Wealth gap
may slow economy; unrest unlikely
By Toni Piech
BEIJING - China's wealth gap has grown, no doubt; now it's a gaping wound.
While Mao Zedong spread poverty equally over a huge land, Deng Xiaoping turned
the tables with his motto: "To get rich is glorious." Some indeed got rich. But
many, many more still wait empty-handed for the fruits of economic
modernization. That those hundreds of millions left behind - 800 million-plus
live in the countryside - might become bitter and ultimately, violently take
the fun out of China's new rise to power is a popular scenario, and one the
government desperately wants to avert.
A caricature would show relatively few Chinese yuppies drinking imported dry
white wine and polishing their foreign cars, while across the great wealth
divide, hundreds of millions in the countryside and some in the cities are
howling about economic injustice.
While the conventional wisdom holds, however, that the wealth gap may lead to
social unrest, in fact, gross inequities are more likely to slow economic
development in the long term. It probably won't lead to cataclysm, but
inequities slowing the rational growth of the economy is a problem.
In 1955, half a decade after the Chinese Communist Party (CCP) came to
power, US economist Simon Kuznets hypothesized that inequality inherently
climbs during a country's industrialization and then falls as the economy
matures. Both the CCP and the so-called Kuznets' Curve and its adherents have
survived to this day, and a certain level of inequality as a byproduct of
economic growth is now widely accepted, even in China. Less palatable, however,
is the extent of the problem and what it really means in terms of livelihood.
A recent editorial in the People's Daily, the CCP mouthpiece, affirms that some
inequality is acceptable, but says, "... how to curb the widening of the income
gap is a question we must face up to in order to avoid social turbulence." In
another article, Fan Gang, director of the National Economic Institute, picks
apart the arguments in The Coming Collapse of China, a foreign doomsday
book by Gordon G Chang banned on the mainland. But even Fan admits that China's
income gap is "one of the worst, if not the worst, in the world".
Well, according to the numbers, it actually isn't that bad, relatively
speaking.
Some countries are more equal than others
According to the most common measure of income inequality, the Gini coefficient
(named after the Italian statistician Corrado Gini), China's riches are just
about as unevenly distributed as those of the United States. On a scale in
which Scandinavian countries mark a low of 25 and some sub-Saharan nations
are over 60, China and the US both score around 42, two-thirds down the
worldwide equality ranking.
"Still, there are several reasons why people are concerned about China's
increasing inequality," said Ximing Wu, an economist at the University of
Guelph in Canada, and co-author of China's Income Distribution and
Inequality. "Among them are China's lack of social security and
the rise of inequality between the city and the countryside," he told Asia
Times Online. "In addition to China's urban-biased policies, the Chinese
government restricts free migration from rural to urban areas. Eventually,
these practices may intensify the social tension between the two sectors," said
Wu.
Inequality-induced anger is nothing new to the Middle Kingdom. The life of its
first dynasty, the Qin, was cut short in 206 BC by hordes of dissatisfied
peasants rebelling against heavy-handed authoritarianism and inequality. Since
then, many a mandate from heaven got shredded by angry farmers. An editorial in
the People's Daily last year even went so far as to proclaim envy of the better
off a typically Chinese characteristic. "Egalitarianism, which was handed down
in history, had led to a strong sense of animosity towards the wealthy people
in China's long-standing history, whereas equality in ownership of land and
assets has always been the repeated crying demand of uprising peasants under
the ruthless rule of successive dynasties," said the newspaper.
A general link between inequality and social unrest might, however, prove
overrated. A quick glance at the Gini rankings finds Rwanda more equal than
Switzerland and Bangladesh more wealth-balanced than the United Kingdom.
"Evidence suggests that there is actually a lot of discontent, in every country
in the world. But revolutions are rare," said Victor Nee, professor of
sociology at Cornell University. "In my view, the concern with inequality in
China is exaggerated," he told Asia Times Online. While studying income
distribution in Shanghai and Guangzhou, Nee found that growth in inequality was
actually driven by higher returns in human capital. In other words, the skilled
are starting to make more money. "This source of inequality is actually very
healthy and beneficial to society, because it focuses incentives on investing
in education and learning on the job," Nee said.
Still, those living at inequality's bottom end in China do suffer. While
millions of people escaped poverty in the early reform years, some studies
suggest little real decline in rural poverty since the late 1980s. The masses
who had once muscled the communists into power weren't just barred from
reform-father Deng Xiaoping's "open door", they actually hit a wall,
losing even the few perks of the Mao Zedong era - rudimentary health insurance,
socialist job security and an ideological cushion to justify their hardships.
The whole strip of western inland provinces, home to as many people as the
European Union, have almost completely missed out on China's economic miracle.
While in Mao's time, rich provinces had been forced to transfer their surplus
to the less successful regions, today China's decentralized system leaves
provinces largely to fend for themselves, and they do suffer.
Chinese have little faith in their future
Most Chinese have little faith in their future. Last year's consumer spending
was the lowest since 1978, despite a sizzling economy and extraordinary growth
that the government is desperately trying to cool and rationalize. The modern
Chinese spends just over half of what he or she earns; the rest goes into the
bank or under the mattress. After all, an average couple entering the workforce
soon has seven mouths to feed - their own, that of their single child (who
expects McDonald's hamburgers) and four parents' (who expect Confucian filial
piety and food).
