Why the Gap Between Rich and Poor Has Widened in China - Essay Example

Why the gap between rich and poor has widened in China Name Course instructor Course Date China despite being the main exporter of the world’s demands is not yet close to being a developed country. The country faces many problems but the key among these issues is the disparity in the economic levels of its citizens. With a Gini coefficient of around 0.447 China has a comparatively high inequality in its population. Furthermore, the average urban to rural per capita ratio in income is more than three times (Fang, Zhang, & Fan 2002). Among the main causes of inequality in China is the increase in rural to urban migration. However, due to their lack of education and skills and the ever changing technology these immigrants they are not in a position to find work. Other factors discussed in this essay include the taxation regime, accumulation of wealth, globalization, policies adopted and the labor market. Education One significant influence in the growing inequality is the difference in the ability to access education. Educated individuals, especially in an economy that has a high demand for employees, generates high earnings for those who poses education, however, an increase in education levels initially increase and subsequently decrease income inequality. Consequently, those who cannot afford education, or do not obtain optional education, usually receive much lower salaries. The lack of education results directly to lower earnings, and thus inferior aggregate investment and savings. The increase in household wealth and income inequality results in greater distribution of educational achievement, mainly because those lower in educational achievement fall further below the standard levels of education. Equally, education increases income and promotes development because it assists to realize the productive potential of individuals (Qian & Smyth, 2008). More and enhanced education is a requirement for the rapid development of the economy; however, the inequality in education also encourages the increasing gap between the rich and the poor. The success of the labor markets has a direct link to education, and the consequences of the increasing disparity in the levels of education further widens the wage gap between the poor who are uneducated and the rich who are educated. From the situation in China, it is clear that the most influential factor on the inequality in income is education. Education affects the distribution of income in both the medium and long run. A worker with a higher education background can obtain and maintain employment more easily than an individual with minimal educational background maintains. Furthermore, Gerard (2006) argues that a farmer in the rural parts of China with basic education is better placed to locate nonagricultural resources of income than uneducated counterpart although not at the same level with an individual with advanced education. It is imperative to note that the level of education has a direct correlation with income ability and more income implies the ability to acquire further education and increase the levels of income. On the other hand, lower income due to lack of education translates to only the basic or minimal education which results in lower wages. Labor market A substantial part in the growing gap of economic inequality in China is caused by the dissimilarity in demand and supply for various types of work. However, where there is imperfect competition; information unequally distributed; prospects of acquiring skills and education unequal, and since these imperfect conditions exist in the Chinese market, there is in effect little assumption that markets are efficient. Where the mode of production is capitalist and professional, and labor organizations cannot restrict the number of employees the wages of employees will not be determined by the employer or these organizations, but relatively by the market. Where there are many employees willing to provide labor for a great amount of time contending for a job that is required by few employers’ results in lower wages for the employees. The competition between the workers for the position will drive down the wages associated with that job (Fan, 2006). On the other hand, a job with a few employees willing to work and more employers will translate to high wages for employees. This is because of employers competing for the available employees. The Organization for Economic Co-Operation and Development. (2004) provides that factors that affect the supply and the demand of the workforce are significantly determined by the skills and education of the employees. These relations in demand and supply of labor lead to the ranking of wage levels within the country and this significantly influences economic inequality. Division of wages is a primary cause of the increasing gap between the rich and the poor in China. Globalization Globalization is an occurrence that has brought about advantages; however globalization has been the driver of economic inequality in China. The concept of globalization has brought about the reduction of the value of unskilled labor pushing the wages of these unskilled workers and those of the skilled workers in opposite directions. Additionally economic liberalization has further exacerbated the disparity in the level of wages of these workers. In view of the dependency theory, dependence by China on advanced nations has brought adverse social and economic implications for it, and particularly in the long term. This dependency is created and sustained mainly by the prevailing dependency on trade as well as movements of foreign direct investment. Accordingly, Wade (2004) provides that the penetration of foreign direct investment in low and middle-income countries including China increases income inequality and impedes economic growth by generating dualism and inequalities in the economy and its productive organizations. These investors create a vastly capital intensive export segment that is detached and functions uniquely or differently from the nation’s economy. This segment utilizes most of the resources available in the economy including the existing credit and capital and further sends out most of wealth and profits earned in China. Furthermore, these divisive effects of foreign direct investments also exists in the local level where as a result of the penetration of these organizations there is the emergence of local elites who are charged with ensuring that the interests of these organizations are met, which regularly is the maintenance of cheap labor from poor and marginalized laborers. In this regard, it is apparent that the flow of foreign direct investment into China has widened the levels of inequality among the poor and the rich. This is also as a result of the transfer of capital from the wealthy countries to the developing nations such as China which is similar to outsourcing work, which according to these developed nations are low skilled labor intensive work. This enormous relocation of capital to China has generated a vast demand for skilled labor, which has