Four Decades of China’s In­come Dis­tri­bu­tion Re­form

中国收入分配制度改革四十年

China Economist - - Articles - LiShi(李实)

Ab­stract: In­come gaps in China kept widen­ing over the past four decades of eco­nomic tran­si­tion. First, this paper de­scribes the change in in­come gaps be­fore and af­ter re­form and open­ing-up in 1978 and found that in­come gaps had been ex­pand­ing be­tween ur­ban and ru­ral ar­eas, within cities and within the coun­try­side. How­ever, this did not lead to in­come po­lar­iza­tion since low-in­come groups only had a slower in­come growth com­pared with high­in­come groups. The num­ber of poor peo­ple con­tin­u­ously re­duced thanks to rapid eco­nomic growth. Over the past decade, the widen­ing of in­come gaps has been ini­tially curbed. Ac­cord­ingly, we ex­plained the im­pact of eco­nomic tran­si­tion on in­come dis­tri­bu­tion from the per­spec­tives of mar­ket-based dis­tri­bu­tion, own­er­ship struc­ture, open­ing-up and in­ter­nal in­come dis­tri­bu­tion. Lastly, this paper pro­vides an in-depth analysis on ur­ban-ru­ral in­come gaps, ex­ces­sive com­pen­sa­tion in mo­nop­o­lis­tic sec­tors and in­come in­equal­i­ties aris­ing from cor­rup­tion. To ad­dress th­ese prob­lems, it is im­por­tant to en­hance tax reg­u­la­tion, in­crease trans­fer pay­ments to poor peo­ple, im­prove so­cial se­cu­rity, equal­ize pub­lic ser­vices, en­hance poverty re­lief and de­velop a fairer in­come dis­tri­bu­tion sys­tem.

Key­words: in­come gap, eco­nomic tran­si­tion, dis­tri­bu­tion fair­ness, Gini co­ef­fi­cient JEL clas­si­fi­ca­tion code: D31, O15, P23

DOI: 1 0.19602/j .chi­nae­conomist.2018.07.01

1. In­tro­duc­tion

Over the past four decades of eco­nomic tran­si­tion, China has trans­formed from a low-in­come econ­omy with per capita in­come less than 200 US dol­lars to one with per capita in­come above 8,000 US dol­lars - an achieve­ment rarely seen in hu­man his­tory. China’s eco­nomic suc­cesses have been widely ac­claimed and aroused a great deal of in­ter­est in “China path” and “China model” among Chi­nese and in­ter­na­tional schol­ars.

Rapid eco­nomic growth has been ac­com­pa­nied by ris­ing in­come level for Chi­nese house­holds since re­form and open­ing-up in 1978. Dur­ing 1949-1978, China’s eco­nomic growth far out­paced house­hold in­come growth and peo­ple’s liv­ing stan­dards did not keep pace with devel­op­ment. Ac­cord­ing to of­fi­cial statis­tics, dur­ing 1952-1978, China’s econ­omy grew by 6.7% and per capita house­hold in­come grew by less than 2% on an an­nual av­er­age ba­sis. In the past four decades of re­form and open­ing-up, how­ever, house­hold in­come growth (about 11%) slightly out­paced GDP an­nual growth rate (about 10%). In this sense, the three decades of eco­nomic growth be­fore re­form and open­ing-up in 1978 is a non-in­clu­sive growth pat­tern that failed to im­prove peo­ple’s liv­ing stan­dards. It also jus­ti­fies the ne­ces­sity of China’s eco­nomic tran­si­tion.

China’s long-term eco­nomic tran­si­tion and devel­op­ment have trans­formed its in­come dis­tri­bu­tion pat­tern. On one hand, in­come gaps have been widen­ing be­tween ur­ban and ru­ral ar­eas, dif­fer­ent re­gions, sec­tors, oc­cu­pa­tions and groups of peo­ple. On the other side, changes have oc­curred in the stan­dards, prin­ci­ples and mech­a­nisms of in­come dis­tri­bu­tion. Th­ese changes in­clude both pos­i­tive and neg­a­tive as­pects. To some ex­tent, widen­ing in­come gaps are in­evitable amid eco­nomic tran­si­tion. In a planned econ­omy, in­come dis­tri­bu­tion is de­ter­mined by own­er­ship, in­dus­trial and em­ploy­ment struc­tures and la­bor sys­tem. When China was un­der the planned econ­omy, egal­i­tar­i­an­ism was both nec­es­sary and po­lit­i­cally cor­rect. Back then, left­ist ide­ol­ogy, planned eco­nomic sys­tem and egal­i­tar­ian dis­tri­bu­tion were the norms of China’s po­lit­i­cal and eco­nomic life. In fact, egal­i­tar­i­an­ism cre­ated an­other form of un­fair dis­tri­bu­tion: the re­sults of work were taken by force from those who worked more to those who worked less or did not work at all.

China’s eco­nomic re­form in­tro­duced mar­ket mech­a­nism that al­lows in­come dis­tri­bu­tion to be de­ter­mined by in­di­vid­ual en­ter­prises free from gov­ern­ment in­ter­ven­tion. The virtue of this tran­si­tion is ob­vi­ous. It cre­ated in­cen­tives for all groups of peo­ple to par­tic­i­pate in eco­nomic ac­tiv­ity for self-in­ter­est. But it also led to widen­ing in­come gaps that aroused pub­lic re­sent­ment. As men­tioned in the Re­port of the 19th CPC Na­tional Congress, “The prin­ci­pal con­tra­dic­tion fac­ing Chi­nese so­ci­ety in the new era is be­tween un­bal­anced and in­ad­e­quate devel­op­ment and the peo­ple’s ever-grow­ing needs for a bet­ter life”. A ma­jor as­pect of “un­bal­anced devel­op­ment” is ex­ces­sive in­come dis­par­i­ties. The re­port also pro­vides a ba­sic as­sess­ment on the cur­rent sta­tus of in­come dis­tri­bu­tion in China: “The devel­op­ment gap be­tween ur­ban and ru­ral ar­eas is still large, and so are in­come dis­par­i­ties”. This as­sess­ment re­flects pre­vi­ous and cur­rent sit­u­a­tion of in­come dis­tri­bu­tion in China and im­plies that re­solv­ing ex­ces­sive in­come gaps re­mains a pri­or­ity for the CPC Cen­tral Com­mit­tee in the fore­see­able fu­ture.

Widen­ing in­come gaps are not unique to China. Over the past three decades, in­come gaps in­creased in most coun­tries by dif­fer­ent de­grees. Ac­cord­ing to a study re­port Di­vided We Stand: Why In­equal­ity Keeps Ris­ing (OECD, 2011) re­cently pub­lished by the OECD, 14 out of 15 OECD coun­tries ex­pe­ri­enced ris­ing Gini co­ef­fi­cients dur­ing the mid-1980s and mid-1990s with an av­er­age in­crease of 14%. From the mid-1990s to 2005, nine out of 15 OECD coun­tries ex­pe­ri­enced ris­ing Gini co­ef­fi­cient but the in­crease slowed. Of course, this does not mean that China’s in­come dis­par­i­ties are caused by the same rea­sons with other coun­tries, nor does it sug­gest that China’s in­come dis­par­i­ties are in­evitable and jus­ti­fied. It should be rec­og­nized that in­come dis­tri­bu­tion in China is not the most in­equitable in the world but China’s in­come gaps are widen­ing at a stag­ger­ing pace. It is fair to say that China has trans­formed from an egal­i­tar­ian so­ci­ety to a highly un­equal so­ci­ety in a mat­ter of three decades. China’s cur­rent pri­or­ity is to re­duce in­come gaps and achieve eq­ui­table devel­op­ment. On this is­sue, the Re­port of the 19th CPC Na­tional Congress has put for­ward clear re­quire­ments.

