Rising Income Inequality in China: A Price Worth Paying?


J. Margolis

China, a country of continental scale, has experienced inequality in many shapes and forms throughout its 4000-year history. Part of this inequality is regional; attributable to China’s sheer size and the diversity of its geography. Lack of water, arable soil, and good links to transport networks significantly affect an area’s ability to prosper. Areas that suffered from such deficiencies in China 1000 years ago tend to be the same areas that struggle with limited resources today. For instance, China’s southeast, with its abundantwater resources and excellent access to international markets, continues to be one of the wealthiest parts of modern China. China’s western plateaus, sparsely inhabited, with poor arable land and water resources, limited transport and infrastructure systems, remain poorer areas of the country today.

Inequality during the Mao Era

During the Mao era, the Chinese government set income equality across China as an important goal, although it was never fully achieved. Topographical advantage remained determinative, even in the face of economic policies aimed at reducing it. The CCP enforced a hukou family register system, which eliminated the ability of China’s citizens to move about the country, limiting them to the area in which they were born and their family registered. What this meant in practice was that those born in regions that lacked resources, or those born in the countryside, had relatively less wealth than those born in more resource-rich regions or in urban areas. Thus inequality during the Mao era was principally between urban and rural areas, as opposed to between individuals in the same area. Nevertheless, high ranking party officials did enjoy more relative wealth than those who were not part of the Communist Party, yet the lack of consumer goods and isolation from the international economy meant there were not many opportunities for even high-ranking party officials to have conspicuous consumer advantages over rank-and-file citizens. In fact, until the Reform era brought more consumer goods to China, most Chinese citizens merely strived for the four “must-haves”: a bike, a watch, a radio, and a sewing machine.

Inequality in the Reform Era

J. Margolis

In 1978, this all began to change with the implementation of the Dengist reforms. Deng explicitly declared that some should be allowed to ”get rich first”, with the implicit understanding that others can get rich later. This was a significant alteration in policy; for a communist government to accept, and even encourage, societal inequality was certainly groundbreaking. As China began to make the transition from planned- to market- economy – a journey that has, by no means, been completed – income inequality increased in measure with its transition towards capitalism. However, the early years of the reforms, at the beginning of the 1980s, were marked by a fall in overall inequality, driven by the loosening of restrictions on rural areas selling their excess produce for profit. This allowed those rural producers of food to close the income gap with their urban counterparts. Chinese official statistics struggle to provide an accurate picture of Chinese incomes today; the wealthy often under report their earnings and the very poor can be underrepresented as their geographical isolation and high illiteracy rates can make them difficult to track. Yet even those official figures that can be produced, which may try to disguise large disparities, have shown income disparity to be increasing. China’s Gini coefficient – the most commonly used measure of inequality under which an entirely equal society would have a coefficient of 0 and one that is entirely unequal would register as 1 – stands today at 0.47. This is considerably above both the World Bank’s ‘critical threshold’ of 0.4 and the US Gini of 0.41, and shows signs of reaching the extreme levels that plague Latin America. This statistic becomes even more alarming when viewed against the levels of inequality at the outset of the economic reforms: in 1980 the Gini coefficient was 0.28. In essence, inequality has risen in China by over 50% in thirty years. While this is in line with the Dengist policy of ‘letting some get rich first’, it is evident that continued increases on anything approaching this scale over the next thirty years would cause difficulties for the CCP both in terms of potential social unrest, something that is already a growing problem, and of its ability to undermine the CCP’s legitimacy base. The CCP has begun to recognize this rhetorically as well as in policy with speeches from Wen Jiabao and Hu Jintao peppered with references to the need to address income divisions.

Regional Inequality

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Today, the biggest discrepancy of incomes can be seen between regions. China began its capitalist experimentation in the Pearl Delta region of Guangdong province, where its workers sewed piecework for Hong Kong textile manufacturers. As more and more of China’s GDP began to be generated by international trade, this and other industries spread northwards along its coast. Consequently, China’s east coast is now its most developed area, with income levels at purchasing power parity (PPP) approaching those of countries such as Saudi Arabia or Singapore.

In the first 12 years of economic reform, growth in China’s interior regions was driven by a re-introduction of private markets in the agricultural sector, as well as increased productivity during the ‘green revolution’. This increased productivity allowed peasants to move into rural industry, such as the manufacturing of farming equipment, further driving rural GDP and income growth. Although this did initially cause the income gap between urban and rural areas to fall in the early 1980s, geographical inequality has since been rising and shows little sign of reaching a plateau.

