A poverty trap is defined as any “self-reinforcing mechanism which causes poverty to persist.” (Wikipedia 2014)
Income inequality is defined as “the unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of population.”(Investopedia 2014)
Following the implementation of China’s “Open door policy” by Deng Xiaoping in 1978 (Wikipedia 2014) China’s economy underwent a huge surge in economic growth. This is made very evident when we examine some facts and figures. Firstly let us compare China’s gross domestic product (GDP) in two periods; 1980, where the reforms had only just been implemented and 2011, where China is widely recognised as the world’s second largest economy. In 1980 China had a GDP of 202.46bn (USD) and in 2011 China had a GDP of 6988.47bn (USD) a value that is more than thirty four times that of China’s GDP in 1980 and tells us that on average China experienced an average growth rate of approximately 12 per cent per annum in the period between 1980 and 2011. (Guardian 2012). While this rapid economic growth brings with it a large number of benefits, for example; improvements in current living standards and higher employment, it can also lead to a large number of problems, for instance; increase environmental degradation, as is evident in the pollution problems and increases in inequality. This week’s blog will focus on the increasing disparity between China’s rich and poor, and factors that may worsen the inequality.
In order to measure wealth/income inequality in a country we will use the Gini coefficient, which shows us the statistical dispersion of income among a country’s residents. For example a Gini value of 0 represents perfect equality, whereby income is the same throughout the country. On the other hand a value of 1 represents total inequality in that one person controls all of the income and everyone else has nothing. (Wikipedia 2014).
The image above shows the Gini coefficient of national income around the world. (Wikipedia 2014). The lighter colours represent countries with a value closer to zero and therefore have less inequality.
As of 2011 China was reported to have a Gini coefficient of 0.477 (China daily 2012) on its own this value is worthless, however when we compare it to the UK’s figure in 2011 of 0.34 (BBC 2012) we can now get a better perspective of the size of inequality. Combine this comparison with the estimate that inequality in the UK results in a cost of 39bn (GBP) per annum (the Guardian 2014) we can now see that China’s inequality is indeed a real problem. Bear in mind that many experts believe that China’s Gini coefficient value is vastly understated. Inequality is problematic because it threatens to lead to an underclass of labourers with low skill sets and education; this harms the economy in that it prevents the economy from functioning at its full potential. (Harvard business review 2012). In other words resources are wasted, in this instance I am referring to the waste of human capital. This underclass of workers could result in political instability, for instance a workers rebellion; in turn this instability deters foreign investment, which in China is a major component of GDP. Inequality also brings with it a large number of social problems. A large gulf between incomes can lead to higher rates of crime, as those on low incomes become desperate and disgruntled at the income differences.
The image above (Wikipedia 2004) helps to visually display the levels of income inequality, with the general trend being an East-West divide with those areas with access to the sea having a higher income.
However many argue that inequality is not a problem and that a Gini coefficient value of 0 is unrealistic and possibly undesirable. It is arguable that inequality can benefit the economy by acting as an incentive for low income earners to work harder, causing productivity to increase. Another argument is that inequality allows for better allocation of resources, wherein resources are placed under control of people with higher skill sets and are therefore utilised better. Finally, it can be said that inequality occurs naturally, as certain people suit different careers. Put differently in an ideal world everyone would be equal, however in reality this is not the case. For example some people have a higher intellect. This means that wages will be different thereby resulting in inequality. While this counter argument is valid, this mostly applies to small amounts of inequality. Having said this it is quite clear that inequality in China is clearly a significant problem.
If China wants to reduce its inequality there are a number of solutions it can utilise a number of responses; Firstly the government could implement a more progressive tax rate, this is where the more you earn the higher a percentage you are taxed. This method can be considered a double sided approach as the increased tax revenue received from the high income earners can be redistributed to those on low incomes. This means fewer extremes in incomes and therefor a higher level of inequality. However getting such a change implemented would be incredibly difficult, as those on high income levels would without a doubt oppose the change. In addition to that the higher tax rates for the rich may result in lower tax revenues as it causes the rich to move their wealth and businesses abroad, thereby damaging the economy.
Another possible solution is the implementation of an education that focuses more on equity, this allows a more equal opportunity for people, and moves the emphasis away from what quality of education your parents can afford. This therefore helps to break the link between the parent’s income and their child’s future income. In addition to this, a policy that focuses on education is very likely to boost an economy’s potential and productivity. However, there are a number of flaws with this proposed solution. Firstly, it is likely to be very expensive and secondly, any benefits from it will take time to come into play.
The most effective solution however would be a combination of the two mentioned earlier, whereby a gradual increase in a progressive tax rate helps to raise revenue and fund the education reform, while the increase in the tax rate is gradual enough to not deter too many of the rich.
While inequality is problematic China has started to address the problem, this is evident when we look at the Gini values from 2008-2011, with the values descending as the years progress; 0.491, 0.49, 0.481 and 0.477 respectively. (China Daily 2013). However as was stated earlier such values should always be seen sceptically. (The Economist 2013). However if accurate it can be said that China is dealing with the problem, however it can also be said that its approach is too gradual, in that any value over 0.40 means that inequality is considered to be a cause of social unrest. (Wikipedia 2014).
Word count including Harvard referencing 1154
The Guardian 2012, China GDP: how it has changed since 1980 http://www.theguardian.com/news/datablog/2012/mar/23/china-gdp-since-1980
Investopedia 2014, definition of income inequalityhttp://www.investopedia.com/terms/i/income-inequality.asp
Wikipedia 2014, Poverty trap http://en.wikipedia.org/wiki/Poverty_trap
Wikipedia 2014, Gini coefficient http://en.wikipedia.org/wiki/Gini_coefficient#Features_of_Gini_coefficient
Harvard Business review 2012, How much inequality is necessary for growth? http://hbr.org/2012/01/how-much-inequality-is-necessary-for-growth/ar/1
China daily 2012, China Gini coefficient http://www.chinadaily.com.cn/bizchina/2013-01/18/content_16140018.htm
BBC 2012, Britain’s recession: Harsh but fair http://www.bbc.co.uk/news/business-19984877
The Guardian 2014, Inequality ‘costs Britain £39bn a year’ http://www.theguardian.com/society/2014/mar/16/inequality-costs-uk-billions
The economist 2013, Gini out of the bottle http://www.economist.com/news/china/21570749-gini-out-bottle