Filling the Income Gap

Income distribution has become one of the people’s main concerns in China where more than 30 years of reform and opening up have also resulted in an ever-expanding wealth gap. But narrowing down the rich-poor disparity will prove to be no easy task. Wei Zhong, a researcher with the Institute of Economics under the Chinese Academy of Social Sciences, elaborated on the origins and trends of China’s widening income gap, and discussed solutions to curb the gap, in a recent article.Edited excerpts follow:

The problems with China’s income distribution should not be simply described as one that has evolved from equalitarian practices before the 1980s to a widening income gap today.

While talking about income distribution inequality, we have to know the different connotations of equality and fairness. By “equality” we describe a situation;by “fairness” we make a judgment. While the pursuit of fairness everywhere in social life and economic activities will ultimately make equality possible, extreme equality will allow equalitarianism to prevail and is therefore detrimental to fairness.

SPENDING MORE: A sales promotion in a shopping center in Yinchuan, capital of the Ningxia Hui Autonomous Region,attracted many female customers on this year’s International Women’s Day(March 8). Some government policies boosted the spending of the low-income group through subsidies

Why the gap?

China practiced equalitarianism for decades in a planned economy that didn’t guarantee general fairness of income distribution. The practice, instead, created a number of problems that continue to affect distribution today, including the urbanrural income gap caused by price scissors,which is the discrepancy in the exchange of industrial products for agricultural products, and by restrictions on the migration of the rural population. Another problem is a real income gap much bigger than that measured only in cash—urban bread earners were paid not only by cash but also by materials such as daily necessities. In addition, the people in China’s planned economy enjoyed relative equalitarianism with the same employer and similar positions, but an income gap did exist between different work units and different positions.

Since the introduction of the reform and opening-up policy, the widening income gap has become a basic feature of China’s income distribution. According to the estimate of the World Bank, China’s Gini coefficient (an important measurement of inequality) was 0.3 in 1982. The Institute of Economics under the Chinese Academy of Social Sciences estimated that it increased to 0.454 in 2002.

But the income gap didn’t expand at all phases of the 30-year reform and opening up, and a widening income gap is not always a bad thing. The rural reform in the early 1980s helped narrow down the urban-rural gap from 3:1 at the beginning of the reform to 2:1 in 1985,while the wealth disparities between different regions diminished in the 1980s as well, only to expand in the 1990s.Incentives including preferential taxes and land uses introduced during the early phase of the reform created an acceptable income gap while allowing the economy to take off.

But as the income disparities keep expanding and urban-rural and interregional labor migrations become more frequent,the Chinese people will not be able to turn a blind eye to the apparent wealth gaps between neighbors, former classmates,regions, and prosperous cities and remote dilapidated villages.

A developing problem

Unlike the income gap in other countries, the rural-urban disparity among Chinese residents is a developing problem.While the income gap expands, the country’s economy grows rapidly, which more or less helps keep the decrease in incomes for low-income residents in check. It also makes it possible to adjust the national income distribution. Generally, it’s comparatively easier for a country to make changes to income distribution patterns under conditions of fast economic growth than doing it against the backdrop of economic stagnation.

Although the income gap is widening,the Chinese Government has adjusted relevant policies and established certain welfare schemes to allow low-income residents a share of China’s fast economic growth. These measures have alleviated the situation and provided guarantees for further improvements for the rich-poor disparity. They include the social security for low-income residents in urban and rural areas; a tuition-free, nine-year compulsory schooling system; medical and unemployment insurance schemes;minimum wage standards; and direct agricultural subsidies and agricultural tax elimination. While some of these policies increased low-income residents’ salaries directly, some boosted their spending through subsidies. Others offered them guarantees of basic living standards.These social security policies for lowincome groups have distinguished China from other developing countries experiencing similar situations.

In addition, the problem of China’s widening income gap rests more with high-income residents who own the majority of China’s ballooning wealth.Their incomes increased much faster than anticipated, due in part to the 20-year old individual income tax system that has yet to be improved to effectively curb tax evasion and corruption. But we don’t think China’s income distribution has become polarized till now.

How to fill?

The Central Government has attached greater importance to the national income distribution issue in recent years and designated special research teams to fi nd reasons and solutions to the problem in order to speed up national income distribution reform.

At the 13th Session of the 11th NPC Standing Committee in February,the National Development and Reform Committee proposed four measures to speed up reform with other ministries:strive to increase farmers’ incomes; beef up support for low-income groups; steadily raise the salary income of workers; and enhance individual income regulation.

In a bid to increase farmers’ incomes,the government will continue to increase the prices for major agricultural products and enhance subsidies for agriculture.Stronger financial and fiscal support will be provided to help farmers develop specialized cooperatives and create new income sources. The pace of urbanization will be accelerated to help farmers find jobs in cities. The county-level economies will be strengthened to create more jobs for local farmers, and professional training will be provided to farmers.

To raise the salary incomes of workers, the country vowed to build a salary increase mechanism and improve the minimum salary standard system. The merit pay system will be implemented in schools providing compulsory education, and public hospitals or health and medical centers.

With respect to bee fi ng up support for low-income groups, basic pensions for enterprise retirees will be adjusted. The standards for basic-living allowances and social assistance in rural and urban areas will be improved to alleviate the living burden of low-income groups.

All these measures and policies are expected to keep China’s widening income gap in check and allow fairness to prevail in the national income distribution scheme. ■