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When it comes to inequality between coastal provinces and their poorer inland neighbors, differences in income have been rising ever since the start of the reform era, as the coastal east has benefited from China’s export driven economic growth. Apart from the obvious geographic advantages for trade, coastal provinces have benefited from government initiatives such as favorable tax and financing regimes. As a result, through much of the 1990s, coastal growth rates were three percentage points higher than those of inland regions and China’s coastal provinces remain more affluent than its interior regions. There is, however, some evidence that the phenomenon of coastal GDP growth outpacing the interior is starting to change, as rising wages in coastal areas and the consequent reduction in international competitiveness, has driven some industries inward in search of lower costs. One notable example is Foxconn, the giant consumer electronics manufacturer that produces goods for companies such as Apple and Sony, which has relocated part of its production line to the interior. That said, China’s interior western provinces still have a long way to go. In 2011 Guizhou, China’s poorest province, had a GDP per capita of 16,000 RMB (approx. $2,400), while Tianjin’s was 84,000 RMB (approx. $13,000). The three provincial-level cities in the east – Beijing, Tianjin, and Shanghai – have the largest incomes per capita by some distance, each with a per capita GDP of in excess of 80,000 RMB, while Tibet, Gansu, Yunnan and Guizhou – all in the far west of the country – are all under a quarter of this total.

Although huge differences in income between regions evidently remain, the central government has shown an increased interest in resolving this inequality. In 1999, President Jiang Zemin announced the “Develop the West Program”. As well as addressing ecological and security concerns, the “Develop the West Program” was intended to stimulate development in China’s least prosperous provinces and to soften the blow to China’s interior as China entered the World Trade Organization in 2001. This policy has had reasonable success; in particular, it has encouraged significant infrastructural investment in China’s western provinces. However, though it may have slowed down the rate of increasing inequality between east and west, the pattern has continued throughout this time, leaving those in the west relatively poorer than they ever have been.

Getting Rich First?

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Within any one region, individual income inequality is also now evident. Economic development tends to lead to income inequality in every society and China has been no exception. In June 2012 it was reported that the number of dollar-millionaires in China had reached 1.4 million, while the number of billionaires has been placed at between 100 and 600, second only to the US; at the same time there are still 400 million Chinese who live on less than $2 a day, and around 172 million on less than $1.25. Many workers have seen great returns on their education and skill levels; those with higher levels of education, experience, and skills were rewarded with increased incomes. Some were well positioned during privatizations, having party and other connections which allowed them to win contracts or acquire state assets at significantly reduced prices. Studies show that CCP membership is positively correlated with income. A report in 2009 said that around 90% of China’s billionaires are so-called “princelings”, the sons or daughters of leading Communist Party cadres. China does, however, have a long history of entrepreneurship and many Chinese have embraced this tradition. Some were just plain lucky, had a good idea, or were in the right place at the right time. Zhang Yin, for example, rose from humble roots to become China’s first female billionaire. She earned her fortune by buying scrap paper from the US, importing it to China where she turned it into cardboard before selling it back to US manufacturers.

Gender Inequality

project1photography / Shutterstock.com While one can point to stories of women such as Zhang Yin as examples of the relative freedoms and opportunities offered to Chinese women, nevertheless there remain real income differences between the sexes even within the same geographical area. Though Mao declared, “women hold up half the sky,” meaning that women were to be freed from the subordinated expectations of dynastic China, and to work as equals with men, this is seen by many not as demonstrative of his opinions surrounding gender equality, but rather his obsession with increasing the Chinese labor force. The male communist worker was still, on average, better compensated than his female compatriot. Yet the income-earning opportunities of women in the Mao era were unimaginably better than those of their ancestors, many of whom were confined to the house, teetering on 3 inch feet. Today, the pay gap between male and female workers shows no signs of decreasing. This is by no means confined to the elder generation; female graduates earn on average 13% less than their male contemporaries. Still, opportunities for women in China are often strong when compared with those of many other countries. For instance, 19% of Chinese companies employ female CEOs, compared with 9% and 5% in the EU and North American markets respectively.

