China Income Inequality Economics Essay

There is no doubt the China’s GDP grows at a high speed since its economic reform. Nevertheless, high GDP growth does not mean the people’s satisfactory of economic reform, nor does it sufficiently means the improving of material conditions of life. The rising of income inequality is viewed as a significant outcome of the transition to a market economy in China (Tusi, 1998; Wu, 2002). The inequalities of income and household wealth are considered as the most significant aspect and social and economic development since household earnings and wealth can to a great extent serve household living, education, medical care and other necessities. This paper will thoroughly discuss and evaluate the specific question of income inequality in Rural China. Although China’s rural region has experienced dramatic economic reform, China’s urban-rural income gap in the past thirty years is much larger than in other periods. This increasing income gap has enlarged the condition of rural income inequality in China. Furthermore, from the perspective of return to education, Yue et al. (2007) argued that the private return to education to education is lower in rural area. Compared with urban area, this fact will further increase income inequality of rural people in future.

This paper will firstly describe the past general picture of Rural China income inequality. Secondly,

The General Picture of Rural China Income Inequality

Pre-reform Period

This period is an era between the established of New China (PRC) and the beginning of Open Door reform. In terms of Spence (1990), more efforts were contributed to eradicate poverty and develop the economy through building socialism. Before the decollectivization of China in 1979, Griffin & Saith (1982) argued that there was little inequality in per capita incomes in production brigades and teams and larger inequality across communes due to the structural factors of the quantity and quality of land.

Reform and Post Reform Period

In accordance with Rozelle (1994), the patterns of inequality were closely related with changing economic structures in rural China. In addition to finding a significant increase in inequality from 1984 to 1989, he found that policies stressing importance of agriculture reduced inequality while policies promoting rural industry increased it. The interregional inequality was increasing in large part due to the expansion of rural industry. Since serious impediments slowed the free flow of products and beneficial factors such as easy access to resources in rural China, many regions still relied heavily on local capital and resources to develop. Income from family production activities contributed most to total income and reduced inequality on the income distribution. Wages were the most important element in increasing income inequality. The rental value of owner-occupied housing had an effect of alleviating inequality. The remaining sources of income such as property income were insignificant and had a disequalizing effect on income distribution. The rich people in rural China obtained a larger proportion of income from wage employment, nonwage income from enterprises and property income. They received about average proportion of income from sales of farm and nonfarm produce and the form of rental value of housing. They got much less than the average proportion of income from family production. Finally, they paid much less than the average rate of net taxes. On the contrary, the poor got a large part of their income from family production and used a high proportion of it for self-consumption. They received little from wage employment, property income, and all other income sources, while paying a higher than average rate of taxes. As a result, the rich get richer and the poor get poorer. In order to reduce inequality, policy makers should try to find ways of breaking the barriers that kept large part of rural society from enjoying the benefits of the success in the rapidly growing areas.

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Household production activities still contributed most to total rural income while its share of total income decreased from 74 percent in 1988 to 56 percent in 1995 (Khan & Riskin, 1998). Wages were the second largest component of income and their share among total income increased sharply from 9 percent to over 22 percent in 1995. The main income sources for the wealthy were wages, non-farm entrepreneurship and transfers from the state and collectives, while the main income sources for the poor were farming and rental value of housing. Furthermore, Ho (1995) suggested that there was a sharp rise in inter-regional income inequality caused primarily by different regional growth rates of rural non-agricultural activities. Non-agricultural activities in rural areas are distributed unevenly because the environment for rural industrialization varies significantly by region. The regions endowed with better infrastructure, greater resources, more developed non-agricultural activities, and closer proximity to urban areas will continue to grow more rapidly than poorly endowed regions and the inter-regional inequality will increase.

The Future Picture of Income Inequality in Rural China

In terms of Yao & Zhu (1998), they summarized three main features for income distribution in China through studying income inequality from a variety of perspectives in their research based on household survey data by State Statistical Bureau and other relevant studies. Firstly, rural per capita incomes quadrupled from 1978 to 1996. However, overall rural income inequality also increased significantly with this rapid income growth. The rural Gini index rose from 0.212 in 1978 to 0.32 in 1994. Secondly, much of rural income inequality can be indirectly explained by uneven development of township and village enterprises. The TVEs obtain most development in the eastern regions of China, moderate development in the central regions, and little development in the western regions. According to World Bank (1997), the Gini coefficient for overall inequality increased from 0.288 in 1981 to 0.388 in 1995. Employment and education were found to be two important factors influencing inequality in rural China. Increased opportunities for off-farm employment not only boosted income growth but also contributed to rising inequality. The share of off-farm incomes in total income rose from 7 percent in 1978 to 33 percent in 1994, as farm incomes fell from 78 percent in 1980 to 60 percent in 1995. By 1990, off-farm employment had become the largest source of inequality, while transfers and migration opportunities played roles in reducing inequality. However, only a small portion (20%-30%) of income inequality and one-third or one half of increases in inequality were accounted for by income determinant variables.

Conclusion