Income Distribution Inequity in China, Research Paper Example

Introduction

The economic growth experienced by China since in 1978 began the process of liberalization and the opening of its economy is acclaimed as a landmark usually unparalleled in the history of mankind. This growth, a 9.9 % annual average between that year and 2007, not only would have converted the Chinese economy in the second largest in the planet, but, according to the interpretation most widely available in this regard, also would have allowed us to get out of poverty to up to 500 million people. Most analysts believe the parallel increase in social inequality, with a Gini index that has gone from a value of 28 to one of 47, would be no more than a “side effect” of the process. In fact, supposedly, this increase would not have prevented the increase in per capita income Chinese would encroach on an improvement of the income distribution on a global scale, with an apparent reduction of the overall Gini of between 3 and 4 points. The heterodox economic and political strategy followed by the Chinese Communist Party (CPC) to achieve these results (described under the label of the “Consensus of Beijing”) would have become a benchmark for other countries of the so-called “developing”.  Even more, thanks to that has a much higher capacity of the world’s most important economies to deal with the current crisis we have, China also would be seen as the last hope that now the capitalism would have to leave that. (Shi 2013)

However, if you look in detail, this course success pales in both its internal dimension, as in the external. To achieve these high growth rates, maintained over such a long period, it has been necessary to establish a complex distributive mechanism that ensures great benefits, both to transnational corporations that have relocated their production to China, such as, but more importantly, at the own companies in the country. Not in vain, are these benefits those who finance the process without couple of investment undertaken to expand the productive apparatus Chinese. The fact is that this mechanism, which ensures the low prices of their exports, is also responsible, both of the substantial increase in the inequality that has occurred in China, as the worsening of working conditions throughout the world. Ultimately, both phenomena explain why neither the reduction of poverty has reached the scale that is normally considered, nor the global inequality has actually been achieved be reduced. Even more, though, as part of its strategy for tackling the crisis, the Government of the CPC has taken measures supposedly designed to reduce the internal inequalities, this is far from ensuring that will do substantially, or these, or those in the global economy as a whole. (Shi 2013)

Literature Review

Unlike what happened in the countries of Eastern Europe, where they were introduced genuine “shock therapy” in order to achieve a rapid transition to a capitalist market economy, in China the transition was gradual and, a priori, did not have as goal defined reached this stage. In reality, the reform began as a simple attempt to improve the productivity of both agriculture and industry, through the introduction of changes in the techniques of managing both. In the field, the so-called “systems of family responsibility” replaced the organization of production on the part of the rural communes. In the city, were endowed with state-owned enterprises of greater autonomy in decision-making with regard to productive planning agencies. In both cases was launched an incentive mechanism by which both the peasant families, such as industrial enterprises were able to sell on the market all production that excels the compulsory sale of shares to the plan. First in the agricultural sector and then in the industrial, production increased considerably, thus fulfilling the purpose proposed. However, once started the process of reform, this was not going to stop there. (Sutherland 2011)

Thanks to these incentives combined with the action of external openness of the economy, the logic of the market has expanded rapidly. Although in no time the Chinese Government lost control over the strategic variables of its economy, the weakening of the system of planning began to go parallel to the increase in dependence on the logic of the market. With a regulation of lower prices than the market, both the peasant families, such as industrial enterprises began to get to the sale toward the greater quantity of production, so that the latter started to gain relevance on the first to become the main regulator of the economic relations. The role of the global market in the determination of prices began to gain importance as China went through a process of external openness, which began with the creation of “special economic zones” for foreign investment and just culminating with the country’s entry into the World Trade Organization in 2001. Already before, had been necessary to break down the mechanisms that prevented the creation as such of a labor market, with the ultimate aim is that businesses should be able to cope with the pressure coming from the markets. This gave them the power that they didn’t have before, to hire and fire workers, power exercised to large-scale after that in 1997 will undertake a campaign of mass privatization. Overall, everything it implied the gradual disappearance of the “danwei” system by which the Chinese workers were linked to your business for life. The loss of the labor protection that this supposed resulted in that the pressure of the market is on the prices began to move directly to wages. (Heckman 2012)

Method of research

Much secondary research was conducted to external sources for the research purposes of this analysis. In 2015, the Chinese government issued a long-awaited report on how to correct the very glaring disparities in income that affect its economy, which is generating a growing social bad mood.

It happens that, in 2012, the annual disposable income (after taxes and social charges) of the urban population in China has been on the order of 4,000 USD per year, an increase of 9.6 % in respect in 2011 and that, in contrast, the annual disposable income of the rural population in China in 2012, has been of only 1,300 USD, which represents an increase of 10.7% over the previous year. (Heckman 2012)

This shows that there is a really huge difference between the income of both groups of the population. Nothing less than the 67%, strictly speaking, between a group and the other. What makes is a subject of disparity well difficult to maintain in time without cause, at any time, very serious social problems. (Heckman 2012)

This is confirmed when, for the first time, has been given to know the so-called Gini Index that corresponds to China: 0.47 %. In an equation that took its name from a well-known Italian statistical, where 0 is the perfect equality and 1 is the perfect inequality. (Heckman 2012)

The index for China, as measured by economists and private consultants, is 0.61%.  For those who have unlimited faith in communism, China today is so uneven as the United States, if we take the official figures, and much more unequal than the country of the north, if instead we rely on the numbers on the private sector. (Heckman 2012)

To remedy the situation, the State is now pressuring the companies of the State itself to deliver a higher percentage of their profits. So that you can drop anchor better housing, social programs, pensions and medical coverage for all. In addition, it is allegedly persecuting the corrupt, at all levels. (Heckman 2012)

In parallel it was announced that the Chinese government will increase soon the burden of taxation on the income of the richest, today very low.