Ethnic Inequality

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Another group that has consistently been at China’s lower income levels is China’s ethnic minorities. Part of this inequality may be caused by the fact that most Chinese minorities live in the western fringes of the country which often suffer from water scarcity, short growing seasons, and difficult access to transportation systems and international markets. The minority populations living in these areas often suffer from lower wages and living standards than those who have made their way to the east and the gap between Han and ethnic minorities can, to some extent, be explained in these geographical terms. Still, it is also true that the average Chinese ethnic minority suffers at least some discrimination regardless of where location, and often does not have the same opportunities as the average Han Chinese.

Inequality at what cost?

China has tolerated its growing inequality in order to achieve the rapid rates of economic growth that is has experienced since the 1980s. The CCP’s fear is that once economic growth starts to slow, which grows more likely given the continuing financial and economic challenges of the west, then the unequal distribution of wealth at various levels will cause major social unrest. The Tiananmen Square incident of June 1989 was partly caused by high levels of income inequality and in reaction to high levels of inflation that were squeezing the living standards of the poorest in China. Beijing is wary of the possibility of the reoccurrence of such an event, especially given the recent events taking place in the Middle East in what has come to be known as the ‘Arab Spring’, itself partly driven by dissatisfaction with levels of inequality. Additionally, as the poorest provinces in China are generally those with the highest percentage of ethnic minorities, China fears that their social unrest may exacerbate feelings of resentment towards Beijing and stoke ethnic tensions within society. Violence directed towards Han Chinese has already occurred in several parts of Chin, notably among the Uyghurs of Xinjiang, the Tibetans in Lhasa, and the Hui in Henan.

Chinese intellectuals today debate whether economic growth at all costs should be tolerated. Many propose a more “socialist” or European model of social development, where the state shares some of the responsibility for ensuring that all its citizens reach a basic level of economic prosperity. This prosperity would be significantly aided by the re-creation of China’s health and pension systems, which were often commune-based and largely dismantled when China privatized many of its state-owned industries. Developing its national healthcare and pension systems would also help China shift its economy from being largely export driven to being one that relies on much greater domestic demand. Currently, the average Chinese citizen saves aggressively in anticipation of future healthcare and pension costs that will need to be self-funded. A first attempt at providing a very basic social security was launched in 1999 with China’s creation of the Minimum Living Standard Guarantee Scheme (Dibao) designed to aid those most in need in the form of a very basic welfare package. The income limit for becoming eligible to this however is incredibly low. In urban areas, the average level is just over 200 RMB ($30) per month, while for rural areas it is below 100 RMB ($15) per month.

Future Trends

The persistence of inequality in China today is a thorn in the side of the CCP. Having largely moved away from its communist ideological base, the CCP’s legitimacy is largely based on nationalism and the promise of economic prosperity. China is faced with the double challenge of not only ensuring that its economy continues to grow, but of trying to see that its wealth is shared out as equally as possible. The potential for friction in society – and the threat that might pose to the CCP – is implicitly acknowledged in Hu Jintao’s drive for a ‘harmonious society’, the principle tenet of his ideological musings. It is important to note that despite the rise in relative inequality, the absolute living standards for almost every single Chinese person have increased since the economic reforms were implemented. Since the reform era began, China has lifted around 400 million people out of absolute poverty, an achievement unmatched anywhere in the world and throughout human history. This should not be underestimated even as the problem of relative wealth disparity is, correctly, addressed as a pressing issue.

It is of course impossible for any nation to be completely equal and most developed countries have their own problems with unequal distribution of wealth. China, with its vast size, enormous population, and varied geography, will always struggle with inequality. Inequality persists throughout China. While it is true that the west is poorer than the east, there are pockets of abject poverty even in the richest provinces and rich parts in the poorest areas. From the Communist Party’s perspective, its key task is to prevent income inequality from rising to such levels that widespread social unrest threatens its control of power. As China’s wealth grows, and as it invests large parts of its enormous surplus within its own borders, more government initiatives are expected to be designed to develop the prosperity of provinces and sectors of society that lag behind the rest. Nevertheless, in the short term, income inequality will continue to increase as China’s rapid economic development lifts its population from poverty at varying rates. The mammoth task for the CCP will be to ensure that inequality doesn’t rise at a faster rate than GDP growth. While the living standards of the majority are being raised it is likely that increases in inequality will not prove perilous for the authority of the CCP, especially as much of this inequality is between areas that are thousands of miles apart. The next 30 years will prove very difficult for China to maintain the balance between consistent economic growth and raising the living standards of those at the very bottom of the income ladder, although this can be managed as long as China continues to move towards a domestic demand-led, and not export-driven, economy.