2008 is a wa­ter­shed year for chang­ing in­come gaps in China. Be­fore 2008, in­come gaps in China had been widen­ing. This trend is in­dis­putable in the academia. Rel­e­vant stud­ies in­clud­ing of­fi­cial statis­tics in­di­cate that the first three decades of China’s eco­nomic tran­si­tion co­in­cided with widen­ing in­come gaps1. This paper will specif­i­cally elab­o­rate the char­ac­ter­is­tics of chang­ing in­come gaps in this pe­riod and un­der­ly­ing rea­sons. As for what hap­pened to in­come gaps in China af­ter 2008, the academia is yet to reach a con­sen­sus. More­over, huge dif­fer­ences ex­ist re­gard­ing the es­ti­ma­tion of in­come gaps. Gini co­ef­fi­cients es­ti­mated by dif­fer­ent schol­ars vary by as much as 10 per­cent­age points. In our view, in­come gaps in China have en­tered into a plateau since 2008 and will not keep in­creas­ing or de­creas­ing in one di­rec­tion de­spite short-term volatility. This as­sess­ment is based on China’s stage of eco­nomic devel­op­ment and pub­lic pol­icy ef­fect. The Chi­nese gov­ern­ment has made great ef­forts to pre­vent in­come

gaps from ex­pand­ing ex­ces­sively since 2003 and is­sued var­i­ous poli­cies to re­form in­come dis­tri­bu­tion sys­tem. Th­ese ef­forts have achieved cer­tain ef­fects in re­vers­ing widen­ing in­come gaps.

Change in in­come dis­tri­bu­tion pat­tern can be at­trib­uted to var­i­ous fac­tors, in­clud­ing fac­tors of eco­nomic tran­si­tion, eco­nomic and so­cial poli­cies, as well as de­mo­graphic changes. The im­pact and the rel­a­tive im­por­tance of th­ese fac­tors will vary across dif­fer­ent pe­ri­ods of time. This paper at­tempts to ex­plain the four decades of China’s chang­ing in­come pat­tern. De­spite the com­plex­ity and dif­fi­culty of this is­sue, it is still nec­es­sary to try to of­fer some ex­pla­na­tions on this topic.

The fol­low­ing char­ac­ter­is­tics can be ob­served in the long- term evo­lu­tion of China’s in­come dis­tri­bu­tion pat­tern. First, widen­ing in­come gaps were not ac­com­pa­nied by po­lar­iza­tion. Al­though the rich be­came richer, the poor did not be­come poorer. That is to say, low-in­come groups still saw their in­come in­crease, al­though at a slower pace com­pared with high-in­come group. This has been ver­i­fied by the sig­nif­i­cant re­duc­tion of ru­ral poor peo­ple over the past four decades. In­come growth al­lowed the poor to ben­e­fit from eco­nomic devel­op­ment de­spite widen­ing in­come gaps. This is why China man­aged to main­tain so­cial sta­bil­ity amid in­creas­ing in­come gaps. Sec­ond, China’s em­ploy­ment pri­or­ity pol­icy played a piv­otal role in re­duc­ing in­come gaps and poverty. Em­ploy­ment is the foun­da­tion for peo­ple’s liveli­hood and an an­ti­dote to poverty. The im­ple­men­ta­tion of em­ploy­ment pri­or­ity strat­egy by the Chi­nese gov­ern­ment since the dawn of the 21st cen­tury has un­doubt­edly played an ef­fec­tive role in pre­vent­ing in­come gaps from fur­ther in­creas­ing. Last, pub­lic poli­cies also eased in­come in­equal­i­ties to some ex­tent, par­tic­u­larly in­clu­sive so­cial se­cu­rity, poverty re­lief and sup­port to back­ward re­gions and agri­cul­ture. Th­ese poli­cies have played out well and will play a big­ger role in the fu­ture as they are im­proved.

2. Changes in the Pat­tern of In­come Dis­tri­bu­tion and Ex­pla­na­tions

It takes two per­spec­tives to ex­plain how the pat­tern of in­come dis­tri­bu­tion evolved in China: First, an em­pir­i­cal analysis needs to be car­ried out to mea­sure in­come gaps, de­scribe their changes and in­ves­ti­gate the un­der­ly­ing rea­sons of change; sec­ond, a value-based as­sess­ment needs to be car­ried out to iden­tify un­fair in­come dis­tri­bu­tion sys­tems, poli­cies, process and re­sults. As for the change of in­come dis­tri­bu­tion, peo­ple will first care about the mag­ni­tude of in­come gaps, par­tic­u­larly in­come gaps be­tween them­selves and other groups (espe­cially com­pa­ra­ble groups). They will care about both ab­so­lute and rel­a­tive in­come gaps. Here, we use the fol­low­ing ex­am­ple to ex­plain what ab­so­lute and rel­a­tive gaps mean. If Jim makes 20,000 yuan per year and Tom makes 200,000 yuan a year, their ab­so­lute in­come gap is 180,000 yuan and rel­a­tive in­come gap is 10 times. In the fol­low­ing year, their in­come both in­crease by 20% with ab­so­lute in­come gap widen­ing to 216,000 yuan and but their rel­a­tive in­come gap re­mains un­changed, i.e. still 10 times. Ob­vi­ously, con­clu­sions on the change of in­come gaps will be dif­fer­ent de­pend­ing on which stan­dard is fol­lowed: ab­so­lute gap or rel­a­tive gap.

Most stud­ies of in­come dis­tri­bu­tion have fol­lowed rel­a­tive stan­dard such as Gini co­ef­fi­cient. It re­mains un­clear why schol­ars tended to fol­low rel­a­tive gap rather than ab­so­lute gap. Maybe a rea­son is that rel­a­tive gap has tem­po­ral and spa­tial com­pa­ra­bil­ity. In ad­di­tion to the mag­ni­tude of in­come gaps, peo­ple also care about whether in­come gaps are rea­son­able and fair based on a set of val­ues, in­clud­ing cul­tural per­cep­tions, so­cial cus­toms, ethics and main­stream ide­ol­ogy. In a so­ci­ety, main­stream val­ues will change with th­ese fac­tors. For in­stance, be­fore China’s eco­nomic tran­si­tion, egal­i­tar­i­an­ism held sway in peo­ple’s per­cep­tions and so­cial devel­op­ment. Af­ter eco­nomic tran­si­tion, egal­i­tar­ian val­ues gave way to the val­ues that en­cour­age the pur­suit of wealth. Thus, in­come gaps that are con­sid­ered as rea­son­able be­came grad­u­ally ac­cepted by peo­ple. How­ever, un­rea­son­able in­come gaps or in­come gaps against univer­sal val­ues are still con­demned. Re­gard­ing the fair­ness of in­come dis­tri­bu­tion, we should look at not only the re­sult of in­come dis­tri­bu­tion but the process and prin­ci­ples as well.

