Research Paper: "Rising Income Inequality in China: A Race to the Top"

How much of a problem could China's increasing income inequality be? The following paper suggests there is room for optimism.

"Rising Income Inequality in China: A Race to the Top"

World Bank Policy Research Working Paper No. 4700

XUBEI LUO, World Bank
NONG ZHU, University of Quebec at Montreal (INRS-UCS)

Income inequality in China has risen rapidly in the past decades across regions, between rural and urban sectors, and within provinces. The dynamics of divergence across these sub-national areas have taken the form of a race to the top - meaning that all segments of the population, including the poor with low education in lagging inland rural areas, have experienced gains in average income. The largest gains have been registered by those with higher income and education in leading coastal urban areas. Using the China Economic, Population, Nutrition and Health Survey data of 1989 and 2004, we show that the most important factors explaining overall inequality are differential returns to schooling and sector of employment. A decomposition analysis based on household income determination shows that the increase in returns to education explains two-thirds of income changes in urban areas and one-sixth in rural areas. The widening income gaps are the consequence of higher growth in leading urban and coastal areas and that the skilled population has benefited more from the economic reforms carried out during the last 25 years. The authors argue that rising income inequality can be part of a normal process of development at a certain stage, and that the dynamics of spatial income divergence in the form of "a race to the top" can be desirable to some extent as it unleashes competitive pressure and creates incentives for investment in skills. Continuing to improve market efficiency and investing in people, in particular improving education service in lagging areas to poor people, are important for sustainable growth and equitable distribution in the long run.

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Is China still a lot poorer than we thought?

China is a country of contradictions. All the press seem to concentrate on is the economic threat from China and the rise of the Chinese middle class.

I believe that while China has travelled a great distance in a very short space of time, millions of Chinese have not enjoyed the same journey. Yes, Chinese growth has probably resulted in the largest and quickest reduction in absolute poverty in history but let us now forget those that have been left behind.

This new World Bank Policy paper sheds some light on this issue.


"China is Poorer Than We Thought, but no Less Successful in the Fight Against Poverty"

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World Bank Policy Research Working Paper No. 4621

SHAOHUA CHEN, World Bank
Email: SCHEN@WORLDBANK.ORG
MARTIN RAVALLION, World Bank - Development Research Group (DECRG)
Email: mravallion@worldbank.org

In 2005, China participated for the first time in the International Comparison Program (ICP), which collects primary data across countries on the prices for an internationally comparable list of goods and services. This paper examines the implications of the new Purchasing Power Parity (PPP) rate (derived by the ICP) for China's poverty rate (by international standards) and how it has changed over time. We provide estimates with and without adjustment for a likely sampling bias in the ICP data. Using an international poverty line of USD 1.25 at 2005 PPP, we find a substantially higher poverty rate for China than past estimates, with about 15% of the population living in consumption poverty, implying about 130 million more poor by this standard. The income poverty rate in 2005 is 10%, implying about 65 million more people living in poverty. However, the new ICP data suggest an even larger reduction in the number of poor since 1981.

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Poverty is China - RDE Special Issue

The latest issue of "Review of Development Economics" (a decent development journal) has a special section of 3 papers looking at poverty in China.

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Special Section: Poverty and Inequality in China
Guest Editor: Guanghua Wan

Introduction to the Special Section: Poverty and Inequality in China
Guanghua Wan
pages 416–418

How Should We Measure Poverty in a Changing World? Methodological Issues and Chinese Case Study
Lars Osberg and Kuan Xu
pages 419–441

Gender Earnings Differential in Urban China
Meiyan Wang and Fang Cai
pages 442–454

Explaining the Poverty Difference between Inland and Coastal China: A Regression-based Decomposition Approach
Guanghua Wan and Yin Zhang
pages 455–467

More on China's trade surplus

As always, an excellent post by Michael Pettis. His well written posts save me a lot of work as he always identifies the points and accurately describes them in a technical but still accessible manner.

His blog is certainly the best blog that covers China economics.

The cause of China’s trade surplus [China Financial Markets]

Prime Minister Manmohan Singh is currently visiting China and yesterday he too complained about China’s trade surplus. There is still a debate about the structure of China’s balance of trade. There are at least three reasons commonly cited to explain China’s massive trade surplus.

Read the post to get the three reasons. Pettis concludes:

It may already be too late to adjust easily, and even if it isn’t if the authorities are too wedded to the ideology of gradualism to make a rapid adjustment, so in this case I expect that the end game will occur either in the form of runaway inflation, which would eventually cause a sharp contraction in the money base, or in the form of sharply rising inventory leading to equally sharp cuts in production, which is how overinvestment cycles classically ended in the 19th Century.

I tend to agree. The adjustment costs will be severe. China is not sufficiently developed to withstand a deep crisis and the implications may be very serious.

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Billionaires in China

What is interesting about this little article about the richest person in China is the sheer number of billionaires being created virtually overnight.

The issue that the government has to be careful to address is the widening gap between the rich and poor and whether rising inequality is a threat to the stability of country.

