China & the World Economy 6: Inequality in China Flashcards
(15 cards)
Framing the Debate: What is Inequality?
China’s inequality is debated globally.
Pope Francis (2014): “Inequality is the root of all evil.”
Obama: “Defining challenge of our time.”
Jeremy Corbyn: “Grotesque inequality.”
Angus Deaton: Inequality is a consequence, not a cause.
Inequality can reflect progress (e.g. entrepreneurship) or problems (e.g. corruption).
Whether inequality is “fair” depends on its causes.
The Tunnel Effect
Hirschman (1973): Inequality is tolerated if people expect future improvement.
“Tunnel effect”: If others advance and you don’t, resentment builds.
Tolerance is higher when people empathize with those advancing.
But once hope fades, backlash can be severe.
Applied to China: rising inequality tolerated due to growth optimism.
Historical Context: Inequality in Pre- and Post-Reform China
Pre-reform: Egalitarian but with rural-urban gaps.
1978 reforms: Agricultural decollectivization → inclusive growth (Wan 2007).
1980s: Urban focus → rising inequality.
Coastal bias in FDI and trade widened regional gaps.
By 2011: 594 billionaires (more than US), 336 million under $2/day (PPP).
Implications of Rising Inequality
Reduces domestic demand → export reliance.
Undermines social cohesion, increases crime (Tian et al. 2009).
Weakens poverty reduction and growth effects (Wan 2008c).
Inequality hinders investment in human capital (Wan et al. 2006).
Can lead to inefficient redistribution and elite capture.
Policy Responses to Inequality
- China has reacted with a number of policy initiatives
- (1) Great Western Development Fund in 2000 to reduce
regional differences - (2) Mid-2000s ”the socialist new countryside development” to
reduce the rural-urban gap - (3) In 2006 ”building a harmonious society” was a central
development goal in the 11th Five-Year Plan (2006-2010) - More recently interventions have covered:
- (1) Expansion of social protection to the rural population
- (2) Improvement in the living conditions of migrant workers
- (3) Increases in public funding for education and health
services - In 2013 the Third Plenum of the 18th Central Committee of
the CCP outlined plans to improve income distribution
through reforms in areas: - (1) Household registration system (hukou)
- (2) Social protection
- (3) Access to public services
- (4) Taxation
- (5) Governance
Great Western Development (2000), Socialist Countryside (mid-2000s), Harmonious Society (2006).
Expanded social protection, migrant support, education/health funding.
2013 Third Plenum reforms: hukou, taxation, governance, public services.
Trends and Measurement of Inequality
Key Measures:
Inequality is typically measured using the Gini index and the Theil index.
These require data on consumption, income, or salary.
Ideally, the unit of analysis is the individual, but due to data limitations, households are usually used.
Inter-household Inequality:
This includes regional and urban-rural disparities.
In China, it is difficult to measure inter-household inequality over time because the government restricts access to household survey data.
As a result, early research focused on regional disparities and urban-rural gaps.
Wang et al. (2014):
Present eight sets of Gini coefficients for inter-household inequality in China.
Their work is a key reference for understanding inequality trends.
Visual Data:
Important Notes:
The Gini index measures inequality on a scale from 0 (perfect equality) to 1 (maximum inequality).
The Theil index is another measure that allows decomposition into within-group and between-group inequality.
These tools are essential for tracking inequality trends and evaluating policy impacts.
Wealth Inequality and Capital Accumulation
Knight et al. (2021): Wealth inequality rose due to:
Capital accumulation
Property price inflation
Financial market access
Top 10% gained most; bottom 8% lost wealth.
Net housing wealth: 64% → 79% of inequality (2002–2013).
Policy: reform banking, release land, tax wealth, reduce corruption.
Regional Inequality
Longstanding issue tied to national security and ethnic tensions.
Inequality rose post-1980s with urban focus and coastal FDI.
Theil index shows rising gaps until 1998 tax reform.
Wan (2007): East-Central-West divide = 30% of regional inequality.
Urban-Rural Inequality
Hukou system restricts migration → persistent gaps.
Ratio of urban to rural income ~3 (high internationally).
Largest gap in Western region (2007).
Wan (2007): Urban-rural gap = 70–80% of regional inequality.
Causes of Rising Inequality
Limited research exists on the causes of rising inequality in China.
Key studies: Wan and Zhou (2005), Chen et al. (2010), Gunatilaka and Chotikapanich (2009).
Kuznets Curve:
Often used to explain inequality trends in development.
Dismissed for China: Assumes population moves from low-inequality to high-inequality sectors.
In China, urban inequality has been lower than rural, though urban inequality is rising.
Hukou system:
Reduces labour mobility, preventing equalisation of income across regions.
Contributes to persistent urban-rural inequality.
Decomposition analysis:
Shorrocks (1992) introduced this method to break down inequality into components.
Figure 6 in the lecture shows:
Urban-rural inequality is the dominant component.
East-Central-West regional inequality is less significant and relatively stable.
Regression-based approaches:
Often used in growth literature to study convergence.
Chen and Fleisher (1996): Used convergence models to estimate that it would take 40–60 years to halve the gap between lagging and leading regions.
These models:
Do not directly model inequality.
Do not rank the contribution of different determinants.
Your note:
“Kuznets curve can apply to environmental issues too” — useful for comparative or interdisciplinary exam questions.
Hukou System and Migration
Hukou (1958): restricted rural-urban migration.
Post-1993: migration increased, but most migrants lack urban hukou.
Migrants lack access to services and good jobs.
Remittances help rural areas (Sinclair 2013), but inequality trend unclear.
Policy and Structural Factors
Coastal bias in trade/FDI (Zhang & Zou 2012).
Decentralized tax system → poor regions underfunded.
Geography: coast has better infrastructure, inland has resources.
Education gaps: 5.98% vs. 97% with college degrees (East vs. West).
Party membership and ethnicity also matter (Gustafsson & Li 1998).
Suggested Interventions
Prioritize urban-rural and regional inequality.
Urbanisation: reform hukou, improve services, raise minimum wage.
Regional: invest in infrastructure, promote FDI inland, fiscal reform.
Social protection: pensions, health, unemployment support.
Testing the Tunnel Effect in China
Knight & Gunatilaka (2010): rural households report higher well-being.
Some studies: Gini positively linked to happiness (Knight et al. 2009).
Others: inequality reduces happiness (Wu & Li 2013).
Whyte & Im (2014): people want safety nets, not revenge on rich.
Xi’s policies (e.g. tutoring ban, housing reform) aim to preserve optimism.
Conclusions and Future Directions
Reform increased intra-urban and intra-rural inequality.
Future research: inequality’s impact on growth, crime, health.
Policy evaluation (e.g. Western Development) is key.
Third Plenum shows China is aware and reform-minded.
