural and urban areas. Although there is social security system in place, it has been noted to only benefit the people in the urban areas. There I need to develop a more comprehensive one that will benefit all who need it (Chen & Yunbo, 176). Since there I a system already in place, what need to be done is to increase its accessibility to the rural people. Conclusion It that been noted that some of the cause of the earning inequalities between the rich and the poor have been caused by the biased policies in the social and economic sectors. Overcoming the inequalities would thus be achieved through gradual elimination of unequal policies and development of strategies to eradicate poverty at all levels. Decentralized fiscal system encourages corruption and discourages small enterprises in the markets. In addition, institutional arrangements, and high social insurance taxes with weak labor market institutions contribute greatly to the widening gap. To reduce the gap, the government needs to expand the tax system to include levy on capital, capital gains, real estates, and stocks. In addition, an improved immigrants system that allows them to access education and other social amenities will go a long way to reduce the gap. The government can also save the situation through provision of an equal competition ground and improve the system to curb the wealth earned by monopolies through corruption. Works Cited “World Bank.”“Equality of opportunity and Basic Security Foe All.” N.d, Web, 14 November 2012, Cai, Fang. Transforming the Chinese Economy. Leiden: Brill, 2010. Print. Chen, Zongsheng, and Yunbo Zhou. Income Distribution During System Reform and Economic Development in China. New York: Nova Science Publishers, 2004. Print. Income Disparities in China: An Oecd Perspective. Paris: OECD, Organisation for Economic Co-operation and Development, 2004. Print. Jin, Jing and Zou, Heng-fu.“Fiscal decentralization and Economic Growth in China.” Econ Hit, N.d, Web, 14 November 2012, < http://www.econ.hit-u.ac.jp/~kokyo/sympojuly05/papers/jing-jin-China.pdf> Renwei, Zhao. Increasing Income Inequality and Its Causes in China. Oxford: Inst. of Economics and Statistics, 1999. Print. 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