China's richest person is 26-year old woman

BEIJING (Reuters) - The twenty-six year-old daughter of a rags-to-riches property developer is China's wealthiest person, with a $16 billion ( 7.8 billion pound) fortune, Forbes magazine said on Monday.

Yang Huiyan shot to the top of the China Rich List after the firm her father founded floated on the Hong Kong stock exchange in April, creating five billionaires at once.

Her low-profile father, Yeung Kwok Keung -- who worked as a farmer and on construction sites before making his fortune, according to Chinese media -- had transferred his stake in Country Garden Holdings Co. to his daughter in 2005.

Also Asia's richest woman, the Ohio State University graduate this year married the son of a top Chinese official she met on a blind date, the China Daily reported.

She is one of the few on the list to have inherited her wealth, in a country where booming economic growth has created fortunes virtually overnight.

The economy has expanded so fast that the country's 40 wealthiest people are now all dollar billionaires, compared with just 15 last year, Forbes said in a press release.

Their combined net worth more than tripled to $120 billion, from last year's $38 billion, Forbes said.

But as the number of the super-rich grows, officials in Beijing are stepping up efforts to tackle the gulf between rich and poor because they fear it threatens social stability.

Real estate was among the most lucrative sectors. Eight of the top ten have big property development interests.

"Household incomes are rising rapidly, and a growing number of people are moving into cities from rural areas. Those trends are creating great business opportunities for property developers," said Russell Flannery, Forbes senior editor and compiler of the China Rich List.

Country Garden, based in the southern city of Guangdong focuses on building villas, townhouses and large apartments.

Yang's father is still chairman and chief executive while she sits on the board as an executive director.

Last year's number one on the Forbes list, Wong Kwong Yu, slipped nine places to squeeze into the top ten, even though his fortune rose by nearly 50 percent.

Forbes compiles its list by looking at stakes in listed and private companies and other assets. It excludes Hong Kong residents like tycoon Li Ka-shing -- estimated by Forbes to have a $22 billion fortune in January.

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Labour Disputes in China

We are all used to news of strikes and labour disputes in the West with the television showing the inevitable conflict between the police, pickets and strike breakers. The battle is seen as being between:

(1) the evil capitalist managers and the exploited workers.
(2) the evil communist workers and the powerless workers.

In China however, a communist country, one might expect reason (1) to prevail.

The possibly sad truth of the matter is that China is probably the most ruthlessly capitalist country in the world with few employee rights and little employment legislation. How can this happen in a country ruled for the workers by the workers?

China looks to deal with rising number of labor disputes[China Briefing]

State media announced today that China’s top legislature started to read the draft law on labor dispute mediation and arbitration on Sunday amid an increasing number of labor disputes that emerged in the country.

“The draft bill has summed up the experience in solving labor disputes, which also takes new situation and problems into account. It is aimed at strengthening mediation and improving arbitration, so as to solve labor disputes without going to court,” said Xin Chunying, vice Chairman of the Legislative Affairs Commission of the National People’s Congress Standing Committee.

Regulations for handling corporate labor disputes were first promulgated in 1993 and 1994, though the continued economic boom has lead to an increasing gap between rich and poor resulting in increased labor disputes throughout the country. According to NPC statistics, labor dispute arbitration organizations at various levels dealt with 1.72 million labor dispute cases, involving 5.32 million employees from 1987 to the end of 2005 - a growth rate of 27.3percent annually.

The draft bill is meant to strengthen mediation and improve arbitration so as to help solve labor disputes without resorting to the courts and thus safeguard employee’s legitimate rights and promote social harmony, Xin said.

According to Xinhua, under the draft bill, corporations are entitled to establish labor mediation committees to solve labor disputes on a grassroots level that occur within the company. The corporate labor mediation committee should consist of employees and management representatives. Should a labor disputes occur, litigants will be able to turn to the corporate mediation committee the draft bill said. Labor disputes concerning pay, medical fees of job-related injuries, compensation, pensions whose relevant sums do not exceed 12 months of the local minimum monthly wages could be solved by arbitration. The arbitration documents will be legally binding once handed out.

Poverty, inequality, and social disparities during China's economic reform

An interesting new paper from the World Bank.

The role of the World Bank in China is often perplexing. Why does China still borrow $1.3billion dollars a year from the World Bank when it has reserves of $1.3 TRILLION and why does the Bank continue to lend them this money?

This comes back to the question, is the average Chinese citizen benefiting from this massive trade surplus of over a trillion dollars. Is it being invested/spent wisely? I see problems ahead and this paper does a good job of highlighting some of them.

