Income Gap in China - Term Paper Example

Income gap in China The difference between the earning rates between the rich and the poor is referred to income gap. The gap is also known as the middle class. The economy of china has developed faster since the development of the reform and open policy in 1978. But more recently attentions have been drown to more important and relevant potential contribution of inequality and poverty as discussed by Wan (2007). Information can be obtained from two sources: the annual national household income from the China Household National Income Project (CHNIP), and expenditure survey of the National Bureau of statistics (NBS). According to the data provided by the National Bureau of Statistics of China, the average growth rate in the last 10 years reached 9.15%, which makes China the third largest economic entity. Despite the development of the reforms that led to the increase in the economic growth, income gap has still increased in China. Researchers from university of North Carolina used the China’s Economic, Population, Nutrition and Health survey (CHNS) released a wide ranging survey data on Chinese family wealth and living habits, which has shown a wide gap in income between the nation’s top earners and those at the bottom of pay grade(Li and Zhu, 2006). And a much similar survey done by World Bank China Poverty Assessment group in 20006 also indicated a great deal in income gap and distribution in relation to location. A survey that was done in 2002 showed that households in the top 5% income bracket earned 23% of China’s total household income distribution, while the households in the lowest 5% accounted for 0.15 of the total income distribution in the country (Gustafsson and Li, 2002). Background It is said that wealth distribution and income inequality are two different concepts, in that wealth distribution considers how the ownership of assets in a given society is being shared among members, while income inequality focuses solely on the income side of the equation. Despite all the difference in the concept, both income inequality and wealth distribution helps in measuring and charting the economic gap within a country’s wealthiest and poorest citizens in relation to the same country’s development. The rising income inequality is considered one of the effects of the economic reforms. Over the last ten years, economic inequality has been growing particularly in more developing countries where, historically, it had been contained initially, such as China. Creation of more winners and losers within China’s population is because of market based income determination. The losers are considered as the low earners while the winners are the high earners and lead a great life compared to that of the middle class. Discussion The economy of China has witnessed a very considerable achievement since the establishment of the economic reforms that were initiated in 1978. New reports have been developed in regard to various researches that have been done to determine the income gap in the country. The immigration rate is one of the factors that was identified and reported by the researchers. It indicated that China has about 20million people moving to the cities from the rural just to make a comparison of its matches which is very reassuring. Average gross domestic product (GDP) has grown to approximately 9% annually during the past 2 years in China as characterized by “Nonfarm activity and income inequality” (Zhu and X.Luo) During the past decade there has been a rapid increase in income inequality, and it has caused an alarming high income disparity levels and that has made China become one of the countries with most unequal income distribution in the world. As described by Adam Hirschberg in “Urbanization winners and losers”, investment growth became uniformly high across China the previous decade since population growth was very uneven. There has been poor response to weak population growth, investment growth in the smaller towns and less attractive regions actually accelerated. Causes and effect The rising inequality in income is considered to be one of the effects of the economic reforms that were developed in 1978. The move from equitable to more market based income determination has created both winners and losers within China population. Criticism goes that income gap has put some opportunities beyond the reach of the average China citizens. Surveys have shown that the average annual income for a family in 2012 was 13,000 renminbi, or you can say it was approximately $2,100 in regard to the existing currency exchange rate. Restructuring of the state-owned enterprises and development of a vibrant private, individual and service sector, with wages and employment determined entirely outside the old socialist labor bureaus, has dramatically changed the human capital skill in most urban areas in China country. When income distribution was broken down geographically, it was realized that the average earning was 29,000 renminbi ($4,700) in the coastal region compared to the average income being earned in place such as Gansu province, which is far from the coastal areas. In this region the income was estimated to be 11,400 renminbi ($2,000). The average earning in the rural was $1,600 in 2012 compared to that of the urban which was $2,600 in the same year. It goes without saying that the income distribution in China is more in the urban than in the rural. Other factor that contributed to income disparity in China is the policy measures implemented before and during the reform. The inequality in the distribution is based on the fact that there is more areas of employment in