The Gap between the Rich and the Poor in China - Case Study Example

Introduction China has the second-largest economy in the world, next only to the United States (Xie & Zhou, 2014, p.6928). Its economy has one of the most impressive growth rates in the world, even while it is still in transition from controlled state socialism into a market society (Haller & Eder, 2016, p.194). Since the initiation of transitional economic reforms in 1978, the economy started out on a trend of impressive growth in its average GDP, but this has unfortunately coincided with having some of the worst income inequalities globally (Cevik & Correa-Caro, 2015, p.3). The Chinese economic structure has ended up being dualistic, with rich individuals and regions benefitting while poorer ones experience little change (Yisheng, 2011, p.293). The growing gap between the rich and the poor in China may be attributed to changes that have been made in the process of transforming the economy. This paper discusses the causes of the growing gap between the rich and poor in China, and suggests that it is because of reform-related issues. The Gap between the Rich and the Poor in China The rich are the ones who have truly benefitted from the transition from centrally-controlled socialism into a market-driven economy. Xie & Zhou (2014, pp. 6928-6931) explain that while incomes for the poor are on the rise, the rich have generally been becoming richer faster. The country has been quickly growing its GDP, but household income growth has not been distributed uniformly. The poorer segments of the society have benefitted because extreme poverty is on track to being eliminated by 2022, but unfortunately a mere 5% of the country’s top earning households account for 23% of total national income while the lowest 5% takes about 0.1%. Yisheng (2011, p.293) believes that this has resulted in a large gap between rich and poor regions and between the incomes of rich and poor individuals across the country, and the gap is also noticeable in education and investment, extending further to water, sanitation, environmental protection and health. China has always experienced a growing income inequality, which mostly reflects a massive growth of income amongst the rich, taking place side by side with stagnation in the poor people’s living standards (Cevik & Correa-Caro, 2015, p.3). The most appropriate measure for this is the Gini Coefficient, whose 0 value represents perfect equality and 1 is its extreme inequality. When a country reaches 0.4 or more, the society is considered to be severely unequal. China’s had reached 0.61 in 2012 (Xie & Zhou, 2014, p.6928). Millionaire households in China stand at over 2.4 million, which is second only to the United States (Cevik & Correa-Caro, 2015, p.3). The disparity is so big that in 2015, China had 596 dollar billionaires, a higher figure than even the United States (Wildau, G and Mitchell, 2016, par.6). While there has been a considerable growth in per-capita income and a sharp decrease in the number of Chinese earning below $1.25 per day, there has been a great increase in income inequality, so that the highest quintile of income earners take home almost 50% of all income, and the poorest earner quintile accounts for less than 5% of all income (Cevik & Correa-Caro, 2015, p.3). Causes of the Inequality Since 1978 when China began its economic opening up and reforms, the country has witnessed a lot of economic growth, and the people’s lives have been considerably improved (Jianlin, 2004, p27). However, the government facilitated the creation of a wealthy social class early during the reforms, and this has remained dominant and economically advantaged. According to Bin (2015, p.2), the country’s income inequalities started growing when in 1978, Deng Xiaoping started out the reforms and opening up of the economy. He expressed the intention of the government to allow some of the country’s regions and even individuals to prosper first, as this would help in the easier achievement of the China’s overall prosperity. Xie & Zhou (2014, p.6928) argue that as a result of this measure, there has been the continued growth of an extremely wealthy class which has benefitted from a kind of ‘informal privatization’ within the economy. According to Haller & Eder (2016, p.195), industrial assets in urban areas and state property in rural areas has ended up being diverted into the hands of private owners, and while there have been increased opportunities for upward mobility in the country and human capital is getting more emphasis, there has also been the maintenance of social networks referred to as the guangxi, which have ensured the unity and protection of the wealthy people’s interests. Cevik & Correa-Caro (2015, p.3) observe that the country’s development model has also all along been export-led and credit-fuelled, and this is likely to have worsened the extreme increases in income inequality as it favors the rich. Additionally, it can be stated that the objective of social equality has been abandoned by the Chinese government for many years, this factor has also promoted the gap between the rich and the poor in China. Ever since the year 1978, China had focused its agenda mainly on promoting economic growth and with time the objective has been attained. On the other hand, the objective of attaining equality in the society has been forgot or left behind. Scholars