Is China Following a Kuznets Curve?

14 Mar

The theory put forward by Simon Kuznet in 1955 (Kuznet, 1955) argued that as a country develops, the relationship between economic growth and economic inequality within its population will form an inverted U shape. As the economy keeps growing, inequality will initially increase, then level out before decreasing. The cause of this pattern is that initial growth will benefit only a small number of individuals who take advantage of the growing market. After a while the wealth of those individuals will filter down and spread out across the population who can take advantage of the advances in technology, infrastructure, greater investment, and a more skilled workforce (Xiaolu, 2006).

This article looks to explore whether China can be placed on this Kuznets Curve and if so, to analyse where on that curve.

There is a consensus among scholars that equality has rapidly declined in China from fairly high levels in the late 1970s. From 1981 to 2009 China went from being one of the most equal societies in the world with a Gini index1 of 29.1, to one of the least equal at 42.1 (World Bank, 2014) (Wanning and Yingjie, 2013). Inequality has increased because China has moved from an egalitarian planned economy to a market led economy where individuals can gain capital (Ravallion and Chen, 1999).

It would seem that China has intended to undergo a Kuznets Curve as a way of developing, judging by 1980s Communist Party Chairman Deng Xiaoping’s comments that some people should be able to “get rich first” (Gustafsson, 2008). What followed was the well documented explosion of the Chinese economy, averaging around a 10% annual increase in GDP for decades through 2013 (Morrison, 2014).

It is important at this point to mention the dualistic nature of the Chinese population and economy, whereby there exists remarkably heterogeneous urban and rural populations (Yao, Zhang, Hammer 2004). The urban population of China is considerably richer than the rural population and has received the majority of the aforementioned 10% annual GDP increase. An important factor in why the increase in wealth has been restricted to the urban areas are restrictions on rural-urban migration (Gustafsson, 2008), alongside subsidies and guaranteed public sector jobs for those living in urban areas (Naughton, 2007). This has meant only the urban residents have been able to directly benefit from the urban economic growth (Yao, Zhang, Hammer, 2004). For inequality to decrease, the wealth of the urban areas will have to flow into the rural areas.

With wealth focussed in urban areas, it would appear that China is currently at the peak of the inverted U-shaped relationship of the Kuznets Curve (Gustafsson, 2008). Whether the Chinese Government can change their attitude towards inequality and economic development is bound to have a considerable effect on whether China can reduce inequality and undergo the second half of the Kuznets Curve. Since 1993, this has been the case. In 1993, an unrealistically ambitious target was set to take all 80 million people under the poverty line out of poverty by the year 2000 (Park and Wang, 2001). There followed a dramatic decline in poverty between 1993 and 1996 (Naughton, 2007). In 1999, the Western Development Strategy was introduced to lower inequality, enacted in successive 5-year plans from 2001 to 2010 (Wanning and Yingjie, 2013). A milestone in the change in attitude of the Chinese Government towards development and equality was the promotion of a “Xiaokang Society” in the 16th Communist Party Congress in 2002 (Gustafsson, 2008). This was the idea that China should strive for the same level of economic growth that had been experienced over the previous decades, but while also being mindful of equality. The Government are no longer willing to ignore equality in the interest of achieving maximum efficiency in economic growth.

Gustafsson (2008) finds evidence that increase in wealth in one area leads to a spread of wealth into another after a lag period. However, this is only shown to be the case in adjacent provinces, and not across wider areas into the less developed West and Central China.

Despite an equalisation across adjacent provinces, nationwide statistics suggest that these pro-equality policies have not had a positive effect in helping to spread wealth out of the urban areas and into the poorer rural areas. According to World Bank data (2014), the Gini index for China in 1993 was 33.5, which then increased to 42.1 in 2009. Inequality appears to be increasing despite a definite rapid reduction in poverty in the rural areas that is made clear by Naughton (2007) and Wanning and Yingjie (2013).

This continuing increase is Gini index can be partially explained by the West and Central regions falling behind the fast developing East. The Chinese high-speed rail network is an example of how the wealth has spread from highly developed Eastern urban areas to nearby poorer areas, but not to the inland areas of China. High-speed lines have been built between cities in the East which have helped to spread businesses across wider areas and make previously remote cities accessible (Zheng and Kahn, 2013). These lines haven’t however been built further West, so while Eastern cities are growing up together, the Western cities are being left behind.

To conclude, the second leg of the Kuznets Curve is far from guaranteed for the Chinese economy. Kuznets himself did not claim that economic growth will inescapably lead to equality eventually (Kuznets, 1955). There are too many other factors influencing equality for anything to be definite. Xiaolu (2006) predicts that inequality in China will not decrease and that it will continue to increase. China should be wary of allowing inequality to rise too high because, aside from concerns of justice and ethics, excessive inequality can cause inefficiencies. Such inequality may cause instability and grievance, a lack of social cohesion, and a large part of the population to be stuck in a costly cycle of poverty (Gustafsson, 2008). It is possible that the divisions in the Chinese population are too deep to overcome.

Words: 998

1Inequality measure where 0 refers to a perfectly equal society while 100 would represent a society where one person owns 100% of the money.

Gustafsson, B. et al. 2008. Inequality and Public Policy in China. Cambridge University Press.

Kuznet, S. 1955. Economic Growth and Income Inequality. The American Economic Review. Volume 45, No.1.

Morrison, W. 2014. China’s Economic Rise: History, Trends, Challenges and Implications for the United States. Congressional Research Service.

Naughton, B. 2007. The Chinese Economy: Transitions and Growth. MIT Press.

Park, A. Wang, S. 2001. China’s Poverty Statistics. China Economic Review. Vol 12, pp384-398.

Ravallion, M. Chen, S. When Economic Reform is Faster than Statistical Reform: Measuring and Explaining Income Inequality in Rural China. Oxford Bulletin of Economics and Statistics. Vol 61, pp 75-102.

Wanning, S. Yingjie, G. 2013. Unequal China: The Political Economy and Cultural Politics of Inequality. Routledge.

Xiaolu, W. 2006. Income Inequality in China and its Influencing Factors. United Nations University.

Yao, S. Zhang, Z. Hammer, L. 2004. Growing Inequality and Poverty in China. China Economic Review. Elsevier. Vol 15, pp145-163.

Zheng, S. and Kahn, M. 2013. China’s bullet trains facilitate market integration and mitigate the cost of megacity growth. PNAS.

 

Theo Tritton

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