the urban compared to the rural region. The cause of large urban-rural income gap is due to heavy-industry-oriented development strategy, which aimed at promoting industrial within cities suppressing the agricultural growth. A flawed sectoral and regional development policy, household registration system which limits labor mobility (aggravating the impacts of both the sectoral and regional-biased policies on spatial disparity) and the lack of social security has worsened income distribution in both urban and rural areas. The change has caused a high difference in the distribution of earnings amongst individual in the same field causing an increase in the income gap in the respect to the available location. The introduction of the household responsibility system and the establishment of off-farm employment, from farm employment, which has been the sole provider of income for decades in the rural, is based on township and village enterprise which has generated great differences in income among farmers and the nonfarm rural population. The bigger difference in this income inequality gap is due to a system that blocks an estimated 150 million or more rural migrants from enjoying benefits such as health care, pensions, and educations as available to the urban residents. As a result of lack of such benefits the migrants are forced to save their income for medical bills and therefore the investment amongst them is discouraged. At the same time the income of the migrants is clinched by high food prices that cost them about 5% of their income, while the rising housing cost them about 6.4% in December on annual basis. With high migration rates, intention of seeking employment in the urban sector economy, the population of the urban gets over-crowded and the cost of the houses gets high. These have increased the income gap in China. The population increasing in China urban areas has increased by 15% in the past 5years. Large income disparities now exist between the urban and rural residents, between different regions, and among the urban and rural residents themselves. Rising income disparity is a source of concern to the government because it causes widespread discontent and social protest of individuals. For long-term economic prosperity, the country should find a way to balance the policy that “let a few people get rich first” and the classical beliefs in egalitarianism. Income disparity in China has many dimensions, and only when the country is capable of tackling all of them can it develop a sustainable basis for continuing economic growth. A number of policy options are envisioned that would provide solutions to the problem. Income gap changes ha s caused poverty rates to increase regardless of location in China. According to Chinese scholar Li Chi, China’s GINI coefficient, which is an income distribution gauge used by the economist, worsened from below 0.3 from a century ago to near 0.5 today. In his book, “Development strategy and regional income disparity in China,” he reports that poverty measure recognizes anything above 0.4 as potentially socially destabilizing, meaning that today there is high social disability in China compared to a century ago. According to the World Bank, the GINI coefficient measures the extent to which the income distribution or consumption expenditure among individual’s households within an economy deviates from a perfectly equal distribution. GINI coefficient is not only used by China to measure income distribution but other countries as well. It measures the difference between Lorenz curves (a standard indicator of the distribution of income within a community), and the hypothetical line of absolute equality, expressed as a percentage of area which is covered under the line. In most indexes 0 represents perfect equality while 100% represents perfect inequality. China has many economic and income disparity in many dimensions and the country should be capable of tackling all of these disparities in most develop and sustainable basis for continuing economic growth, or by envisioning various appropriate policies that would provide permanent solution for the problem. In a survey done in 2002 international pricing, in terms of absolute poverty, China was one of the highest percentages of people living with less than $2 a day. The data showed that the poverty level was also realized in most countries in Africa such as Malawi, Madagascar, Comoros, and Haiti. Compared to the rest of the world, 10% of the population at the top of economic ladder was being controlled by the highest share of the national income just has China does. Wang Xiaolu, an economist in National Economic Research institute, says that China’s wealth gap may be worse than what is indicated by the official statistics. He says that undisclosed income could add up to $1.4 trillion annually, which ranges from kickbacks to business or government to perks such as subsidized holding offered by the state run companies. According to his studies he believed if the economy was driven in that manner then the wealthiest 10% of the population earned 65 times that of the 10% poorest individuals – and not the 23 times shown by the government data. Therefore it means that the China government can improve the agricultural sector to reduce the gap in disparity between the wealthy and the poor. Attempted solutions Different communist economic system with various collective ownership and income distribution has made China’s market economy to become metaphor with social inequality. The income gap in China started to change after the economic reform that were developed in 1978, when the GINI index was about 6% that has aggravated till