2.1 In­come Gaps be­fore Re­form and Open­ing-up in 1978

Upon the found­ing of the Peo­ple’s Repub­lic of China in 1949, huge in­come gaps ex­isted in China. Ac­cord­ing to a study, China’s Gini co­ef­fi­cient in 1953 was 0.5582. Ini­tially af­ter the new gov­ern­ment took over the econ­omy, China’s eco­nomic land­scape, in­come dis­tri­bu­tion and in­come gaps were left over from the old China. In this sense, the huge in­come gaps are un­der­stand­able. As the planned econ­omy took shape and espe­cially af­ter the first and sec­ond Five-Year Plan pe­ri­ods, house­hold in­come gaps swiftly nar­rowed. In 1965, a year be­fore the Cul­tural Rev­o­lu­tion, China’s Gini co­ef­fi­cient was about 0.27 (Dowl­ing and Soo, 1983). It is not dif­fi­cult to ex­plain the low level of house­hold in­come gaps in China dur­ing the planned econ­omy: First, state-owned and col­lec­tive en­ter­prises re­placed pri­vate and in­di­vid­ual busi­nesses in cities and Peo­ple’s Com­munes were cre­ated in the coun­try­side; sec­ond, salary de­ter­mi­na­tion and dis­tri­bu­tion were brought un­der in­creas­ingly rig­or­ous con­trol un­der the planned econ­omy. De­spite the pyra­mid-shaped com­pen­sa­tion stan­dard, the dif­fer­ence be­tween min­i­mum and max­i­mum com­pen­sa­tion was small. Third, egal­i­tar­i­an­ism in­creas­ingly took hold, as re­flected in the nar­row­ing dif­fer­ences be­tween salary grades through a few rounds of ad­just­ment be­fore the Cul­tural Rev­o­lu­tion.

Small in­come gaps un­der the planned eco­nomic sys­tem were not tan­ta­mount to fair in­come dis­tri­bu­tion. In fact, egal­i­tar­ian dis­tri­bu­tion sys­tem even ran against the China’s cher­ished prin­ci­ple of dis­tri­bu­tion ac­cord­ing to la­bor, cre­at­ing an un­fair treat­ment to those who were more hard-work­ing and ta­lented. In ad­di­tion, non­mon­e­tary wel­fare and in-kind dis­tri­bu­tion sys­tems rep­re­sented an im­plicit form of un­fair in­come dis­tri­bu­tion. Fur­ther­more, in­come dis­tri­bu­tion sys­tem was tilted in fa­vor of the priv­i­leged group. In the early stage of re­form and open­ing-up af­ter 1978, the academia ex­ten­sively dis­cussed the in­ef­fi­cien­cies of dis­tri­bu­tion sys­tem un­der the planned econ­omy. In fact, this dis­tri­bu­tion sys­tem was not only in­ef­fi­cient but cre­ated new forms of un­fair dis­tri­bu­tion. For in­stance, de­spite its in­ten­tion to re­duce in­come gaps, the pol­icy to freeze com­pen­sa­tion stan­dards cre­ated in­ter-gen­er­a­tional in­equal­ity (Zhao, 1983).

It should be noted that sig­nif­i­cant in­come gaps still ex­isted be­tween ur­ban and ru­ral ar­eas de­spite the main­stream ide­ol­ogy to nar­row th­ese gaps. In 1978, the year of re­form and open­ing-up, in­come gap be­tween ur­ban and ru­ral res­i­dents was still 2.56 times. If var­i­ous so­cial pro­tec­tion and wel­fare en­ti­tled to ur­ban em­ploy­ees are taken into ac­count, real in­come gaps be­tween ur­ban and ru­ral res­i­dents were much more sig­nif­i­cant. This re­sult stemmed from ur­ban-ru­ral di­vide un­der the house­hold regis­tra­tion ( hukou) sys­tem and pri­mary cap­i­tal ac­cu­mu­la­tion at the ex­pense of farm­ers’ in­ter­ests. In this sense, devel­op­ment was high on the agenda for pol­i­cy­mak­ers, while egal­i­tar­i­an­ism be­came a mere slo­gan.

2.2 Ru­ral In­come Gaps dur­ing Tran­si­tion Pe­riod

The ini­tial stage of ru­ral eco­nomic re­form is the “best times” of si­mul­ta­ne­ous in­come growth and nar­row­ing in­come gaps with a balance be­tween fair­ness and ef­fi­ciency. In the late 1970s and early 1980s, ru­ral eco­nomic re­form not only led to a rapid in­crease in farm­ers’ in­come but re­duced in­come gaps in the coun­try­side as well. Dur­ing 1978-1984, real per capita in­come in the coun­try­side grew by 16.4% on an an­nual av­er­age ba­sis - a rare growth mir­a­cle in Chi­nese his­tory that never oc­curred in the three decades pre­ced­ing re­form and open­ing-up and never re­peated there­after.

Var­i­ous ex­pla­na­tions have been of­fered on the surg­ing in­come of farm­ers dur­ing this pe­riod. Some ar­gue that house­hold con­tract sys­tem in­cen­tivized farm­ers to in­crease agri­cul­tural yield. The re­form also gave farm­ers greater free­dom in the se­lec­tion of crops and thus in­creased land al­lo­ca­tion ef­fi­ciency. In

ad­di­tion, the re­form al­lowed ru­ral work­force to en­gage in non-agri­cul­tural ac­tiv­i­ties and thus in­creased ru­ral la­bor al­lo­ca­tion ef­fi­ciency. Oth­ers be­lieve that farm­ers’ in­come in­creased be­cause the Chi­nese gov­ern­ment raised agri­cul­tural pur­chase price for a few times dur­ing this pe­riod3. More im­por­tantly, ru­ral in­come gaps stayed flat dur­ing this pe­riod of time. Ac­cord­ing to a house­hold sur­vey con­ducted by the Na­tional Bureau of Statis­tics (NBS), ru­ral Gini co­ef­fi­cient fluc­tu­ated within a range of 0.24-0.26 dur­ing 1979-1984. This shows that ru­ral in­come in­equal­ity was lim­ited and did not change much.

The re­form in cities and towns was pre­ceded by the re­form in ru­ral ar­eas. Un­til the early 1980s, pre­vi­ous dis­tri­bu­tion sys­tem was still fol­lowed in cities with­out much change. Al­though wage growth for ur­ban em­ploy­ees was less stag­nant than dur­ing the Cul­tura Revo­lu­tion4, it was far out­paced by the in­come growth of farm­ers. As a re­sult, in­come gaps be­tween ur­ban and ru­ral ar­eas swiftly nar­rowed, down from 2.6 times in 1978 to 1.82 times in 1983 - the low­est level since China’s eco­nomic tran­si­tion.

How­ever, this pe­riod was short-lived. In­come growth for farm­ers slowed as re­form div­i­dends di­min­ished and stag­nated for a rather long pe­riod of time since the mid-1980s. Dur­ing 1985-1995, farm­ers’ per capita real in­come grew by only 3.6% on an an­nual av­er­age ba­sis. Ru­ral in­come gaps started to widen with in­dus­trial devel­op­ment and the emer­gence of non-farm­ing jobs in the coun­try­side. Ac­cord­ing to the NBS, the Gini co­ef­fi­cient of ru­ral in­come gaps in­creased sharply from 0.26 in 1985 to 0.34 in 1995. Ac­cord­ing to an es­ti­mate by Chi­nese House­hold In­come Project (CHIP) Se­ries, ru­ral Gini co­ef­fi­cient also in­creased dur­ing 1988-1995, up from 0.34 to 0.405.

Ru­ral in­come gaps ex­panded swiftly pri­mar­ily due to in­dus­trial devel­op­ment that pro­vided non­farm­ing jobs to ru­ral la­bor. Nev­er­the­less, ru­ral in­dus­tri­al­iza­tion was ac­com­pa­nied by re­gional im­bal­ance: While town­ship and vil­lage en­ter­prises mush­roomed in China’s eastern coastal re­gion, farm­ers in western parts of China were still till­ing their crops. In­dus­trial devel­op­ment not only cre­ated jobs for farm­ers but also changed their in­come struc­ture: Wage be­came a source of in­come for farm­ers. But this also led to widen­ing in­come gaps since only a few peo­ple had the op­por­tu­nity to work out­side agri­cul­tural sec­tor. Com­pared with 1988, the share of wage in­come for ru­ral house­holds in­creased by al­most 14 per­cent­age points to ex­ceed 22% in 1995, with the share of non-agri­cul­tural op­er­a­tional in­come reach­ing 6%. It should be noted that the dis­tri­bu­tion of wage in­come and house­hold non-agri­cul­tural op­er­a­tional in­come was ex­tremely un­equal: Con­cen­tra­tion ra­tio is 0.74 for the former and 0.54 for the lat­ter, both far ex­ceed Gini co­ef­fi­cient for ru­ral res­i­dents (Khan and Riskin, 1999).

