China's income inequality in the global context☆
Introduction
China – the world's most populous nation – has enjoyed remarkable economic growth and gained a second large economy in terms of GDP in the world. At the same time the living standard of many Chinese people has also increased significantly. Yet these economic gains have not been spreading across all people. The disparities in rural, urban areas, regions and population groups have reached to the extreme, although most indicators show weakening trends after 2010. However, “policy and institutions leading to income inequality have not changed radically, and the widening gap of wealth is further enlarging the income gap, so we could not say that the basic pattern of income distribution in China has been shift fundamentally”, said by Li (2015), the famous expert on income distribution study, economic professor of Beijing Normal University.
At present, accompanying with polarization between the rich and poor, there exist many kinds of complication, such as a wide range of poor areas and poor population, low and poor public service, and a wide spread phenomena of hollow village and abandoned land in the vast rural areas and remote mountainous area. Meanwhile, definitely low level of governance of local governments and bureaucracy has inevitably caused the degradation of ecological environment and serious waste of natural resources. All above are potential adverse factors to the society, which to an extent, may foster social and political unrest and eventually revolution when people get it worse after having got it better, according to Østerud (2014), Professor in political science at the University of Oslo. China's economy has currently entered “the new normal” characteristics of lower growth rate, we have to be more careful to maintain the society in safety.
Inspired by Piketty (2014), the famous French economist, and professor of Paris school of economics, who predicts that in future 10 years, the inequality in China will become increasingly prominent, for the economic growth will eventually slow down; an ideal social economic system remains to be established. What kind of system should be established? In consideration of the current economic power of China, in the duration of economic adjustment, it might be a good opportunity to recall social equity, as the social nature of China.
In this paper, we are to make a thorough study on China's income inequality in the context of the world, especially to compare China and the European countries, concerning of our common pursuit for socialist values; And according to the results of comparisons, we make a ladder target of the Gini coefficient standards for Chinese government to keep constraint by oneself, and some principled approaches necessarily to obey.
Materials and methods
In China, the biggest income gap has been being between urban and rural areas, and income gaps among the administrative areas and industrial inequality of personal income are next following (Li, 2010, Li and Li, 2010a, Li and Li, 2010b). As available materials show, most of the literature on China's inequality are of domestic, and further the most are about the gap of urban and rural areas.
In this paper, the core task is to measure and judge if there is polarization between the rich and poor and how it is. The measurement is mainly to see China's inequality profile in the world. Hence comparative method is widely used in the paper. The Gini Coefficient, a comprehensive index prevailing in the world showing the inequality degree of income distribution, is the main indicator used widely in the paper. In theory, there is a warning line, which is the maximum 0.4 empirically, beyond 0.4, the society would be not in harmony, such as regional unbalance, rural and remote poverty, discrimination, hostility, crime, environmental degradation, etc. exist, just as China's current states. And also a dangerous line (0.5) is seemingly appeared to exist; reaching to 0.5, the society would probably be unrest, such as mass disturbance, vandalism, even rebellion, etc. may happen, as it is in Latin countries. Meanwhile, Percentage of Total Income of National Population by Income Quintile is utilized as well, and the Top/Bottom Ratio as an indicator is good for verifying results mutually with the Gini Coefficient.
About Gini coefficient, some scholars argue that China's Gini coefficient was over-valued or the data is not accurate, or the indicator itself has major defects, and so on. (Zhang, 2005, Li, 2006, Qu, 2007, Dong and Yang, 2010) But we advocate that Gini coefficient is the most authoritative and appropriate indicator to measure social inequality, especially in the global context. (Ge, 1996, Ge, 2001, Zhao, 2002). Even Wang (2010) points out that China's Gini coefficient is probably under-valued, and originally put forward an extra part, – “Grey income”.
Data using in the text are mostly from National Bureau of Statistics of China (NBSC, http://data.stats.gov.cn) and Wind Information (data mostly origin from NBSC). The data from one official source make things simpler and more comparable.
China's inequality level in international context
This is the major part of the paper. We take China in the context of the world, to measure and judge whether China's inequality is a serious problem or not.
Gini coefficient
In Graph 3.1, Europe is treated as the main reference of studying Chinese inequality, because Europeans’ popular value pursuit, “born equal”, and its market socialism mode is quite similar with the final pursuit of “equality” of China's socialist system of market economy.
Graph 3.1. Average Gini Coefficient of China VS EU.
Source of Data: Wind Information.China and the European Union's (EU) data are during 2004–2013, some individual countries in the EU countries are the average of recent nine years, the rest are also 10 years average from 2004 to 2013.
China's average Gini coefficient of recent 10 years is 0.482, while that of the EU 27 countries is 0.305. This means that China's Gini coefficient is 58% higher than that of the EU. Furthermore, China's Gini coefficient is 67% higher than Germany's, the most typical market socialist country.
