The Blog of Changes - Duncan Freeman

Achieving a harmonious society was one of the central policy goals of the Chinese Communist Party (CCP) leadership under Hu Jintao and Wen Jiabao. This harmonious society was somewhat ill defined, but one element was the reduction, if not the removal, of the inequalities that have arisen in China since it embarked on economic reform. In the eyes of most observers, including many in China, such efforts have been a failure.

The widening income gap in China is a widely cited proof of this failure. It is a commonplace amongst foreign observers, including journalists as well as more serious analysts, that income gaps in China have been widening. In China this belief is similarly widespread and even the Chinese government appears to subscribe to it.

When China’s National Bureau of Statistics (NBS) for the first time since 2005 earlier this year published figures for its GINI coefficient, the result was widely taken as a confirmation of this growing inequality (The GINI coefficient is a measure of income inequality, usually given as ranging from 0 to 1, or from 0 to 100. The higher the coefficient, the greater the level of income inequality). The figures from the NBS showed that China has a high GINI coefficient, thus a high level of income inequality.

The following chart uses World Bank data to compare the GINI for China with other countries in 2009, the last year in which the World Bank published a GINI index for China. According to the World Bank figures, with a GINI of 42.1 China ranks about in the middle of the chart. (The chart shows two figures for China, one is from the World Bank, the other from the NBS. Interestingly, the NBS figure is higher than that from the World Bank. If nothing else, this confirms the difficulty of measuring income inequality in China and making comparisons using it. Some studies have put the GINI for China significantly higher.)

Chart 1: GINI Index for China and Other Countries in 2009 Source: World Bank, NBS

In international comparisons, based on the World Bank figure, China has greater income inequality than many other developing countries. On the other hand, China is well below major developing economies like Brazil and South Africa and also many Latin American countries, and is similar to other Asian countries such as Malaysia, Thailand and the Philippines. The GINI for China is significantly higher than most major developed countries, except for the US, which are not shown here.

The GINI for China is relatively high, but as the following charts show, this does not tell the whole story. As the chart based on the NBS figures published earlier this year shows, the GINI coefficient was largely stable over the period of the Hu-Wen leadership. It reached a peak in 2008, and then declined to the same level in 2011 as the beginning of the period .

Chart 2: GINI Index for China 2003-2012 Source: NBS

The NBS figures are not the only ones to suggest this. The following chart shows the GINI for China from the World Bank’s World Development Index over the past three decades. At the beginning of the reform period China had a very low GINI reflecting the fact that at the time everyone was more or less poor together. The index even declined in the early reform period, largely because of the boost given to rural incomes in the first half of the 1980s by the initial reforms which focused on the agricultural economy. Subsequently, in the later 1980s and especially during most of the 1990s through to the early 2000s under Jiang Zemin, the GINI index increased as policies and reforms favouring the urban economy were pushed through, urban incomes grew and rural incomes stagnated. More recently, the World Bank figures show the same picture as those from the NBS in the 2000s, a leveling off of the GINI index and a fall in the most recent figure for 2009 over the previous year.

Chart 3: GINI Index for China 1981-2009 Source: World Bank

Should Hu and Wen then be given more credit than is usual for their success in putting China on the road to a harmonious society, first in stabilizing, and then reducing income inequality? Evidence suggests that the most important cause of the increasing GINI in China is the growing gap between rural and urban incomes. One of the policy achievements under Hu and Wen was a massive increase in government support to the rural economy, especially in their later years. This was effected through a wide range of measures to support to rural incomes, as well as increased investment in the rural economy. This has had an impact in raising rural incomes.

Chart 4: Ratio of Urban/Rural Per Capita Incomes 1978-2011 Source: NBS, author’s calculations

The chart above shows the trend for the ratio between per capita urban and rural incomes in China. As with the GINI chart, it shows a rising gap from the mid 1980s and during the 1990s, stabilization in the 2000s, and a decrease in recent years, which appears to confirm the fact that inequality has stabilized and even begun to fall.

Income inequality is a problem in China, but the common assumptions, especially that it has been continuously growing, need to be carefully considered. There are many problems with assuming that the GINI is providing any useful information, or that it is telling us what we think it means. To take a simple example, if a society where everyone earns 10 dollars changes into one where incomes range between 100 and 1000 dollars the GINI coefficient will rise, but does that matter if everyone is at least ten times better off, and if it does matter, how and why? Like their predecessors, the leadership of Xi Jinping and Li Keqiang have made reducing inequality a key policy, but perhaps Hu and Wen should get more credit than they are generally given for reversing the previous trend, and setting China, if not on the path to the elusive harmonious society, at least to a less unequal one.

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