Original source: Shanghai Daily http://china-wire.org/?p=13164

Researchers attending a recent seminar voiced their concerns over growing income disparities, particularly in emerging economies, and prescribed a number of remedies for the problem.

The seminar, held May 10-11 in Shanghai, was titled “Redistribution for Growth? Income Inequality and Demand-led Economic Growth in Emerging Economies.” It was sponsored by the Shanghai Academy of Social Sciences and the Friedrich-Ebert-Stiftung.

Experts in the field made a penetrating analysis of worsening inequalities in China that have arisen from decades of soaring growth.

In his address, professor Li Shi concluded that growth alone failed to explain the wider inequality and that there was an urgency to address structural imbalances.

Li, director of the Center for Research on Income Distribution and Poverty at Beijing Normal University, said income gaps are widening in both rural and urban areas across the nation.

Measuring the gap with the Gini coefficient, Li found that in rural areas, the coefficient soared from 0.22 in the late 1970s to 0.38 in 2007.

A figure of 0 represents total equality while 1 means maximum inequality in incomes.

In cities, it rose from 0.15 in the early 1980s to 0.36 in 2007. The 0.36 figure is generally believed to be underestimated as it is difficult to identify the high-income segment of the population in China, let alone measure their real wealth with any accuracy.

When adjusted for statistical deviations, the figure is likely to be close to 0.42.

The Gini coefficient nationwide now is a staggering 0.48, according to Li.

The professor said the income gap cannot be explained in terms of growth, as some economists suggest.

The late economist Simon Kuznets believed that economic inequality increased over time as a country developed, and then after a certain average income was attained, inequality would begin to decrease.

Li’s findings suggest this hypothesis is wrong when applied to China. In other words, the income gap is widening, not narrowing.

A number of disturbing facts, however, do shed light on China’s unique reality.

Urban rural divide

For instance since the 1990s, the urban-rural income gap, whether in real or nominal terms, has continued to increase. Li’s studies suggest this gap accounts for half of the inequality nationwide.

The income gap is also growing fast between monopoly and competitive sectors.

In the early 1990s, people working in monopolistic sectors such as power, telecommunications, finance, petroleum and petrochemicals were making about 30 percent more than those in manufacturing.

In 2008, this was 200 to 300 percent more. The latest study put the figure at 450 to 480 percent.

Using Oaxaca-Blinder decomposition, Li found 64 percent of the wage differentials can be explained only in terms of monopoly.

The situation is worsened by the current tax system, which imposes a greater burden on the poor than on the rich. The after tax Gini coefficients were generally higher than the pretax figures.

Research has confirmed that a better education tends to correlate more with greater future earning power. Where there are equal education opportunities, the urban-rural divide is expected to narrow.

But studies find that the difference in average years of education received by urban and rural residents in 2002 was virtually the same compared to 1995, suggesting that sending children to schools have not become easier for peasants.

Meanwhile, urban children are receiving much better education in terms of quality, meaning it is getting more difficult for village children to go to college or university.

As a result inequality in education tends to perpetuate or worsen inequality already significant in the previous generation.

Studies in income growth over different groups also confirm that if you are poor now, the possibility is growing that you will remain so 10 years from now.

Costs of growth

Given these tendencies, and how these tendencies are fueling higher growth, it will be difficult for the government to fully embrace measures intended to narrow the income gap.

Pure economic policy adjustments must be matched with political will.

Progress is long overdue in, for instance, making officials declare their family assets to the public, repricing natural resources and making governments less dependent on land sales – initiatives destined to be met with strong resistance.

In his speech at the seminar, Chi Fulin, director of the China Institute for Reform and Development, Hainan, identified the transition to growth driven by domestic demand as “tough,” but vital to short-term economic stability and long-term sustainability.

The crucial period to watch for this to happen would be the next five years.

The past decade has seen explosive growth in government investment and exports. But people’s willingness to spend has dropped to an all-time low.

In terms of GDP, China is now ranked as the second largest economy in the world, while its per capita GDP ranks about 99th. The country’s per capita income is near the bottom.

Soaring growth has other costs.

It led to the dominance of heavy manufacturing, causing irreparable damage to the environment and people’s health.

The export-led growth is also triggering global imbalances.

As pointed out by Jan Nederveen Pieterse, Mellichamp, professor of global studies and sociology, University of California, both the US model of import and borrow and the Chinese model of export and lend are unsustainable.

He suggested that credit expansion in import dependent countries fed financialization, deepened inequality and precipitated the 2007-08 crisis. The surplus and savings in exporting countries also feed financialization.

Given the general consensus on the urgency of rebalancing the economy, and the many recipes proffered, the real difficulty seems to be getting the process started.