proportionately increased the relative income received by these skilled workers. However, the comparative wages received by unskilled workers has deteriorated in the country which then means that inequality has further widened. Moreover besides these multinational companies outsourcing undertakings that depend heavily on low and cheap labor, they also bring about new technologies (Zongsheng & Yunbo 2005). Although the introduction of such technology will initially create a demand for skilled employees to operate the machines, consequently this results in the creation of inequality, as well as market segmentation in China. Policy reforms The process of reforms in the state-owned enterprises also affects the pattern of income distribution in China, which is the backbone of the nation’s economy. The reform process has provided some of these enterprises the ability to raise efficiency and productivity and result in considerable achievements in these enterprises, which in return has enabled these enterprises to raise the wages of its employees and even provide bonuses. However, other enterprises have been unable or slow in making the required adjustments to adapt to the market conditions because of the reforms and cannot afford higher wages or bonuses. Moreover, some enterprises have shut down, and this contributes to the increasing disparity between the rich and the poor in the country. Tax Another cause of the increasing gap between the rich and the poor in China is the rate at which income is taxed as well as the progressivity of the system of tax employed. A progressive tax system is a tax system by which the rate of taxation increases as the taxable amount rises. In this progressive tax system, the amount of the maximum rate of tax will have a direct effect on the level of disparity in a society, either decreasing or increasing it, on condition that there is no change in income because of the variation in the tax regime. Furthermore, a sharper progressivity results in a more equal income distribution across the board. Conversely, the taxation regime in China has increased the inequality between the rich and the poor by enabling the rich far superior access to wealth than those with low income. The nature of the taxation regime in China does not seem to succeed in the redistribution of wealth and thus does not move the society towards closing the gap between the rich and the poor but rather worsens it. Essentially, the Chinese tax system is non-effective in income distribution. Although salaries and wages in China are taxed at progressive rates ranging from 5% to 45% and private enterprises taxed at progressive rates ranging from 5% to 35% other income including savings, dividends, returns from stocks, property transfers and leases attract taxes flat rated at 20%. This implies that earnings from working get higher taxes of up to 45% while semi work is taxed at a maximum of 35% while returns from non-work are taxed at a low rate of 20%. This situation results in the widening gap between the rich and the poor in China. Wealth concentration The disparity in economic inequality is in large because of the stages of growth in a country. Countries with little growth have comparatively equal allocation of wealth among its citizens. However as a country grows, it gains additional capital, which in turn results in the owners of this capital obtaining more income and wealth which results in inequality. This situation leads to wealth concentration, which is a process through which newly generated wealth concentrates in the control of already-wealthy entities or individuals. In essence, this theory provides that individuals who hold wealth have the means of acquiring more wealth through investment in new sources of wealth creation. Consequently, this wealth concentration adversely affects the distribution of wealth in an economy such as China and increases the gap between the rich and the poor (Carl, Renwei, & Shi, 2001). . Rural urban divide Another reason that is responsible for the widening gap between the poor and the rich in China is the segmentation of the economy into the rural, which is low income, and the urban segment that is high income. In ordinary circumstances, the overall level of inequality will initially increase as people transfer from the rural low -income sector to the urban high - income sector. Consequently, the levels of inequality will drop as the majority of the population settles in urban areas and increase their income. In this regard, the level of inequality will increase during the process of urbanization and can be a transitory process with a decline in the inequality at the end of the urbanization process (Sicular et al, 2007). A solution to the inequality according to this approach is to accelerate the rate of urbanization in the short run while promoting growth in the urban sector in the end. However, the urban sector is not in a position to absorb the migration from rural to urban China. Additionally China’s stringent residence registration system prevents migrants from the rural China from immigrating to and obtaining residence status in urban areas. This, therefore, implies that the rural segment of the economy cannot access the welfare subsidiaries and benefits enjoyed by higher paying jobs and urban residents. Moreover, the existence of urban - biased institutions and policies are liable for the enduring divide between the rural – urban rift and the current increase in inequality (Yang, 1999). If migration barriers remain in place, then inequality is not likely to diminish and, therefore, it is possible that China will retain the high level of inequality in its economy. Reference list . Fan, C. C. (2006). China's eleventh five-year plan (2006-2010): from" getting rich first" to" common prosperity". Eurasian Geography and Economics, 47(6), 708-723. Carl R., Renwei Z. & Shi L. (2001). China's Retreat from Equality: Income Distribution and Economic Transition. M.E. Sharpe. Fang, C., Zhang, X., & Fan, S. (2002). Emergence of urban poverty and inequality in China: evidence from household survey. China Economic Review, 13(4), 430-443. Gerard A. P. (2006). Education and Social Change in China: Inequality in a Market Economy. M.E. Sharpe. Organization for Economic Co-Operation and Development. (2004). Income Disparities in China: An Oecd Perspective, Part 612. OECD Publishing. Qian, X., & Smyth, R. (2008). Measuring regional inequality of education in China: widening coast–inland gap or widening rural–urban gap. Journal of International Development, 20(2), 132-144. Sicular, T., Ximing, Y., Gustafsson, B., & Shi, L. (2007). The urban–rural income gap and inequality in China. Review of Income and Wealth, 53(1), 93-126. Wade, R. H. (2004). Is globalization reducing poverty and inequality? World Development, 32(4), 567-589. Yang, D. T. (1999). Urban-biased policies and rising income inequality in China. The American Economic Review, 89(2), 306-310. Zongsheng C. & Yunbo Z. (2005). Income Distribution during System Reform and Economic Development in China: The Status and Trend of Income Inequality of Chinese Residents. Nova Publishers. Read More