In the late 1990s, wage in­come and house­hold non-agri­cul­tural op­er­a­tional in­come in­creased the share of ru­ral house­hold in­come as ru­ral la­bor started to mi­grate to cities. By 2002, the share of wage in­come in ru­ral house­hold in­come ap­proached 30%, up eight per­cent­age points over 1995 and the share of house­hold non-agri­cul­tural op­er­a­tional in­come rose to 12%. In this pe­riod, wage in­come dis­tri­bu­tion gaps re­duced but still ex­ceeded the Gini co­ef­fi­cient of net in­come for ru­ral res­i­dents and con­trib­uted to widen­ing in­come gaps. Dis­tri­bu­tion of house­hold non-agri­cul­tural op­er­a­tional in­come was still rather un­equal with con­cen­tra­tion ra­tio higher by net in­come Gini co­ef­fi­cient by 18 per­cent­age points. This process lasted un­til early 21st cen­tury.

Over the past decade, ru­ral in­come gaps have sta­bi­lized. In­come gaps are still widen­ing but at a much slower pace com­pared with the 1990s. Ac­cord­ing to cal­cu­la­tions based on CHIP sur­vey, China’s ru­ral Gini co­ef­fi­cient in 2013 in­creased by about two per­cent­age points over 2002 (see Fig­ure 1). Such change is closely re­lated to a host of ru­ral devel­op­ment poli­cies. Ru­ral so­cial pro­tec­tion sys­tem and pro-

farmer and pro-poor poli­cies have greatly in­creased the in­come of poor farm­ers and im­proved liv­ing stan­dards for poor and low-in­come peo­ple.

2.3 Chang­ing Ur­ban In­come dur­ing Tran­si­tion Pe­riod

In the early stage of eco­nomic tran­si­tion, ur­ban house­hold in­come gaps were lim­ited in China. Ur­ban Gini co­ef­fi­cient was only around 0.16 ac­cord­ing to cal­cu­la­tions based on NBS ur­ban house­hold sur­vey data ( see Fig­ure 2). In the 1980s, eco­nomic re­forms, in­clud­ing mi­nor ad­just­ments to SOE com­pen­sa­tion sys­tem, were car­ried out in cities to in­crease SOE ef­fi­ciency. But th­ese re­forms did not cause much change to ur­ban in­come gaps. Dur­ing this pe­riod, ur­ban house­hold in­come gaps widened to a lim­ited de­gree. In the decade af­ter re­form and open­ing-up in 1978, ur­ban Gini co­ef­fi­cient was still be­low 0.2. Pri­vate and in­di­vid­ual econ­omy and dou­ble-track price sys­tem were re­spon­si­ble for widen­ing ur­ban in­come gaps in the late 1980s. Dur­ing 1985-1992, ur­ban Gini co­ef­fi­cient sig­nif­i­cantly in­creased by about nine per­cent­age points. In the late 1990s, re­forms in ur­ban ar­eas en­tered into a sub­stan­tive stage. As over­staffed SOEs and col­lec­tive en­ter­prises laid off work­ers, pri­vate and in­di­vid­ual busi­nesses de­vel­oped by leaps and bounds, caus­ing in­come gaps to widen fur­ther. As Fig­ure 2 shows, ur­ban Gini co­ef­fi­cient in­creased by 7 to 8 per­cent­age points dur­ing 1995-2002. Ef­fects of eco­nomic tran­si­tion can be man­i­fested in the change of house­hold in­come struc­ture: While the share of wage in­come re­duced by about two per­cent­age points, the share of pen­sion in­creased by three per­cent­age points and the share of house­hold op­er­a­tional in­come in­creased by two per­cent­age points (Li, Sic­u­lar and Sato, 2008). This re­flects an in­crease in the num­ber of re­tirees un­der un­em­ploy­ment pres­sures and an in­crease in the rev­enues from pri­vate and in­di­vid­ual busi­ness ac­tiv­i­ties.

Af­ter the dawn of the 21st cen­tury, ur­ban in­come gaps con­tin­ued to widen. Peo­ple’s per­cep­tion that in­come gaps widened more in cities than in the coun­try­side is con­tra­dicted by rel­e­vant data. For

in­stance, the Na­tional Bureau of Statis­tics (see Fig­ure 2) es­ti­mates that in the first three years in the new cen­tury, ur­ban in­come gap re­mained un­changed and Gini co­ef­fi­cient was 0.32; dur­ing 2002-2005, ur­ban Gini co­ef­fi­cient in­creased to 0.34 and stayed at this level for a few years there­after; in 2009, ur­ban Gini co­ef­fi­cient started to fall from 0.34 to 0.33. This re­sult was chal­lenged by some schol­ars who be­lieved that ur­ban Gini co­ef­fi­cient was un­der­es­ti­mated - such un­der­es­ti­ma­tion is caused by a very low pro­por­tion of high-in­come sam­ples in house­hold sur­vey as it be­came in­creas­ingly dif­fi­cult to ac­quire high-in­come house­hold sam­ples (Li, Luo and Terry, 2013). Of course, sam­ple de­vi­a­tion also led to the un­der­es­ti­ma­tion of ur­ban-ru­ral in­come gaps and na­tional in­come gaps. Based on rel­e­vant stud­ies, China’s ur­ban Gini co­ef­fi­cient would have al­ready ex­ceeded 0.4 (Li and Luo, 2011), which is above ru­ral Gini co­ef­fi­cient.

Mi­grant work­ers have trans­formed the work­force struc­ture of cities. While most mi­grant work­ers are less ed­u­cated and non-skilled, their dili­gence and obe­di­ence still make them cost-ef­fec­tive em­ploy­ees. Their mi­gra­tion into cities cre­ated pres­sures for the em­ploy­ment of less ed­u­cated ur­ban em­ploy­ees, caus­ing their wage level to grow slowly ( Cai and Du, 2011). In­dus­trial up­grade and tech­nol­ogy devel­op­ment spurred de­mand for ed­u­cated and skilled em­ploy­ees, caus­ing their wage to in­crease at a faster pace. As high-in­come group ex­panded in pro­por­tion, ur­ban in­come gaps kept widen­ing. Th­ese fac­tors largely in­creased ur­ban in­come gaps.

2.4 China’s Chang­ing In­come Gaps dur­ing Tran­si­tion Pe­riod

In the first few years of the 21st cen­tury, China’s in­come gaps reached the high­est level in half a cen­tury (Li et al., 2013). Ac­cord­ing to NBS es­ti­mate, China’s in­come gaps kept ex­pand­ing dur­ing 20002008 with Gini co­ef­fi­cient up from 0.44 to above 0.496. In re­cent few years, how­ever, in­come gaps in

China nar­rowed slowly. Ac­cord­ing to NBS es­ti­mate, China’s Gini co­ef­fi­cient dropped from 0.49 in 2008 to 0.47 in 2014. Based on CHIPs and CFPS data, Kan­bur, Wang and Zhang (2017) proved that China’s in­come gaps nar­rowed af­ter 2012. Based on NBS grouped data and na­tional in­come dis­tri­bu­tion data, Piketty, Yang and Suc­man (2017) ver­i­fied the re­duc­tion of wealth gaps be­tween high-in­come and low­in­come peo­ple.

