Income Inequality In China

Here is the headline-grabber:

(China Daily)  Income gap in China widens in first quarter.  June 19, 2005.

China's income gap widened in the first quarter of the year, with 10 percent of the nation's richest people enjoying 45 percent of the country's wealth, state press reports said.  China's poorest 10 percent had only 1.4 percent of the nation's wealth, the Xinhua news agency reported, citing a recent survey by the National Bureau of Statistics. 

...

The survey, which polled 54,000 urban and rural households, found China's richest 10 percent had disposable income 11.8 times greater than the lowest 10 percent at the end of the first quarter of 2005.  This compares with the rich having disposable income 10.9 times greater than the poorest 10 percent during the same period last year, the report said. 

How serious is this problem?  Will the number of peasant riots (last count was 58,000 per year) skyrocket so as to topple the regime?  Not to worry, because the key lies in the following paragraph:

However, income continued to grow among both the rich and the poor during the first quarter of 2005. The richest 10 percent saw disposable income rise 15.7 percent over the same period last year to 8,880 yuan (1,072 dollars), it said.  Disposable income for the lowest 10 percent rose 7.6 percent from the first quarter of 2004 to 755 yuan. 

As long as disposable income rises for everyone, there is not a serious problem.  For the lowest 10 percent, here is the bet -- you are getting a 7.6% increase per quarter; if you topple this government, what will your disposble income be?  You don't have a clue, nor can anyone else tell you with any certainty.  It will be a huge bet.  There will be people who are willing to tell you that an American-style democracy will bring you an American standard of living, but you have to be very simple and naïve to believe that.  Just about every Latin American country was sold on that notion, and nothing like that has ever happened to them.  Against that is the possibility that a military junta will take over and go right back to the total control in the Cultural Revolution Days where everyone makes 36 yuan per month.  So I believe the people of China will acquiesce until as such times when the situation changes.

The big problem will come if the above paragraph should read in the future something like:

The richest 10 percent saw disposable income rise 20% percent over the same period last year to 175,000 yuan, the report said.  Meanwhile, disposable income for the lowest 10 percent decreased 25% percent from the first quarter to 250 yuan. 

As long as everyone is doing better, the trickle-down theory will keep just about everyone happy.  And then the bomb will come when the economy cannot grow that fast, or else the rich gets too greedy.

The other statistic mentioned in the China Daily report is the Gini index:

Still, China's Gini coefficient -- an internationally accepted measurement of income equality -- was calculated to be over the "alarm level" of 0.4, the report said.  On the Gini scale, zero corresponds to complete equality and one refers to perfect inequality, or one person having all the income.  No precise Gini coefficient was provided, but state press reports in recent weeks said the value was more than 0.48 and approaching 0.5.  Most developed European nations tend to have coefficients of between 0.24 and 0.36, while the United States has been above 0.4 for several decades, according to the United Nations 2004 Human Development Report, which calculated China's value last year at 0.447.

Again, by itself, an increasing Gini index is not a problem as long as everybody does better.  A higher Gini index means the rich are doing even better, but the poor may not have much to complain about with a 7.5% quarterly increase in disposable income.  Here is a hypothetical set of examples to illustrate absolute versus relative poverty.

The richest 10% has disposable income of 4,500,000 yuan while the poorest 10% has disposable income of 30,000 yuan (all figures in real terms).  The Gini index is 0.600, but everyone is happy in this extremely well-off society twenty years from now.

The richest 10% has disposable income of 100 yuan per month while the poorest 10% has 36 yuan.  The Gini index is 0.050, but everybody is miserable in this Cultural Revolution-era society.

The bomb will come in five or ten years time when the growth rates slow down. 

Related post:  Gini Index in Hong Kong  (December 27, 2004)

(Global Times)  Income gap not as big as earlier thought   By Song Shenxia.   February 5, 2010.

The income gap between the rich and poor in China has been narrowing in recent years and may have been overstated in the past, according to a report released Tuesday by the Organization for Economic Cooperation and Development (OECD).

While the report suggests that China's efforts to tackle one of its toughest social problems are being increasingly recognized worldwide, some experts are challenging the report results while pointing to the core issues that they say the government needs to address to further narrow the national wealth gap.

The report said that increased welfare spending in rural areas and growing migration to cities has helped mitigate the increase in inequality across the country.

Richard Herd, a senior economist at the OECD, said at a press briefing Tuesday in Beijing that the migration of rural people to urban areas for work allows them to increase their income dramatically.