Poverty, inequality, and social disparities during China's economic reform

Summary: China has been the most rapidly growing economy in the world over the past 25 years. This growth has fueled a remarkable increase in per capita income and a decline in the poverty rate from 64 percent at the beginning of reform to 10 percent in 2004. At the same time, however, different kinds of disparities have increased. Income inequality has risen, propelled by the rural-urban income gap and by the growing disparity between highly educated urban professionals and the urban working class. There have also been increases in inequality of health and education outcomes. Some rise in inequality was inevitable as China introduced a market system, but inequality may have been exacerbated rather than mitigated by a number of policy features. Restrictions on rural-urban migration have limited opportunities for the relatively poor rural population. The inability to sell or mortgage rural land has further reduced opportunities. China has a uniquely decentralized fiscal system that has relied on local government to fund basic health and education. The result has been that poor villages could not afford to provide good services, and poor households could not afford the high private costs of basic public services. Ironically, the large trade surplus that China has built up in recent years is a further problem, in that it stimulates an urban industrial sector that no longer creates many jobs while restricting the government's ability to increase spending to improve services and address disparities. The government's recent policy shift to encourage migration, fund education and health for poor areas and poor households, and rebalance the economy away from investment and exports toward domestic consumption and public services should help reduce social disparities.

Research Paper: Wealth Accumulation and Distribution in Urban China

An interesting paper that I need to read. The interesting aspect appears to be the ability of party members to accumulate wealth and the role wealth accumulation has had on the ability of families to send their children to Western Unviersities to study.

"Wealth Accumulation and Distribution in Urban China"
IZA Discussion Paper No. 2553


Contact: XIN MENG
Australian National University - Department of
Economics, Institute for the Study of Labor (IZA)
Email: XIN.MENG@ANU.EDU.AU
Auth-Page: http://ssrn.com/author=173998

Full Text: http://ssrn.com/abstract=958717

ABSTRACT: Under socialism it was neither possible nor necessary to accumulate significant levels of personal wealth. The acceleration of economic reform in the last decade, however, has brought dramatic increases in income and investment opportunities. Reform has also reduced social protections provided by the state welfare system. In response to these changes, between 1995 and 2002, urban average real household net total wealth increased by 24 per cent per annum. There is a concern, however, that those accumulating wealth are the economic and political elites while those unable to accumulate wealth are the most vulnerable workers who are losing social protection.

Using Chinese urban survey data of 1995, 1999, and 2002, this paper investigates this issue. It is found that households with above average income have accumulated more wealth than their poorer counterparts. In addition, a large proportion of this wealth accumulation may be from non-earned sources, such as buying larger and better housing at highly subsidized prices.

Furthermore, party members and their children have benefited a great deal from this fast wealth accumulation process. Although at lower rates, the poor and vulnerable have also been able to accumulate wealth.

China in 2050: Report Released

It is the question economists the world over want to know - just what will China be like in around 50 years time. Although the answer will be "very different" just how different is the question and will it always be for the better.

This report, I would suggest, from the Official communist party of China, is a tad on the optimistic side.

What will be China like in 2050?

"An Outline of Sustainable Development in China: State Volume", a 20-volume book series compiled by 184 Chinese experts and scholars over two years and eight months, was published Sunday in Beijing.

The publication is China's first large-scale academic work summarizing the experience and laws of sustainable development. It proposes strategic objectives for sustainable development in China by 2050: reaching the sustainability level of moderately developed countries in an all-round way and entering the ranks of the world's top ten countries in terms of sustainable development capability.


Many indicators related to people's livelihood

The outline proposes concrete indicators to be attained by 2050 in sustainable development, with many of them closely related to people's lives.

The average life expectancy is to reach 85.

The four major coefficients will average at the following points: Engel's coefficient below 0.15; the Gini coefficient between 0.35 and 0.40; the human development index over 0.900; and the dual structure index around 1.5.

The average number of years of education for the whole population will grow from the current 8.2 years to over 14 years.

Scientific development will contribute more than 75 percent to the national economy as a whole.

Energy and resource consumption per unit of GDP will generate a value between 15 and 20 times higher than that in 2005.

Poverty will basically be eliminated nationwide.

Zero growth in the degeneration rate of the environment will basically be achieved.


Three steps in the course of development

China must pass through three stages before reaching its sustainable development objectives, the Outline suggests. These are the three basic "zero growths" ¨C zero growth in the natural growth rate of the population by 2030; zero growth in the consumption rate of energy and resources by 2040; and zero growth in the degeneration rate of the environment by 2050.

These three stages are a must for every country implementing a sustainable development strategy, said Niu Wenyuan, chief scientist and team leader of the sustainability studies group at the Chinese Academy of Sciences. Of them, zero growth of the population is the most important. Before 2050, China will pass through the peaks of three reversed-U curves as it makes a positive shift.


Timetable formulated for modernization

The Outline makes predictions about when each Chinese region will realize modernization, or reach the level of moderately developed countries at that time.

Shanghai is believed to be the first to realize modernization, in around 2015, followed by Beijing around 2018. Thirteen Chinese provinces and municipalities are expected to realize modernization ahead of schedule, prior to 2050.

By 2050, China as a nation will reach the level of moderately developed countries in an all-round way, and then march forward dynamically towards higher objectives.

Before 2060, 27 provinces, autonomous regions and municipalities will have reached their development goals, followed by the remainder of the nation by 2075.

By People's Daily Online