As can be learned from Fig­ure 3, China’s na­tional Gini co­ef­fi­cient de­creased only slightly. Whether or not this trend will con­tinue in the long run still re­quires fur­ther ob­ser­va­tion. Given the sam­ple de­vi­a­tion of high-in­come group in house­hold sam­ple sur­vey, China’s na­tional in­come gaps are un­der­es­ti­mated to some ex­tent and whether such un­der­es­ti­ma­tion may re­flect the real pic­ture of chang­ing in­come gaps is also a ques­tion7. Based on the lat­est CHIPs data, Luo, Shi and Li (2017) es­ti­mated China’s chang­ing in­come gaps dur­ing 2007- 2013 and the re­sult shows a down­ward trend of Gini co­ef­fi­cient. If the de­vi­a­tion in high-in­come group sam­ples is cor­rected, Gini co­ef­fi­cient will in­crease. More im­por­tantly, we can­not over-in­ter­pret the slight re­duc­tion of in­come gaps in the short run, still less should we con­sider it as the be­gin­ning of a long-term trend. In gen­eral, cur­rent in­come gaps in China are the high­est in six decades. Given the un­der­es­ti­ma­tion, China’s na­tional Gini co­ef­fi­cient should be no less than 0.58.

3. Eco­nomic Tran­si­tion and In­come Dis­tri­bu­tion

China’s in­come dis­tri­bu­tion pat­tern is largely shaped by its eco­nomic tran­si­tion - such an in­flu­ence is man­i­fested in both the mech­a­nism and re­sult of in­come dis­tri­bu­tion. Specif­i­cally, as China moved from the planned econ­omy to a mar­ket-based one, its highly cen­tral­ized in­come dis­tri­bu­tion sys­tem be­came de­cen­tral­ized. In­come dis­tri­bu­tion was also trans­formed by the re­form to di­ver­sify the own­er­ship struc­ture of en­ter­prises - re­form that also trans­formed in­come gaps for en­ter­prises within the same sec­tor. Th­ese re­sults are all at­trib­ut­able to the dif­fer­ent in­come de­ter­mi­na­tion and dis­tri­bu­tion sys­tems fol­lowed by sec­tors with dif­fer­ent own­er­ship sys­tems. An­other in­flu­enc­ing fac­tor is for­eign trade and in­vest­ment. For­eign and joint-stock com­pa­nies of­fered high wages to at­tract and re­tain tal­ents, which also con­trib­uted to widen­ing in­come gaps be­tween for­eign and do­mes­tic en­ter­prises. Fur­ther­more, com­pen­sa­tion re­form in the pub­lic sec­tor also af­fected in­come dis­tri­bu­tion. SOEs widened in­come gaps not only be­tween the man­age­ment and or­di­nary em­ploy­ees but among em­ploy­ees as well.

Un­der mar­ket- based in­come dis­tri­bu­tion mech­a­nism, the in­come of each em­ployee is jointly de­ter­mined by the mar­ket and the em­ployer. The av­er­age in­come level of peo­ple with the same com­pe­tence and skills is de­ter­mined by mar­ket sup­ply and de­mand ( equi­lib­rium wage). Real com­pen­sa­tion is de­ter­mined by em­ploy­ers ac­cord­ing to the con­tri­bu­tion of em­ploy­ees. Mar­ket­based dis­tri­bu­tion mech­a­nism also pro­vides re­turn to pro­duc­tion fac­tors other than la­bor. Ma­te­rial cap­i­tal, hu­man cap­i­tal, man­age­ment com­pe­tence, in­no­va­tive con­cepts and cre­ativ­ity will all re­ceive com­pen­sa­tion un­der the dis­tri­bu­tion mech­a­nism at mi­cro-level. Mar­ket-based in­come dis­tri­bu­tion also al­lows risk and op­por­tu­nity to re­ceive re­turn. The di­ver­sity of in­come de­ter­mi­na­tion en­ti­ties and fac­tors has trans­formed in­come de­ter­mi­na­tion mech­a­nism, mak­ing widen­ing in­come gaps in­evitable.

Own­er­ship di­ver­si­fi­ca­tion not only trans­formed in­come dis­tri­bu­tion but led to widen­ing in­come gaps as well. If SOE re­form is ap­pro­pri­ate, chang­ing own­er­ship struc­ture will only lead to widen­ing in­come gaps within a sec­tor. Oth­er­wise, in­ap­pro­pri­ate re­form will lead to widen­ing in­come gaps both within a sec­tor and be­tween sec­tors of dif­fer­ent own­er­ship. While re­form re­duced the size and head­count of SOEs, large SOEs en­hanced their mo­nop­o­lis­tic po­si­tion and turned their mo­nop­o­lis­tic prof­its into ex­cess com­pen­sa­tion for em­ploy­ees and se­nior man­age­ment. This not only caused ris­ing wage in­come gaps be­tween sec­tors but led to un­fair in­come dis­tri­bu­tion as well (Zhao, Li and Li, 1999).

Open­ing-up pro­vides a key driver of China’s eco­nomic growth by in­creas­ing em­ploy­ment and ab­sorb­ing sur­plus la­bor, par­tic­u­larly ru­ral sur­plus la­bor. This process helps ru­ral res­i­dents in­crease their in­come and nar­row ur­ban-ru­ral in­come gaps. With greater de­mand for skilled and ed­u­cated work­force, for­eign-funded en­ter­prises will also in­crease re­turn to hu­man cap­i­tal. Given the ex­is­tence of ru­ral sur­plus la­bor in China, for­eign cap­i­tal also has an ef­fect on in­creas­ing in­come gaps. The over­all ef­fect of for­eign trade and in­vest­ment also re­quires care­ful analysis.

The in­come dis­tri­bu­tion mech­a­nism of pub­lic sec­tor, given its large share in to­tal em­ploy­ment, di­rectly or in­di­rectly in­flu­ences over­all in­come dis­tri­bu­tion pat­tern in China. Pub­lic sec­tor in­cludes gov­ern­ment agen­cies, non-profit in­sti­tu­tions and SOEs. There­fore, in­come dis­tri­bu­tion mech­a­nisms in China’s pub­lic sec­tor are de­cen­tral­ized but also sub­ject to cen­tral con­trol to dif­fer­ent de­grees. While de­cen­tral­iza­tion led to widen­ing in­come gaps, cen­tral­ized com­pen­sa­tion sys­tem also re­sulted in in­come in­equal­ity in some re­spects.

4. Cre­ate a Fair In­come Dis­tri­bu­tion Sys­tem

In­come dis­tri­bu­tion in­equal­i­ties have ex­isted in China and showed no sign of abate­ment over the years. But in the re­cent few years, some im­prove­ments have oc­curred as a re­sult of in­come dis­tri­bu­tion

re­form and anti-cor­rup­tion cam­paign.