We choose five representative countries from northern Europe, western Europe, southern Europe and eastern Europe and find that the Gini coefficient in northern and western European countries is generally below the EU average of 0.305, except Britain under the Anglo-American model (0.326). However, in the southern and eastern European countries the Gini coefficients are higher than the EU average, except for the Czech Republic and Hungary. The Czech Republic (0.251) is equivalent to the lowest level of northern Europe, Hungary (0.269) is equivalent to the lowest level in western Europe, but are much lower than China's average level of inequality (0.482).
Shi Li wrote (2010), “the characteristics of the Gini coefficient is decreasing. When the income gap is not big, the Gini coefficient is more sensitive to reflect, such as two persons’ income gap from 2 times to 3 times, on the Gini coefficient is changed from 0.17 to 0.25; and when their income gap from 10 times to expand to 15 times, a reflection of the Gini coefficient is 0.41–0.44. So although it seems a little change from 0.48 to 0.50, but it reflects the actual income inequality may be 30–50 times.” So that China's Gini coefficient level in 2010 is roughly equivalent to the actual income gap about 30 times.
To see China's inequality more globally, Graph 3.2 shows that China's Gini coefficient is slightly low and close to the Latin American average Gini coefficient (0.4864), but higher than several other continents. That means China's Gini coefficient (0.481) belongs to a handful of countries with top inequality in the world, not only higher than that of western developed countries, but also above Asia's average (0.3513). This situation does not conform to the nature of socialism and higher than market capitalism countries (0.374) in North America, and even more unequal than the most typical market capitalism country – the United States (0.4112).
Graph 3.2. Gini Coefficient of China VS Overseas (2010). Note: Data of Gini of continents are average level calculated from main countries of each continent.
Source of Data: National Bureau of Statistics of China (http://data.stats.gov.cn).Wang (2010) finds that the “invisible income” of Chinese residents is 9.3 trillion yuan, and the “gray income” is 5.4 trillion yuan. China's top 10% households’ income is 65 times more than the lowest 10% households. If we take the corrupt officials’ illegal income into account, the gap between the rich and poor in China could reach 100 times, so it is awful.
Graph 3.3 shows the general trend of China's Gini coefficient in recent 12 years. The Gini coefficient peaked to 0.491 in 2008, began to decline since 2010, and reached to 0.469 in 2014. Though falling fast, the current Gini coefficient is still higher than 0.4, the warning line of inequality. The most serious is we have a long distance (0.06) away from America, the most typical market capitalist country. According to the pace achieved through 5 years 0.02 (0.49–0.47 between 2009 and 2014), we need 15 years to chase America by Gini coefficient.
Graph 3.3. Gini Coefficient of Nationwide Residents in China (2003–2014).
Source of Data: Wind information.Income proportion of 5 group population equally divided
Both Graph 3.4 and Table 1 show that data of all continents are average of some major countries on the continent, and data available in 2010; Compared with China in 2014, the latest data; meanwhile data of the city and the country in 2013.
Graph 3.4Table 1. Proportions in Total Income possessed by 5 Population Groups and Top/Bottom Ratio.
| Top to bottom income group equally divided: China and overseas (%) | |||||||
|---|---|---|---|---|---|---|---|
| Group/indicator | Asia 2010 | Europe 2010 | NorthA 2010 | LatinA 2010 | China 2014 | Rural 2013 | Urban 2013 |
| Low to 20% population posseses the proportion in total income | 7.69 | 7.14 | 5.9 | 4.17 | 4.27 | 5.31 | 7.98 |
| The 4th 20% population posseses the proportion in total income | 21.65 | 22.82 | 22.92 | 20.58 | 9.79 | 11.33 | 12.90 |
| The 3rd 20% population posseses the proportion in total income | 15.78 | 17.13 | 16.28 | 13.13 | 15.86 | 16.31 | 17.12 |
| The 2nd 20% population posseses the proportion in total income | 11.68 | 12.74 | 11.39 | 8.43 | 24.23 | 23.36 | 22.63 |
| Up to 20% population posseses the proportion in total income | 43.2 | 40.17 | 43.50 | 53.69 | 45.85 | 43.69 | 39.37 |
| Top/bottom ratio | 5.62 | 5.63 | 7.37 | 12.88 | 10.74 | 8.23 | 4.93 |
Source of Data: National Bureau of Statistics of China (http://data.stats.gov.cn).
The indicator for level comparison we use is Top/Bottom Ratio, which is the income share of the highest income group divided by the income share of the lowest income group, meaning income inequality between two extreme groups. The purpose of this comparison is to mutually verify each other with the comparison results of Graph 3.2.
The contrast results of Graph 3.4 is quite similar to the results of Graph 3.2, the only difference is that the difference of extreme income in Europe is higher than in Asia, whereas the results of the Gini coefficient comparison in Graph 3.2, is on the contrary, i.e. Asia is higher than Europe. And from Graph 3.4, Top/Bottom Ratios of China's urban and rural areas are both lower than China's national average and the internal extreme difference of countryside (8.23) is much greater than that of cities (4.93).