today. The diversification has helped reduce the poverty rate in rural areas in 2010 compared to 2009. But despite that the population growth in urban is much greater than that of the rural in those years due to open door policy of China. Certain policies were developed to reduce the disparity in income and within the policy statement filled with populist rhetoric, China’s state council pledged to boost the social safety net and also vowed to turn over more dividends from SOEs to pay for ambitious welfare programs and as well making steps to root corruption to help the needy. They tried to raise income levels of the poor and adjust taxes on the excessively wealthy to boost social justice and social harmony. Policies that were also developed beside the reform during that period of reform creation also contributed to China’s income disparity instead of reducing them. Policy such as doubling income in 2020 and reducing wage bill to 40% did not happen even though it is still in progress. Income inequality has been argued to be a menace to social stability, and potentially causes the disappearance of the middle class capital. The heavy-oriented development strategy, which aimed at promoting growth of industries within the cities, greatly discouraged the agricultural sector and created a large urban rural income gap. China as well tried to handle the situation by developing interest rate liberalization, state-owned enterprise dividend payment and putting restrictions on government official’s income. Every country has ambition and every ambition has to developed form goals. China has a projection of wealth by 2015 to be producing 27% of all wealth in the world, basing their interest on the economic trends that has been there since 1975 to 2002 continues for 13years. When this economic were set, just like any strategy there are always downfalls. In year one of the establishments China generated 26% that is more above their expectation in the first year of operation. But very slowly the generation declined to 5% of the world total income in 1980s. China has been developing economically recently and it is expected of them to be recovering their position in the world economy, and this time instead of America having small percentage of world wealth, as in year 1, the Africans are the ones who have shifted to holding smaller percentage in the world economic due terrorism. Proposal Earning gap is widening in China because of the demand for education and other skilled personnel are growing, such as the technology. Globalization has also encouraged the importing of products using relatively low skilled labor. Therefore should an increase in earnings inequality due primarily to higher rates of return on education and other developed skills be considered a favorable or unfavorable? I think higher rates on return on capital are a good sign of greater productivity in the economy, and with such kind of interference it can be extended to impact returns to human capital as well as to physical capital, and this is a much better strategy that can be adopted by China. China should increase the industrial pay grade as well as increasing wages for the factory workers since that is partly what has caused the huge income disparity. According to Li (2008), he argues that the income gap is likely to remain high in China in the coming years and there is no effective way of reducing the GINI coefficient or other equality distribution measures in the long run but rather they can only be reduced in the short run. There I propose that China can develop seasonal jobs that can help the potential low earners to improve their income and that will increase the GINI coefficient analysis. The other point is that China should increase urbanization that will help reduce income disparity in the long run. On the same way Terry (2008) suggests that gradual removal of sectoral and regional biasness in instructions and policies would help reduce income in China. But I propose that China can as well adopt a clear strategy for regional development that can favor the disadvantaged areas, to help reduce regional income inequality and its possible effects on political stability and growth. Since the major cause of income disparity in China is rural urban income gap, the most effort the government can do is to accelerate urbanization in that they can as well be a drop in the rural urban movement. China’s urbanization lags so much behind the world urbanization standard, and by reducing this lag an approximated number of 50 million people are believed to gain from the development. Li (2008) believes that this change alone cannot reduce the measured GINI coefficient per se, but to me; to some point it’s a probable measure to make the country as whole better off. Income gap is hard to cab not only in China but in the entire world, but from the experience gained from China we have known that in can be reduced. Works Cited Gustafsson, Björn, Shi Li, and Terry Sicular. Inequality and public policy in China. Cambridge: Cambridge University Press, 2008. Print. Chi, Li. Development strategies and regional income disparities in China. Helsinki, Finnland: UNU World Inst. for Development Economics Research (UNU/WIDER), 2006. Print. Zhu, Nong, and Xubei Luo. Nonfarm activity and rural income inequality: a case study of two provinces in China. Washington, D.C.: World Bank, Development Economics, Office of the Senior Vice President and Chief Economist, 2006. Print. Salidjanova, Nargiza . "U.S.-China Economic and Security Review Commission Staff Research Backgrounder12." China’s New Income Inequality Reform Plan and Implications for Rebalancing 1.1 (2013): 1-10. Print. Read More