And help from the government doesn't come easy. "The under-privileged and
ignored in China need to make lots of noise to have their lot recognized. It's
not as if they can vote the guys out of office," said Carl Riskin, professor of
economics at the Weatherhead East Asian Institute of Columbia University. "But
the government has been talking a good game," he told Asia Times Online.
Indeed, the fourth generation of Chinese leaders under President Hu Jintao and
Premier Wen Jiabao have unveiled a flurry of measures to help rural areas. At
the National People's Congress in March, Wen defined the strengthening of
agriculture and increasing rural incomes as China's second domestic priority,
just after keeping economic growth on track. Within five years, all
agricultural tax is to be junked, and investment in rural areas is expected to
increase at least 20% in 2004, officials say. "Balanced Growth" is the new
party catch-phrase. But there's still much balancing to do. According to
government figures, urban per capita income stands at just over US$1,000, three
times the rural income. Foreign analysts reckon the ratio is much higher, and
even China's own Ministry of Construction just released data suggesting that
the wage gap between city and countryside actually reached 5:1. So as to
whether the government's rhetoric and policy actually will be durable, Riskin
said: "The evidence isn't in yet as to the seriousness of the commitment."
American Dream with Chinese characteristics
The People's Republic of China's (PRC's) initial social contract has long since
been pulped, and the CCP will eventually need more than a blistering economy to
justify its claim to power. Already, the party welcomes business people among
its ranks, and even oversees the emergence of a - Friedrich Engels forbid
- middle class. On the other hand, government rhetoric is still packed with
such contradictory terms as "socialist market economy", and the party's
command structure remains virtually unchanged since Mao's time.
China's political choices, too, might greatly influence perceptions of
inequality. Studies comparing the United States and Europe have found that
different systems also breed different attitudes toward inequality. While
European governments redistribute a good deal more wealth, popular demand for
governments to reduce inequality has been greater than in the United States for
some time.
On the other side of the Atlantic, the American Dream - that elusive, perhaps
mythological yet still persuasive promise that today's poor may become
tomorrow's rich - keeps a lot of discontent in check. Hence Americans,
surrounded by more inequality, seem actually less concerned about it than those
in other countries.
A survey among 800 Beijing residents, conducted by Harvard Sociologist Martin
Whyte in 2000, found that an overwhelming majority of respondents thought that
inequality was too high and at least partly blamed "system failure" for the
malaise. But two-thirds also said their families were doing better than five
years ago, and an equal share thought they would be better off in another five
years.
"There is lots of optimism about chances for getting rich alongside a feeling
that the overall extent of inequality is too large and unfair," Whyte told Asia
Times Online. Granted, the urban respondents occupy the bright side of modern
China, but the city air already seems to carry a whiff of an American Dream
with Chinese characteristics. Whether or not the government can carry that
promise to the countryside might greatly influence future perceptions about
inequality.
Inequality and growth
In the meantime, the income gap poses some real and immediate dangers. Research
found that excessive inequality raises infant mortality and violent crime,
regardless of the absolute levels of poverty. And despite a range of
conflicting academic models, most economists agree that too much inequality
hampers growth.
South Korea and the Philippines are classic examples. Around 1960, the two were
mirror images in all major economic aggregates, including gross domestic
product (GDP) per capita, population, urbanization, primary and
secondary-school enrollment. Despite similar starting positions, South Korea's
economy boomed away three times as fast over the next quarter-century. It
would be simplistic to ascribe this to a single factor, but inequality seemed
to have a lot to do with it - the distribution of income and land in South
Korea was strikingly more equal than in the Philippines, and the countries were
almost 20 points apart on the Gini Scale of income inequality. Similar examples
are spread around the globe. Development economists' conventional wisdom holds,
for instance, that Latin American growth was held back by overly concentrated
wealth.
The current dread of China's wealth gap by its political leaders is certainly
not unfounded. But it's probably exaggerated. Inequality often gets blamed for
other social problems. Rural poverty in China, for one, is a real problem
regardless of whether the Shanghainese whiz around in Porsches. Corruption,
too, needs to be weeded out, but there is little wrong with lining pockets with
hard-earned currency. Similar cases can be made for unemployment, the lack of
central budget control, and lack of social security. Such fundamental problems
are often confused with and ascribed to economic inequality.
As for the future of China's wealth gap, predictions abound. Economist Ximing
Wu told Asia Times Online that his research suggests that inequality is likely
to increase for an extended period. The Kuznets Curve, on the other hand,
predicts that it should decline as more people move out of agriculture into the
industrial sector. But since every seventh person on this planet works in
Chinese agriculture, there are a lot of people left to move.
Help might come from a surprising source: a study using data from 100 Chinese
cities between 1988 and 1993, conducted by the National Bureau of Economic
Research, showed that those cities that had a greater increase in their
trade-to-GDP ratio over time also tended to witness a reduction in urban-rural
income inequality. In other words - and contrary to common assumption -
globalization in some cases actually seemed to reduce inequality.
Toni Piech is a freelance correspondent based in Beijing. He can be
contacted at toni@piech.ch.
(Copyright 2004 Asia Times Online Co, Ltd. All rights reserved. Please contact
content@atimes.com for information on our
sales and syndication policies.)