First, sig­nif­i­cant in­come gaps still ex­ist be­tween ur­ban and ru­ral ar­eas. Ac­cord­ing to NBS data, ur­ban-ru­ral in­come gaps no­tice­ably in­creased from 2000-2009 with ur­ban and ru­ral house­hold in­come ra­tio up from 2.78 times to 3.33 times, reach­ing the high­est level in 2009 (see Fig­ure 4). After­wards, ur­ban- ru­ral in­come gaps in­creased slightly and this process lasted for eight years. The dif­fer­ence dropped to 3 times in 2013 and fur­ther de­creased in 20169. But com­pared with the early stage of re­form and open­ing-up, cur­rent ur­ban-ru­ral in­come gaps are still rather high. How did ur­ban-ru­ral in­come gaps oc­cur? There are both his­tor­i­cal and in­sti­tu­tional rea­sons. In the planned econ­omy, the Chi­nese gov­ern­ment adopted dif­fer­en­ti­ated so­cio-eco­nomic sys­tems and poli­cies be­tween ur­ban and ru­ral ar­eas to fi­nance for in­dus­trial devel­op­ment at the ex­pense of farm­ers’ in­ter­ests (Lin, Cai and Li, 1999). Ur­ban and ru­ral di­vide was man­i­fested in back­ward so­cial se­cu­rity and pub­lic ser­vices in the coun­try­side as com­pared with cities and slow in­come growth of farm­ers as com­pared with ur­ban res­i­dents (Sic­u­lar, 2008; Cai and Yang, 2010). Af­ter re­form and open­ing-up, ur­ban-ru­ral di­vide left over from the planned econ­omy per­sisted, so did the hukou sys­tem that im­peded ru­ral la­bor and pop­u­la­tion mi­gra­tion. The coun­try­side re­mained rel­a­tively back­ward in its so­cio-eco­nomic devel­op­ment. In this sense, tremen­dous ur­ban-ru­ral in­come gaps re­sulted from an un­fair devel­op­ment strat­egy. It stemmed from an un­fair so­cioe­co­nomic sys­tem and un­fair pub­lic ser­vice poli­cies that led to se­ri­ous in­come in­equal­i­ties.

Sec­ond, em­ploy­ees in mo­nop­o­lis­tic sec­tors are over­paid. In the early 1990s, in­come gaps be­tween sec­tors were in­signif­i­cant and av­er­age com­pen­sa­tion in the high­est paid sec­tors was only 30% to 40% above av­er­age com­pen­sa­tion. Since the 2000s, wage level has in­creased rapidly in some mo­nop­o­lis­tic sec­tors, where av­er­age com­pen­sa­tion far ex­ceeds the na­tional av­er­age. For in­stance, av­er­age com­pen­sa­tion in fi­nan­cial sec­tor ex­ceeded av­er­age com­pen­sa­tion for ur­ban em­ploy­ees by 94% in 2011. Av­er­age com­pen­sa­tion of Bei­jing’s fi­nan­cial in­dus­try was 2.3 times higher than av­er­age com­pen­sa­tion for ur­ban em­ploy­ees in Bei­jing and over three times higher than man­u­fac­tur­ing sec­tor in Bei­jing. Ac­cord­ing to rel­e­vant stud­ies, most of th­ese high-in­come sec­tors are mo­nop­o­lis­tic sec­tors, whose high

in­come largely stems from mo­nop­o­lis­tic prof­its (Yue et al., 2010). For some mo­nop­o­lis­tic sec­tors, their high in­come is also as­so­ci­ated with surg­ing pay to cor­po­rate ex­ec­u­tives. Ac­cord­ing to a sur­vey on the pay to ex­ec­u­tives of 197 large SOEs in 2011, 35% of SOEs paid an av­er­age com­pen­sa­tion of 500,000-1 mil­lion yuan for their top three ex­ec­u­tives, 8.12% of SOEs paid an av­er­age com­pen­sa­tion of 1 bil­lion-1.5 mil­lion yuan, 5.58% of SOEs paid an av­er­age com­pen­sa­tion of 1.5 mil­lion yuan-2 mil­lion yuan and 13.7% of SOEs paid an av­er­age com­pen­sa­tion of over 2 mil­lion yuan (China In­sti­tute for In­come Dis­tri­bu­tion, Bei­jing Nor­mal Univer­sity, 2012).

An­other prob­lem fac­ing Chi­nese so­ci­ety is cor­rup­tion and as­so­ci­ated un­fair in­come dis­tri­bu­tion. For­tu­nately, the spread of cor­rup­tion has been greatly con­tained in re­cent few years. Be­fore an ef­fec­tive an­ti­cor­rup­tion sys­tem is cre­ated, cor­rup­tion re­mains a huge chal­lenge to Chi­nese so­ci­ety. With­out doubt, cor­rup­tion mainly oc­curs among medium and high-in­come priv­i­leged group and will in­crease in­come gaps at large. Cor­rup­tion also breeds rent- seek­ing that widens in­come gaps, as proven by rel­e­vant em­pir­i­cal stud­ies10. By break­ing the rules of in­come dis­tri­bu­tion, cor­rup­tion gives rise to pub­lic re­sent­ment and con­fi­dence cri­sis and spawns the risks of so­cial cri­sis.

As shown in ex­ten­sive lit­er­a­ture, ex­ces­sive in­come in­equal­i­ties are harm­ful to a coun­try’s eco­nomic devel­op­ment and so­cial sta­bil­ity (Ace­moglu, 1997; Alesina and Ro­drik, 1994, 1996; Mur­phy, Sh­leifer and Vishny, 1989; Perotti, 1993, 1996). Ex­ces­sive in­come in­equal­i­ties will lead to in­suf­fi­cient con­sumer de­mand and in­ef­fi­ciency that take a toll on eco­nomic growth mo­men­tum, pre­vent poor and low-in­come peo­ple from ac­cu­mu­lat­ing hu­man cap­i­tal and es­cap­ing poverty trap, un­der­mine mu­tual trust among so­cial mem­bers and trig­ger so­cial con­flicts. More im­por­tantly, se­ri­ous in­come in­equal­i­ties will cause pub­lic pol­icy and re­dis­tri­bu­tion pol­icy to fail (Van­de­moortele, 2013), mak­ing it hard to cre­ate a so­cial sys­tem and dis­tri­bu­tion mech­a­nism that pro­vide equal op­por­tu­ni­ties.

Over the years, China’s so­cio-eco­nomic sta­bil­ity has been main­tained de­spite widen­ing in­come gaps largely thanks to rapid eco­nomic growth and low un­em­ploy­ment. While in­come gaps in­creased, low­in­come peo­ple be­came bet­ter off with in­creased in­come and more peo­ple were lifted out of poverty. As China’s econ­omy en­ters into the new nor­mal, growth de­cel­er­a­tion be­comes in­evitable. If growth de­cel­er­ates or re­ces­sion kicks in, un­em­ploy­ment, in­come gaps and in­equal­i­ties will take a deep toll on so­cial sta­bil­ity.

It takes a com­pre­hen­sive ap­proach to ad­dress in­come in­equal­i­ties. The gov­ern­ment must in­tro­duce in­come dis­tri­bu­tion and re­dis­tri­bu­tion poli­cies to pre­vent in­come gaps from widen­ing and ad­dress the root cause of in­come in­equal­i­ties.

In pri­mary dis­tri­bu­tion, the share of la­bor com­pen­sa­tion in na­tional in­come con­tin­u­ously de­clined. Dur­ing the decade be­tween 1998 and 2007, in par­tic­u­lar, the share of la­bor com­pen­sa­tion dropped from 53% to less than 40% and stayed at a rel­a­tively low level de­spite some in­crease in the fol­low­ing years11. The gov­ern­ment will face greater chal­lenges in reg­u­lat­ing in­come dis­tri­bu­tion.