have argued that the increasing gap between the rich and the poor in China has been influenced by the egalitarianism that existed during the reign of the Mao. In most cases, the leadership that has historically emerged in China has not done much to alleviate the disparity. The country has therefore witnessed bitterness and anger from the citizens which have resulted to mass demonstrations to the extent of threatening the political stability of the nation (Whyte, 2010). In the recent years for instance, debate has emerged concerning the expanding gap between the rich and the poor. Zhu Guangyao China’s finance minister disclosed that the country’s GDP will attain 100 trillion Yuan ($16.11 trillion) by the year 2020, making the per capita GDP to rise from $10,000, up from $7,485 in 2014. Analysts argue that the continued focus by the government on numeric targets is mainly geared towards benefiting the rich in the country at the expense of the poor people, this has therefore increased inequality in terms of income distribution (Scutt, 2015). Growing unemployment has ensured a growing gap between the rich and the poor in China. According to Yan (2015, p.173), the number of jobs created is limited, materials for production are scarce and quality of human resources insufficient. These, together with unemployment have ensured the expansion of poverty especially among new graduates, laid off workers who are victims of restructuring and migrants who go from the rural areas to cities. Chinese unemployment is mostly structural, because of institutional transition and structural transformations arising from reforms. Related to this, there is inequality in terms of what a person can earn. Haller & Eder (2016, p.195) explain that there are systematic divisions of rural and urban workers in China, especially through the limiting of migration from rural to urban areas by means of the hukou system which requires people to register themselves as residents of specific areas. Some areas, especially rural therefore may have extreme unemployment and low wages even when elsewhere there is demand for labour, leading to income imbalances. The provision of more employment opportunities and resolution of issues relating to urban poverty and unemployment are therefore major issues limiting reduction in the gap. The large and diverse nature of China has created an imbalance in the impact of economic growth on communities. According to Yan (2015, pp.171), there is a continuous production of a newly poor segment, especially as population grows, and much of this population is distributed across backward, remote areas whose natural conditions are harsh for instance in desertified areas, the Tibetan Plateau, the Qinba Mountains, where inhabitants lack infrastructure, survive in harsh living environments and do not have adequate access to public services or even medical care, making it difficult for the impacts of economic growth to trickle down to them. According to the Pareto criterion even the lowest income earners always must benefit from growth through its spillover effects (Landsburg, 2011, p.241). However, when disparities are this extreme, poverty only grows. Yisheng (2011, p.239) adds that ecological destruction and environmental pollution continue to worsen the lives of the poorer segments of the population, who are most vulnerable, making their lives incomparable to those of the rich. The shift from an egalitarian to open market economy inevitably led to income disparities that have maintained the gap. According to Haller & Eder (2016, p.195), continuing economic reforms have led to the creation of a partially market economy. Pre-reform China was a socialist egalitarian society where government policies ensured that any income inequalities were suppressed. For instance, industries, shops and houses in towns and cities were either co-owned or owned by the government. The setting and administration of workers’ earnings was also centralized, and the government dictated uniform wage scales and standards for everyone. Within the rural areas, all means of production was owned by communes that worked on them, while the government sold all the inputs. The system therefore helped to eliminate the gap between the rich and the poor in China. Bin (2015, p.3) explains that starting in 1978, the government has implemented a policy that advocated for entrepreneurship as a means of wealth creation. In towns and cities, state-owned corporations were reformed and the private sector developed quickly, and because pay was no longer government-directed, skill became a major factor determining wages hence income inequality grew than ever. Within rural China, there was the launch of the Household Responsibility System (HRS). According to Lin et al. (2003, p. 145), the HRS was an agricultural production system within which households were able to contract machinery, land or any other facilities, with the aim of preserving unified management while contracting out whatever was necessary. This enables households to make independent operating decisions for instance on sale of any surplus, therefore income differences arose. China has pursued a wrong regional development strategy, which has led to the creation of major disparities. The nature of ethnic-national constructs within the Chinese society has ensured that the economic strengths of communities depend on where they come