If we take the figures of 2011, the Chinese State enterprises have been distributed as dividends to a order of 52% of their annual profits. The rest will be dedicated to sustainability, for the benefit of its most senior officials, what is a real enormity. (Sutherland 2011)

In 2012 they rose 7.6 %.  For this year is projected a stronger wage growth, which has been estimated at 9.2 %.  This is good for the economy is, as so far, so heavily dependent on external sector and begins to move, to a large extent, to the beat of domestic consumption. But it is certainly bad for the overall competitiveness of the Chinese economy, as well as for the control of domestic inflation. (Heckman 2012)

This is what explains that companies are appearing that are now going to China and are installed in Mexico, whose wages are today quite competitive with the Chinese and whose access to the market is rather better than that of China.

But beware, for not doing things too dramatic, China is also growing very strongly the productivity of their work, as a factor of production. In 2012, that increase was exceptional: of the 8.3 % for the year. (Heckman 2012)

Research Question

Does China have a chance at obtaining income equity? The relationship between the field and the city has become the key to articulate that pressure. During the early years of the reform the production improvements in rural areas had been reinforced by the increase of agricultural prices that the Government had driven with the intention of promoting the changes undertaken in the. This allowed an immediate increase of standard of living of the rural population that produced not only the more important reduction of the poverty figures for the entire period of reform, but also a decrease in inequality field-city. All this generated a broad popular support for the reforms. However, this initial development turned out to be a mirage, according to the priorities of the process changed. Gradually the terms of exchange between the agricultural and industrial turned again in favor of the latter, without having gone so far to alter Is this trend. With the dismantling of the communes, farmers lost their access to public services for that before they were fed those and until the arrival of the crisis any other public institution had replaced in that role. Rural industrial companies have experienced a strong growth at the beginning of the reform process, generating a large amount of jobs. In spite of that, progressively, the industrial development was transferred to the coastal cities, where currently remains focused. In addition, the tax policies directed to the field generated a load divided by the decreasing among the population. Thanks to that land ownership remains collective, peasant families have land to exploit in usufruct, but this is not enough to retain them in them. On the contrary, in the context described above, the flow of emigration from rural to urban areas has been continuous, becoming migrants in the labor force that holds the main factories in China. (Xie 2014)

In effect, the main function that he had met that distributive mechanism that links the conditions of life in the field at the level of industrial wages has been to ensure a pillar of benefits high enough to sustain the intense accumulation process set in motion. Not in vain, as a result of the pressure exerted by this mechanism, wages have been rising at rates lower than those which has increased the productivity of Chinese workers. This has led to their participation in the distribution of national income has not ceased to fall since practically the beginning of the reform until you get to just 45% of GDP, a level even lower than the already small figure in that found in other economies of similar level of per capita income. (Xie 2014)

The resulting increase in the participation of the benefits it has allowed investment rates remain above the 35% of GDP during almost three decades. Most analysts argue that is the savings that Chinese families carried out in a preventive manner in order to meet their expenses on health, education and retirement, which explains the high rates of the same that keeps the economy. Although these resources Do not cease to be relevant, in fact, more than half of the total savings carried out in China comes from corporate profits and it is precisely its reinvestment that sustained the growth: the benefits have pushed to the accumulation of capital and this has guided the growth.  In fact, the foreign investment represents just 10% of the total productive investment carried out, which lets you see the central role that has led to the channeling of the surplus generated by the own Chinese companies to the country’s economic expansion. (Heckman 2012)

Conclusion

The increase in social inequality experienced in China has been directly reflected in the evolution of inequality on a global scale. This relationship has resulted in two ways: first, by means of the actual effect the growth of the Chinese per capita income and the deterioration of their distribution have had on the statistics of global inequality. The second, as a result of the consequences that has led to the limitation of both the labor conditions, such as wages of Chinese workers on the workers of the rest of the world. As we advanced, some of the first studies carried out during the nineties of the last century, to measure the global inequality and explain its evolution showed a drop of the Gini index of between 3 and 4 points. In these studies it was argued that this alleged decrease in inequality would have occurred, in good measure, thanks to the greater increase in the per capita income China with regard to the given by the developed countries. However, new measures of the magnitude of this income, made after reviewing the price level actually exists in the country of Asia. As a result, finally, it has been found an increase in global inequality, at least between 1990 and 2005, that has led up to a value of 70 points to the corresponding Gini index. More importantly, these new measures also drove them to revise upward the graphs that had previously been handled people living below the poverty line in China. (Heckman 2012)

References

Shi, L., Li, S., Sato, H., & Sicular, T. (Eds.). (2013). Rising inequality in China: Challenges to a harmonious society. Cambridge University Press.

Sutherland, D., & Yao, S. (2011). Income inequality in China over 30 years of reforms. Cambridge Journal of Regions, Economy and Society, 4(1), 91-105.

Xie, Y., & Zhou, X. (2014). Income inequality in today’s China. Proceedings of the national academy of Sciences, 111(19), 6928-6933.

Heckman, J. J., & Yi, J. (2012). Human capital, economic growth, and inequality in China (No. w18100). National Bureau of Economic Research.