Re­solv­ing in­come in­equal­i­ties re­quires ef­forts to ad­just pri­mary dis­tri­bu­tion and re­dis­tri­bu­tion. Re­gard­ing pri­mary dis­tri­bu­tion, the gov­ern­ment has un­shirk­able re­spon­si­bil­i­ties. First, the gov­ern­ment plays an essential role in im­prov­ing mar­ket sys­tems to en­able the de­ci­sive role of mar­ket mech­a­nisms in re­source al­lo­ca­tion. De­spite a well- func­tion­ing com­mod­ity mar­ket, in­dus­try mo­nop­oly, mar­ket dis­tor­tion and ex­ces­sive gov­ern­ment in­ter­ven­tion still ex­ist in China’s pro­duc­tion fac­tor mar­ket. Th­ese im­per­fec­tions have led to in­ef­fi­cien­cies in pro­duc­tion fac­tor al­lo­ca­tion and se­ri­ous in­come in­equal­i­ties. For cap­i­tal mar­kets and espe­cially fi­nan­cial sec­tor, the mo­nop­oly of state cap­i­tal makes it hard for pri­vate cap­i­tal to par­tic­i­pate in fi­nan­cial ac­tiv­i­ties, par­tic­u­larly in highly prof­itable sec­tors and ar­eas. For

em­ploy­ees and ex­ec­u­tives in mo­nop­o­lis­tic sec­tors, their in­come is far above mar­ket av­er­age. China’s la­bor mar­ket is also im­per­fect, as man­i­fested in the seg­re­ga­tion of ur­ban and ru­ral la­bor mar­kets (De­murger et al., 2006), iden­tity dis­crim­i­na­tion as­so­ci­ated with hukou sys­tem, in­flu­ence of fam­ily back­ground, as well as un­equal pay for equal work12. With­out doubt, th­ese prob­lems have led to un­rea­son­able in­come gaps for em­ploy­ees. More prob­lems ex­ist in land mar­ket. To some ex­tent, no real land mar­ket has come into shape in China. Land mar­ket is im­por­tant to farm­ers’ in­ter­ests and helps in­crease their in­come, im­prove ru­ral in­come dis­tri­bu­tion and re­duce in­come gaps. Cre­at­ing an ef­fec­tive land mar­ket in­volves the re­form of land sys­tem, pro­tec­tion of own­er­ship rights, im­prove­ment of land trans­ac­tion mar­ket, and is­sues that may only be re­solved by the gov­ern­ment.

Sec­ond, the role of gov­ern­ment is also essential in cre­at­ing a rea­son­able or­der of pri­mary in­come dis­tri­bu­tion. As shown by the ex­pe­ri­ence of de­vel­oped coun­tries, a com­pen­sa­tion ne­go­ti­a­tion mech­a­nism is essential to en­sur­ing reg­u­lar wage hikes. Chi­nese schol­ars also called for cre­at­ing a com­pen­sa­tion ne­go­ti­a­tion or con­sul­ta­tion mech­a­nism but saw lim­ited progress. An im­por­tant rea­son is the lack of an in­sti­tu­tional en­vi­ron­ment nec­es­sary for such a mech­a­nism. Trade unions are not in­de­pen­dent and can­not rep­re­sent work­ers’ in­ter­ests. Work­ers’ rep­re­sen­ta­tives must rep­re­sent work­ers’ in­ter­ests in or­der for the ne­go­ti­a­tion to bear fruit in fa­vor of work­ers. It is the gov­ern­ment’s re­spon­si­bil­ity to re­form trade unions to make them in­de­pen­dent and rep­re­sent work­ers’ vi­tal in­ter­ests.

Lastly, the gov­ern­ment must also re­form and ad­just sys­tems and poli­cies that lead to in­come in­equal­i­ties. The much an­tic­i­pated hukou re­form and pen­sion re­form are good ex­am­ples. Un­fair hukou and pen­sion sys­tems con­sti­tute both the root causes of ur­ban-ru­ral in­come gaps and the bar­ri­ers to ur­ban­rural in­te­gra­tion. In­stead of nar­row­ing in­come gaps, China’s dif­fer­en­ti­ated pen­sion sys­tem has in fact in­creased in­come gaps. Re­form­ing th­ese sys­tems may only be the re­spon­si­bil­ity of the gov­ern­ment.

When it comes to re­dis­tri­bu­tion, the gov­ern­ment has more work to be done. As men­tioned in the re­port of the 19th CPC Na­tional Congress, “the gov­ern­ment must ful­fill its role of in­come re­dis­tri­bu­tion”. In­deed, the gov­ern­ment has worked a lot to pro­mote in­come re­dis­tri­bu­tion over the past decade with some re­sults (Li and Sic­u­lar, 2014), as man­i­fested in the fol­low­ing as­pects: First, the gov­ern­ment has taken steps to cre­ate a min­i­mum in­come se­cu­rity sys­tem cov­er­ing ur­ban and ru­ral res­i­dents since 2003. By the end of 2014, 70.89 mil­lion peo­ple have ben­e­fited from the min­i­mum in­come se­cu­rity sys­tem, in­clud­ing 18.8 mil­lion ur­ban res­i­dents and 52.09 mil­lion ru­ral res­i­dents13. Min­i­mum in­come se­cu­rity has some ef­fects in al­le­vi­at­ing poverty, rais­ing the in­come of the poor and re­duc­ing in­come gaps. Sec­ond, pro-farmer poli­cies such as grain pro­duc­tion sub­sidy, ru­ral co­op­er­a­tive med­i­cal sys­tem and ru­ral pen­sion sys­tem play an im­por­tant role in in­creas­ing the trans­fer in­come of farm­ers, im­prov­ing their liv­ing stan­dards and nar­row­ing ur­ban-ru­ral in­come gaps. Lastly, re­form to re­scind agri­cul­tural tax greatly in­creased farm­ers’ in­come and helped nar­row in­come gaps within the coun­try­side and be­tween ur­ban and ru­ral ar­eas.

Nev­er­the­less, the Chi­nese gov­ern­ment needs to con­tinue ad­just­ing its in­come re­dis­tri­bu­tion pol­icy to ful­fil its role of in­come re­dis­tri­bu­tion. Ac­cord­ing to in­ter­na­tional com­par­isons con­ducted by some schol­ars, Gini co­ef­fi­cients in some de­vel­oped coun­tries were as high as over 0.5 be­fore in­come re­dis­tri­bu­tion and dropped to about 0.3 af­ter in­come re­dis­tri­bu­tion, down 20 per­cent­age points. Some stud­ies con­ducted sim­i­lar es­ti­ma­tions on the ef­fects of China’s re­dis­tri­bu­tion pol­icy and found that China’s Gini co­ef­fi­cient re­duced by less than five per­cent­age points af­ter the im­ple­men­ta­tion of in­come dis­tri­bu­tion pol­icy (Li, Zhu and Zhan, 2017). The slight de­crease of Gini co­ef­fi­cient sug­gests that China’s in­come re­dis­tri­bu­tion pol­icy achieved lim­ited ef­fect. When it comes to in­come re­dis­tri­bu­tion,

the Chi­nese gov­ern­ment must work on the fol­low­ing fronts:

First, en­hance the role of tax­a­tion in reg­u­lat­ing in­come dis­tri­bu­tion. China’s cur­rent tax sys­tem has a lim­ited ef­fect in reg­u­lat­ing in­come dis­tri­bu­tion. Tax struc­ture, for in­stance, is tilted in fa­vor of in­di­rect tax such as VAT that con­trib­utes to in­creas­ing in­come gaps, while the share of di­rect tax such as per­sonal in­come tax that helps nar­row in­come gaps is too small (Nie, Yue; 2012). More­over, per­sonal in­come tax is a salary tax im­posed on salary­men and can­not reg­u­late the in­come of peo­ple with other in­come sources. As Ta­ble 1 shows, per­sonal in­come tax con­trib­uted more to nar­row­ing in­come gaps be­tween ur­ban and ru­ral res­i­dents since 2005 but the ef­fect was lim­ited. In 2009, per­sonal in­come tax only re­duced Gini co­ef­fi­cient be­tween ur­ban and ru­ral res­i­dents by about one per­cent­age point. It is nec­es­sary, there­fore, to ad­just tax struc­ture by in­clud­ing taxes that help reg­u­late in­come dis­tri­bu­tion: among them, prop­erty tax and in­her­i­tance tax are worth con­sid­er­ing. Prop­erty tax will in­crease the share of di­rect tax and al­low the gov­ern­ment to con­di­tion­ally ex­empt cer­tain in­di­rect taxes and in­vig­o­rate en­ter­prises. It will also ef­fec­tively reg­u­late the in­come of high-in­come groups.