Income inequality is measured by the Gini index, which ranges from zero to 100, with zero indicating complete equality and 100 showing complete inequality, while 40 is seen as a warning threshold.

According to academics at the Chinese Academy of Social Sciences (CASS), the Gini index stood at 49.6 in 2005. However, the OECD put the index at 41 in 2005 and 40.8 in 2007, based on what it called a better gauge of price changes and unregistered rural migrant workers in cities.

Wu Yaowu, an associate professor with the university's Institute of Population and Labor Economics, told the Global Times that it's possible that the increase in China's inequality has leveled off in recent years.

"The wealth gap in China has been overstated by international organizations and even government researchers in the past because they failed to include the rural population that migrated to cit-ies, because it's difficult to track down their income," he said.

Since 2004, there has been a significant shortage of laborers in cities – a trend that helped raise the average monthly income of migrant workers from between 300 yuan ($43) and 600 yuan in 2002 to between 1,200 and 1,500 yuan now.

He said that as rural migrants in cities earn more than those staying in their hometowns, their income level can be used to level off the figure if it's included in the estimate.

"There's no doubt that China has made incredible progress in recent years to lift people out of poverty," Wu said. "There will be no group in the social stratum deprived of opportunities to share in the fruit of China's development."

In the past 10 years, China's GDP tripled from 9.9 trillion yuan in 2000 to 33.53 trillion yuan last year, and the GDP per capital grew from 7,858 yuan to about 20,500 yuan, putting the country on track toward becoming the second-largest economy in the world.

Gao Huiqing, an official with the State Information Center's Economic Forecast Department, suggested that people's perception of the widening wealth gap might be misled by their thinking that the rich are getting richer.

"But, in fact, the income of the poor has to have grown faster than that of the rich," he said.

The OECD report also suggests that the gap is wider in China than in the United States and other developed countries, but narrower than that in other developing countries such as Vietnam.

Hong Lin, a Chongqing migrant worker who makes 2,000 yuan a month doing construction work, said he dreams of marrying a Vietnamese woman, as he claimed that he could be a rich man in that country, where the average monthly income is about 500 yuan, the Chongqing Evening New reported recently.

Despite the encouraging OECD figures and optimism among some experts over the narrowing gap, a vast number of people are still unhappy with their earnings.

The number of people living in poverty is around 40 million, according to China's poverty line of 1,196 yuan a year, and that number could jump to nearly 100 million based on the international standard of $2 a day set by the World Bank, according to Li Shi, a professor specializing in income inequality and poverty at Beijing Normal University.

Fei Long, a 28-year-old farmer in Jingyuan, a poverty-stricken county in northwest China's Gansu Province, told the Global Times that even though he works at a Jingyuan coalmine now, he still feels left out of the growing prosperity experienced by many other Chinese, especially those in cities.

"I can only make a little more than 10,000 yuan per year, but my boss can make an annual income of some 30 million yuan," he said.

Fei said that, beyond his monthly salary of about 1,000 yuan, he enjoys no endowment or medical insurance, and he is under constant pressure of losing his job because of competition among his fellow villagers.

The government has been trying to help the rural areas in recent years catch up with the industrial boom seen in cities, including the latest plan issued in January, to put more investment, subsi-dies, fiscal and policy support into vast rural areas.

Despite the efforts, China still faces growing difficulties in increasing farmers' incomes and narrowing the gap seen between workers in urban and rural areas.

Statistics by the National Bureau of Statistics (NBS) released last month showed that the per-capita disposable income of urban people was 17,175 yuan in 2009, up 8.8 percent from a year earlier, while the per-capita disposable income of rural residents stood at 5,153 yuan last year, and the growth rate was 0.6 percentage points lower than that of urban residents.

The income ratio between urban and rural residents was 3.33:1 last year, compared with a ratio of 3.31:1 in 2008.

"The abolition of the nearly 3,000-year-old agricultural tax, the establishment of an insurance network covering all rural areas and the pace of urbanization have helped boost farmers' income and narrow the gap," said Ding Yifan, a researcher at the State Council's Development Research Center.

But he said the government has to exert more effort in implementing policies.

Shen Jie, a researcher of psychological sociology at the Chinese Academy of Social Sciences, also suggested that the rich-poor gap can be found in every nation around the world, but what is more frightening is when poor people lose the hope of striving for a better life.

"The government should offer more resources to underprivileged people so they won't alienate themselves from society," Shen said.