from. According to Jianlin (2004, p.28), there are serious inequalities between rural and urban residents in China. Haller & Eder (2016, p.195) explain that there is also unequal development of the country’s macro-economic regions. Eastern China has for instance always been allocated more resources when compared to Western China. Bin (2015, p.2) notes that the government created Special Economic Zones in the East with more legislative autonomy, infrastructural support and tax incentives so that more trade and foreign investment could be ensured. Subsequently, Yisheng (2011, p.293) observes that there has been a consistent growth in the gap between the wellbeing of western and eastern China. Eastern China has been the one selling value added products to Western and Central China. Meanwhile, Western and Central China provide raw materials and energy resources to the East, of course at regulated prices. This kind of arrangement has resulted in an imbalanced exchange regime which has in turn led to differences in economic development and potential for wealth creation across the regions. Such arrangements have ensured that some areas remain poor irrespective of progress and the richer regions or individuals end up being beneficiaries of growth. The absence of a reliable social security system has contributed to income disparity. China does not have good social security. Reforms in state institutions led to challenges relating to social security, and these have worsened income inequalities in cities. Prior to 1978, state enterprises got government funds which they used to pay for employee social security. With time, the provision of this security was left to the enterprises which became overburdened as more workers became old. Although the government is trying to change this by returning the responsibility to itself, this process has been slow, leading to delays in pension payments, thereby making the incomes of the people who get out of employment lower than other people within the cities (Yan, 2015, p.54). China’s emphasis on industrialization at the expense of agriculture has historically worsened the growing gap between the rich and the poor. Lin et al. (2003, p. 112) explains that the government always tried to ensure a development strategy that focused more on heavy industries. Because this was mainly in towns, it diverted a lot of resources from agriculture, for instance through restricting labour mobility and pricing of products, and this created a dual society where rural areas were generally poorer than urban ones. When the reforms started, there was a reduction in income differences across the sectors. This was because of the government’s decision to liberalise agricultural markets while controlling prices of produce and therefore incomes of farmers. However, this did not last for long because as from the mid-1980’s, the disparity across urban and rural areas rose again. Prices were lowered and funds were transferred from rural to urban sectors again. Zongsheng and Yunbo (2004, p.69) explain that many of the industries had to be placed in western and central China for security reasons, but the distribution of the industries across the regions did not match the areas’ comparative advantages. This led to inefficiency in their operations and need for frequent government interventions. Supporting them in turn required depressing of input prices that were locally produced, which ended up limiting market functioning, capital accumulation and application of technology hence productivity. As a result, agricultural communities, which make up a large fraction of the population have remained disadvantaged as compared to industrial workers and owners. Conclusion China has undergone a lot of growth in its economy since the beginning of the reform era in 1978. Although there has been a subsequent improvement of life for most citizens, there has also been a growing gap between the rich and the poor in the society. This has been attributable to factors such as allowing a pioneer class of beneficiaries, structural unemployment that has arisen, the inability of the system to include all areas of China in the development agenda, the inevitable shift from egalitarianism during reforms, imbalances in regional development, abandonment of government-guaranteed social security and overemphasis on industrialization at the expense of agriculture. The fact that many people fall under the relatively disadvantaged groups, and their population is ever growing implies that even if economic conditions improve, the effect is minimal as compared to that on the lives of the advantaged groups. The gap between the rich and the poor has therefore generally been the outcome of the transitional features of the country, hence its reforms. References Bin, P. (2015). Regional Disparity and Dynamic Development of China: a Multidimensional Index. Trento: University of Trento Cevik, S and Correa-Caro, C. (2015). Growing (Un)equal: Fiscal Policy and Income Inequality in China and BRIC+: IMF Working Paper. Washington DC: International Monetary Fund Haller, M and Eder, A. (2016). Ethnic Stratification and Economic Inequality Around the World: The End of Exploitation and Exclusion? London: Routledge Jianlin, F. Income Disparities in China: A Review of Chinese Studies in OECD. (2004). Income Disparities in China: an OECD Perspective. 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