How to Fix China’s Income Inequality

China’s much-anticipated plan to tackle income inequality has struggled to reach a consensus, writes the Carnegie Endowment’s Yukon Huang in The Wall Street Journal:

The debate was unusually broad, ranging from the need for property taxes and agricultural support prices to the role of the state in influencing returns to firms and labor. Given the lack of details and firm targets, it’s not clear whether this plan will effectively tackle the sources of inequality that are most harmful to development.

Rapidly growing economies tend to experience widening disparities. China’s growth has lifted some 600 million out of poverty even as its Gini coefficient, a measure of income inequality, has soared to 0.47 today from 0.25 in the mid-1980s. Although high, China’s Gini is comparable to that of the U.S. and other relatively successfully Asian economies such as Singapore and Malaysia.

The Gini number is less important than the reasons behind it. Inequality is positive when it emanates from productivity increases, entrepreneurial risk-taking and structural changes that produce sustained growth. Harmful inequality comes from distortions that ultimately undermine the development process.

It is the latter kind of inequality that Beijing has been slow to address. First, policy distortions have exaggerated geographical disparities. Second, the government budget has failed to provide equal access to social services. And finally, links between government-party officials and commercial activities have led to excessive rent-seeking.

For The Diplomat, Eve Cary writes that time will tell if the Communist Party can execute on its plan and preserve its legitimacy:

Indeed, the plan, in development for several years, is quite ambitious. It is the specific points–such as garnishing more profits from SOEs and spending more on social services–that have a better chance of success, though at first they may face considerable political pushback. It will be interesting to see how far these reforms go, considering that the new Politburo Standing Committee is dominated by the Jiang faction, with 6 of the 7 protégés of the former president, according to Brookings Institution scholar Cheng Li. Of those 6, 4 are princelings, or sons of Chinese Communist Party revolutionary heroes. In general, Jiang’s faction- sometimes referred to as the Shanghai gang- and the princelings promote the interests of the middle class, entrepreneurs, and the coast, as opposed to the populists, who tend to promote the interests of the common people.

There are other reforms in the pipeline, as well. Last November the State Council backed policy changes that aim to strengthen the property rights of farmers, including such measures as identifying and registering land, and issuing land ownership certificates to farmers. This policy was pushed through by outgoing populist premier Wen Jiabao. Affordable housing has also been a hot issue: in 2012, the central government allocated 37.1 billion dollars (233.26 billion yuan) for subsidized housing projects, up almost 40% from the previous year.

Of all the problems that China faces in the next 25 years, the income gap–and all of the associated issues–is perhaps the most dangerous for the Communist Party and future social stability. For example, in its 2013 Social Development Blue Book, the Chinese Academy of Social Sciences notes that there have been 100,000 “mass incidents” (large protests) every year for several years, and that half of these protests are related to land grabs.

It has become a commonly-held belief among China watchers that the CCP has remained in power through a Faustian bargain with its people–it retains power as long as it maintains economic growth. With so many left behind, there is a growing contingent who are left out of this deal, and they are become increasingly vocal. Despite the elitist bent of the new Standing Committee, one hopes that they have the foresight to continue to focus on this critical issue, and develop effective solutions to it.

See also previous CDT coverage of China’s income inequality.

February 22, 2013 12:44 AM
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