Findings
- 1)
The average Gini coefficient of China in recent decade (2004–2013) is 0.482, which close to the dangerous line 0.5. Average level of the European Union's 27 countries is just over 0.3, a reasonable level grade. Northern and western Europe is below 0.3, as the equal level grade. Also as reasonable level grade is the southern and eastern Europe. Among them, some countries in eastern Europe, such as the Czech republic and Hungary, which Gini coefficients are equal to the lowest level of north and western Europe.
- 2)
From global perspective, all data in 2010, China's Gini coefficient (0.481), is slightly low and close to Latin America's 0.4864, but higher than in several other continents which is not only higher than that of western developed countries, but also is above Asia's average (0.3513). This does not conform to the nature of socialism, and higher than market capitalism countries (0.374) in North America.
- 3)
The changing trend of China's Gini coefficient: The Gini coefficient peaked to 0.491 in 2008, began to decline since 2010, to 0.469 by 2014. Though falling fast, the current Gini coefficient is still much higher than 0.4, the warning line of inequality.
- 4)
The most serious is we have a long distance 0.06 away from America, the most typical market capitalist country. The Gini coefficient of the United States is 0.4112 in 2010. According to the pace achieved through 5 years 0.02 (0.49–0.47; 2009–2014), we need 15 years to chase America by Gini coefficient.
- 5)
The level of the Gini coefficient in China (2010), roughly equivalent to about 30 times actual income gap. If considering the invisible income and officials’ illegal income, the gap between rich and poor in China might reach to 100 times by the actual income gap.
- 6)
In general, for countries or larger regions, the more developed, the more equal; the more socialist, the more equal; the more humanist, the more equal. But China is an exception, which probably caused by China's long-lasting “efficiency first” policy guidance.
Discussion and conclusions
From the above, Serious Inequality exists in China and it has been one of the most important problems in China nowadays. Polarization between the rich and poor is not likely to close automatically without policy to adjust or reform of the system (Wang, 2006). So to reduce the inequality should be an urgent mission of the deepening comprehensive reform for Chinese government.
A declining trend of Gini Coefficient since 2010, reflects that the effects of policies conducted by the government in recent years are effective. By following the same approaches and paces achieved through recent 5 years, then another three 5-years to catch up with America, the most typical market capitalist country (shown in Table 2).
Table 2. Gini coefficient target for China.
| China 2009 | China 2014 | Gap for cutting | Warning line (Theory) | Warning line (China) | |
|---|---|---|---|---|---|
| 5 year | 0.49 | 0.47 | 0.02 | 0.40 | 0.30 |
| US 2010 | (1) | 0.41 | 0.06 | ||
| UK 2010 | (2) | 0.33 | 0.08 | ||
| Germany 2010 | (3) | 0.29 | 0.04 | ||
| EU average | 0.31 |
Source of Data: National Bureau of Statistics of China (http://data.stats.gov.cn).
There exists co-relationship between income distribution and economic growth, which relation has been discussed by many scholars. (Zeng, 2003, Hu, 2013; etc.) Common conclusions seem generally that there is a Two-way causality between income gap and economic growth, but their causing factors are multiple and complicated; China is developing big country during its transforming stage, all kinds of irregular and illegal incomes should be eliminated by law; However, on the adjustment or reform of normal institutions and policies, there are so large differences, and even opposing views. And the mainstream is to fully recognize the positive effect of the widening gap between rich and the poor, employment is the most important, and for the Gini coefficient, Trying by not Trying. That is the thought of “primary accumulation”, which seems overwhelming, is even more harmful to form a modern socialist country.
Anyhow, it is certain necessity for China set a target to reduce the inequality in terms of the unequal degree and for the sake of social harmony, no matter China's socialist nature. Then is in what degree and step to cut the inequality; Table 2 contains a target plan of “cutting” for the government to follow.
From the perspective of China's socialist nature, we should set the EU average as a reference warning line for China, around 0.3. To pursue a goal of inequality reduction currently in China, we have three steps to go: (1) to surpass US; (2) to chase UK; (3) to pursue Germany (see Table 2).
Considering further solutions, the principles in general might be followed:
- (1)
To be fair, do not affect efficiency;
- (2)
Generally beneficial policy is superior to the preferential policy;
- (3)
Regional policy is better than policy to a village and a household;
- (4)
Badly damaged rural environment should be paid closest attentions;
- (5)
Promoting public service in rural and remote mountainous areas should be a trigger.
Conflict of interest
The authors declare that there is no conflict of interest.
Funds
On the ecological compensation mechanism for Beijing–Tianjin–Hebei mountainous region under the background of regional governance, Research project of Social Science Foundation China (Serial number: HB15LJ002), funded by Hebei Office for Programming Philosophy and Social Science.
On the mechanism of integration governance of the Beijing–Tianjin–Hebei mountainous region based on its ecological function, Research project of Soft Science Foundation China (2016), funded by Hebei Bureau of Science and Technology.