Sec­ond, in­crease trans­fer pay­ment to low-in­come and poor peo­ple. China has cre­ated a min­i­mum sub­sis­tence pro­duc­tion sys­tem ( Dibao) cov­er­ing ur­ban and ru­ral ar­eas but the ef­fect of in­come re­dis­tri­bu­tion is in­signif­i­cant (Li and Yang; 2009). Ac­cord­ing to statis­tics of the Min­istry of Civil Af­fairs, more than 60 mil­lion peo­ple re­ceived Dibao re­lief by the end of 2016, in­clud­ing 47 mil­lion ru­ral res­i­dents. Even with Dibao re­lief, there were still about 50 mil­lion poor peo­ple in the coun­try­side. This means that Dibao cov­er­age needs to fur­ther in­crease and that the level of pro­tec­tion re­mains lim­ited for some poverty-stricken ar­eas. Due to lim­ited fis­cal re­sources, some ru­ral lo­cal­i­ties have set very low pro­tec­tion stan­dards, mak­ing Dibao sys­tem in­ef­fec­tive. Fu­ture re­form must con­tin­u­ously raise Dibao stan­dards and max­i­mize its cov­er­age. In ad­di­tion, the types of trans­fer pay­ment in China are lim­ited. For

in­stance, child ed­u­ca­tion sub­sidy (such as child Pro­gresa Pro­gram in Mex­ico) and al­lowance for el­derly per­sons (such as Older Per­son’s Grant in South Africa) are con­sid­ered as im­por­tant means of in­come reg­u­la­tion but are not put on the agenda of the Chi­nese gov­ern­ment. Re­gard­ing trans­fer pay­ment, the gov­ern­ment may con­tin­u­ously in­crease wel­fare pro­grams for spe­cial groups and vul­ner­a­ble groups to nar­row the in­come gaps with other so­cial mem­bers.

Third, im­prove so­cial se­cu­rity sys­tem and nar­row the gaps in the level of pro­tec­tion. To­day, China has ini­tially cre­ated pen­sion se­cu­rity and med­i­cal se­cu­rity sys­tems with univer­sal cov­er­age. But both sys­tems have a com­mon prob­lem: Dif­fer­ent groups are en­ti­tled to dif­fer­ent sys­tems and lev­els of pro­tec­tion (Li, Zhao, Gao; 2013). For in­stance, China’s pen­sion sys­tem is dif­fer­en­ti­ated for pub­lic ser­vants, re­tirees from pub­lic in­sti­tu­tions, en­ter­prise em­ploy­ees and ru­ral res­i­dents. The level of pen­sion varies greatly among th­ese pen­sion sys­tems. Med­i­cal se­cu­rity is also dif­fer­en­ti­ated for pub­lic ser­vants, pub­lic in­sti­tu­tion em­ploy­ees, en­ter­prise em­ploy­ees and ru­ral res­i­dents. The level of pro­tec­tion also varies greatly among th­ese dif­fer­ent sys­tems. In the long run, it is un­sus­tain­able for one type of pro­tec­tion sys­tem to be di­vided into dif­fer­ent grades and lev­els with huge dif­fer­ence in the lev­els of pro­tec­tion for dif­fer­ent groups. It is the gov­ern­ment’s re­spon­si­bil­ity to nar­row the dif­fer­ences in the level of pro­tec­tion.

Fourth, strive to equal­ize pub­lic ser­vices. Much re­mains to be done to ac­com­plish this widely rec­og­nized goal. In ad­di­tion to mar­ket mech­a­nism, the gov­ern­ment should play a greater role in pro­vid­ing pub­lic ser­vices, par­tic­u­larly when it comes to the equal­iza­tion of pub­lic ser­vices.

Lastly, en­hance poverty re­lief and bring hope to the poor. De­spite tremen­dous achieve­ments in poverty al­le­vi­a­tion, there is still a large group of poverty-stricken pop­u­la­tions in China. The gov­ern­ment made huge in­vest­ments on poverty re­lief but re­sults are far from de­sir­able. In many cases, poverty al­le­vi­a­tion funds were not ef­fec­tively uti­lized to help the poor­est peo­ple by en­abling them to take part in eco­nomic devel­op­ment and es­cape poverty. The gov­ern­ment must in­crease the ef­fec­tive­ness of poverty re­lief poli­cies and en­sure the rea­son­able use of poverty re­lief funds.

5. Con­clu­sions

Four decades of eco­nomic tran­si­tion have trans­formed China’s land­scape in ev­ery as­pect, par­tic­u­larly in­come dis­tri­bu­tion. In the first three decades of the re­form and open­ing-up, the “ef­fi­ciency first” strat­egy led to widen­ing in­come gaps in China in all re­spects. In­come gaps kept widen­ing be­tween ur­ban and ru­ral ar­eas, within cities and within the coun­try­side. In­come gaps also widened to dif­fer­ent de­grees be­tween re­gions, in­dus­tries and in­come groups. In­come gaps be­tween high-in­come and low­in­come groups widened more sig­nif­i­cantly. Com­pared with other coun­tries, how­ever, China’s in­come gaps are not a form of po­lar­iza­tion and did not make the poor poorer and the rich richer. Low-in­come groups also saw their in­come in­crease but at a slower pace com­pared with high-in­come groups. The num­ber of poor peo­ple kept fall­ing thanks to rapid eco­nomic growth. This is also the rea­son why China man­aged to main­tain so­cial sta­bil­ity de­spite widen­ing in­come gaps.

Over the past decade, the trend of widen­ing in­come gaps abated in China. Com­pa­ra­ble data sug­gest that house­hold in­come gaps are rel­a­tively sta­ble and some­what re­duced. This change is mainly due to nar­row­ing ur­ban-ru­ral in­come gaps. In par­tic­u­lar, ru­ral house­hold in­come growth out­paced ur­ban house­hold in­come growth since 2010. In­come gaps within cities and the coun­try­side, how­ever, con­tin­ued to ex­pand. There are many de­ter­mi­nants of in­come gaps be­tween ur­ban and ru­ral ar­eas. One of them is China’s pro-coun­try­side and pro-farmer poli­cies im­ple­mented over the past decade.

De­spite an ini­tial abate­ment, in­come gaps re­main high in China and re­quire re­lent­less ef­forts to nar­row. More im­por­tantly, the prob­lem of in­come in­equal­ity still needs to be ad­dressed. Both in­come gaps and in­equal­i­ties can­not be re­solved with­out in­come dis­tri­bu­tion re­form.

Af­ter the 19th CPC Na­tional Congress, the Chi­nese gov­ern­ment will con­tinue to en­hance in­come

dis­tri­bu­tion re­form, nar­row in­come gaps, mit­i­gate in­come in­equal­i­ties, strive to build a fairer so­ci­ety and ul­ti­mately achieve pros­per­ity for all.

Fig­ure 1: Ru­ral Gini Co­ef­fi­cient, 1978-2011Source: NBS China Ru­ral House­hold Sur­vey Year­book for var­i­ous years.

Fig­ure 2: China’s Ur­ban Gini Co­ef­fi­cient, 1978-2011 Source: NBS China Ru­ral House­hold Sur­vey Year­book for var­i­ous years.

Fig­ure 3: China’s Na­tional Gini Co­ef­fi­cient Source: Gini co­ef­fi­cients of 1995-2001 are from Raval­lion and Chen (2007); Gini co­ef­fi­cients of 2003-2015 are from NBS press re­leases in re­cent few years; Gini co­ef­fi­cient of 2002 is from Gustafs­son, Li and Terry (2008).

Fig­ure 4: Change in China’s Ur­ban-Ru­ral In­come Gaps Source: China Sta­tis­ti­cal Year­book.

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