Re­duc­ing inequal­ity re­mains a chal­lenge

In­come re­dis­tri­bu­tion through tax­a­tion and trans­fers will have to play an in­creas­ingly im­por­tant role ...

China Daily (USA) - - VIEWS -

Af­ter nearly 40 years of mar­ket-ori­ented re­forms, pri­vate wealth ac­cu­mu­la­tion in China has ac­cel­er­ated dra­mat­i­cally, lead­ing also to a mas­sive re­duc­tion in poverty. But inequal­ity has soared. By 2008, China’s Gini co­ef­fi­cient of per capita house­hold dis­pos­able in­come, a mea­sure used by economists to es­ti­mate inequal­ity (with 0 de­not­ing com­plete equal­ity and 1 com­plete inequal­ity), had reached 0.491— mak­ing it one of the most un­equal so­ci­eties in the world.

Over the past eight years, how­ever, China’s inequal­ity has been on the de­cline. The Gini co­ef­fi­cient has been fall­ing each year, al­though marginally, reach­ing 0.463 in 2015. This has led many to spec­u­late that China has reached the so-called “Kuznets turn­ing point”, where in­come inequal­ity peaks and then be­gins to fall.

The re­al­ity is far more com­plex. While a com­bi­na­tion of struc­tural fac­tors and govern­ment poli­cies have helped re­duce China’s in­come dis­par­i­ties, there is no guar­an­tee that inequal­ity will con­tinue to fall.

A prom­i­nent fea­ture of the rise in China’s inequal­ity has been the grow­ing gap be­tween ru­ral and ur­ban in­comes. This peaked in 2007, with ur­ban house­holds earn­ing 3.3 times as high as their ru­ral coun­ter­parts. But, as the pool of sur­plus la­bor shrinks in ru­ral ar­eas, in­comes and pro­duc­tiv­ity there are in­creas­ing sig­nif­i­cantly, and the ur­ban-ru­ral in­come gap has be­gun to fall.

Sim­i­larly, inequal­ity in pro­vin­cial per capita in­come— a mea­sure of re­gional dis­par­ity— peaked in 2003 and has been de­clin­ing since. Stud­ies credit this to large govern­ment in­vest­ments in power, re­gional con­nec­tiv­ity and hu­man cap­i­tal in the in­te­rior prov­inces, mak­ing them de­velop faster than the coastal ar­eas. Rapidly ris­ing min­i­mum wages are also a con­tribut­ing fac­tor.

An­other fea­ture of China’s inequal­ity has been the fall­ing share of la­bor in­come to over­all in­come. Re­cent data sug­gest that since 2008, work­ers have started to see larger shares of in­come. This is largely due to the de­cline in sur­plus la­bor from ru­ral ar­eas.

These are en­cour­ag­ing de­vel­op­ments. But it is far from cer­tain whether China’s in­come inequal­ity has peaked and will con­tinue to de­cline. Inequal­ity in the dis­tri­bu­tion of wealth, which in­cludes fac­to­ries and ma­chines owned by house­holds, fi­nan­cial as­sets, and prop­er­ties, has more than dou­bled in 25 years. Wealth inequal­ity con­trib­utes to in­come inequal­ity.

One of the un­der­ly­ing fac­tors of the Kuznets hy­poth­e­sis is that, as a coun­try be­comes more ad­vanced, there will be greater in­come re­dis­tri­bu­tion through tax­a­tion and trans­fers. In­deed, this was the model in manyWestern coun­tries. How­ever, in­come re­dis­tri­bu­tion through tax­a­tion and trans­fers play a much more lim­ited role in China. The pre-tax and pre-trans­fer in­come inequal­ity is not very dif­fer­ent from the post-tax and post-trans­fer inequal­ity in China while the lat­ter is one-third lower in high-in­come coun­tries.

The lim­ited role of re­dis­tri­bu­tion through fis­cal mea­sures in re­duc­ing in­come inequal­ity in China is con­sis­tent with the fact that the coun­try’s to­tal per­sonal in­come tax rev­enue cur­rently amounts to less than 1.5 per­cent ofGDP, com­pared with high-in­come coun­tries’ ra­tio of 10 per­cent on av­er­age.

The need there­fore is for greater re­dis­tri­bu­tion through tax pol­icy. Tax re­forms cou­pled with on­go­ing in­clu­sive growth pro­grams in the ar­eas of ed­u­ca­tion, health­care, so­cial pro­tec­tion and the hukuo, house­hold regis­tra­tion, The au­thor is for­mer pres­i­dent of China In­sti­tutes of Con­tem­po­rary In­ter­na­tional Re­la­tions. Cour­tesy: chin­aus­fo­ sys­tem should al­low China to see fur­ther and more sig­nif­i­cant re­duc­tions in in­come inequal­ity.

This will not be easy. China’s newmid­dle class­may not be will­ing to ac­cept larger taxes with­out some­thing in re­turn. The govern­ment will have to con­tinue to work on in­creas­ing ef­fi­ciency and qual­ity in de­liv­er­ing pub­lic ser­vices.

En­act­ing ma­jor fis­cal re­forms is cer­tainly a chal­lenge, but China has shown time and again its nim­ble­ness in pol­i­cy­mak­ing and im­ple­men­ta­tion. The govern­ment has in­di­cated that per­sonal in­come tax re­form will be a pol­icy pri­or­ity go­ing for­ward.

In­come re­dis­tri­bu­tion through tax­a­tion and trans­fers will have to play an in­creas­ingly im­por­tant role as China con­tin­ues to grow, if ben­e­fits of growth are to reach the wider pop­u­la­tion and if it is to de­liver on the prom­ises of op­por­tu­nity and equal­ity for all. The au­thor is deputy chief econ­o­mist at the Asian De­vel­op­ment Bank.


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