Income Distribution During System Reform and Economic Development in China - Literature review Example

Poverty and inequality Background China has maintained a remarkable economic growth path its ice-breaking reform in the 1970s. For the past three decades, the country maintained a nearly two-digit average growth rate, and this has made it the fastest-growing major economy in the world (Burianek, 2009). Moreover, such a stable economy has helped China lift hundreds of people out of incriminating poverty. Records from the World Bank indicate that the poverty rate in China reduced from a threatening 85% back in 1981, to a promising 16% in 2005 (Burianek, 2009).Nonetheless, despite the dramatic improvements in the average standards of living of the Chinese citizens, income equality between the urban and rural areas is still significant and expanding. Truthfully, among the transition and developing nations, China is considered to have the greatest and most visible challenges relating to urban-rural inequality. Income equality and economic growth are two important objectives that governments across the world should regard with much esteem. China has achieved successfully with the objective of fast economic growth but has failed relatively to achieve the income equality objective. China has also achieved the best record in history in terms of household income and growth in GDP. The period between 1978 and 2012 marked a remarkable span of the history of China, where the household income in the urban and rural areas grew by 8 percent and the GDP by nearly 10 percent. Towards the end of 2012, the GDP per capita was recorded to be close $5500, elevating China up the ladders as one of the upper-middle income countries (Lin, 2012). The rate of economic growth in the developing and transitioning nations usually has a positive relationship with that of income inequality. However, the trend of income inequality ought to be looked at separately for rural and urban China. Similar to other developing countries, China has implemented specific social and economic policies for the rural and urban areas. The policies consist of urban-biased features that have contributed immensely towards the significant differences between the rural and urban households in terms of their economic level, human development, and accessibility of public services. The income gap between the rural and urban households has shown a rising trend within the last decade. For instance, the ratio of urban to rural household income per capita rose to 3.12 in 2011 from 1.8 back in 1996 in nominal terms (Lin, 2012). The continuous rise in the rate of income inequality is likely to lead to cases of social instability in China. Hence, the Chinese government has recently emphasized on the benefits of building a harmonious society and creating a balanced social and social development. The essay is a cause analysis of the large gap in income in the Chinese urban and rural areas. Literature review Income inequality has been under scrutiny in China since the early 1990s. The widening inequality has been discussed by many scholars at different levels. Some have discussed it within the rural areas, others in the urban, others in the urban and rural areas, and others in the regional or national level. Most of the studies concluded that the income inequality within the rural and urban areas has gone incredibly up especially during the transition period. Despite the upward trend, there have been slight declines in the rate of poverty over time. Yang and Zhou argue that urban-rural inequality was initially narrowed due to the success of the policies that aimed at reducing the rate of rural-urban division (Wu, 2004). Such division occurred due to increases in the prices of procurement for agricultural products, liberalization of local markets, adoption of household responsibility systems, and the relaxation of the restrictions on the labor mobility to the cities. However, the income gap later widened again after 1985 due to the higher labor productivity in the urban industries owned by the state than in the agricultural sector and the rural industries in China (Wu, 2004). Several scholars researched on the overall income inequality in China and credited it to inequality between the urban and rural areas. Through his research, Yang found that the urban-rural inequality contributed to about 80 percent of the overall inequality. Yang conducted his research by analyzing the Gini ratio and generalized the entropy measures in two provinces between 1986 and 1994 (Liu, Chang, & Yang, 2011). On the other hand, (Wu, 2004)analyzed the income distribution from the year 1985 to 2001, and concluded that the urban-rural gap played an important role in the enlargement of income inequality among other factors. The significance of the urban-rural income inequality has also been analyzed and discussed by scholars such as Heshmati (2004), Lin et al. (2002), and Yao et al. (2005) among others. Apart from these scholars, numerous studies have also been carried out to find the underlying factors that have resulted in an increase in income inequality. One common factor that has been proposed, tested, and examined frequently by most scholars is the political strategies that favored the heavy-industry during the early stage and the manufacturing sectors in the later years (Liu, Chang, & Yang, 2011). The growth in the urban areas was majorly stimulated by preferential policies, investments, and financial supports. Thus, the agricultural industry was lagged behind and instead used as a stepping stone for the development of other sectors. Furthermore, the agricultural surplus was extracted for the urban-based subsidies and urban capital accumulation. The main enforcement mechanism largely deteriorated the level of income for the rural residents through the suppression of food prices, control of the rate of agricultural production and procurement, and rural-urban migration restrictions. Another factor that is thought to have led to an increase in the level of income inequality is the development of financial sectors. A study by Zhang (2004) on the ratio of bank credit over the GDP financial intermediary found out that the evolution of the GDP enlarged the urban-rural income gap from 1978 to 1998 significantly (Chen & Zhou, 2004). However, Yao (2005) found both positive and negative conclusions on the causality between the efficiency of financial development, and the urban-rural income gap (Chen & Zhou, 2004). Also, the huge difference in income inequality might have developed from the progress of urbanization through the invasion of people from the rural areas into the cities. According to Murphy (2002), rural-urban migration allowed the flow of people, capital, skills, information, and commodities, thereby contributing immensely to the urban-rural income. Also, Li (2009) analyzed data from a 1995 survey and concluded that rural-urban migration contributed to the growth of rural income (Burianek, 2009). Some scholars also addressed the income inequality issue from a human capital perspective. For instance, Guo (2005) tried using the endogenous growth theory to analyze the urban-rural income gap in China. He observed and analyzed basic data such as birth rate, human capital, and interaction to deduce his conclusion (Lin, Edvinsson, Chen, & Beding, 2012). His revelations proved that Malthusian homeostasis resulted in a high birth rate in rural areas. Also, a low rate of accumulation of human capital decisively impeded the growth of the income received by peasants. He also concluded that the urban sectors in China had entered into an equilibrated stage of sustainable growth, and were free from the paradigm of high human capital accumulation and low birth rate. China’s opening up to the urban-rural income inequality was quite far from conclusive. A study by Wei and Yi (2001) in over 100 Chia cities found out that the opening up reform narrowed the rural-urban income gap (Lin, Edvinsson, Chen, & Beding, 2012). Correspondingly, Hertel and Fan (2006) reasoned that the impact of reforms in the product and factor market reduced the rural-urban income inequality extensively. Quite the reverse, Jeanneney and Hua (2008) studied the effects of the exchange rate policy on the urban-rural per capita income and concluded that real appreciation weakened the inequality level, whereas depreciation strengthened inequality (Liu, Zhang, & Zhang, 2010). Also, Wei and Zhao (2012) used provincial panel data recorded from 1978 to 2007 and proved that international trade played a critical role in increasing the urban-rural gap through its effects on wage and employment. To sum up, all the existing studies on urban-rural income inequality focus more on the factors that are related to economic transformation during the 1980s and 1990s. Instead of examining income inequality using the factors studied by previous scholars, this essay looks at the issue from the perspective of individual characteristics. Such characteristics can be the education level, marital status, occupation, and registration type among other related factors. The essay highlights how such individual characteristics affect the income gap in China using household survey data recorded from 1995 to 2002. The lifespan considered in this paper has not been studied fully yet, and provides room for a current analysis on the state of the urban-rural income inequality in China. Data and issue analysis The data used in this analysis is derived from two rounds of the CASS Household Income Survey that was conducted in 1996 and 2003. The data is suitable for the reference periods of 1995 and 2002. The surveys were conducted under the stewardship of a team of scholars and researchers at the Chinese Academy of research and the Institute of Economics. The data was collected using survey instruments that were designed by the research team. The essay points out some of the main features of the set of data and discusses the aspects that are more relevant to the analysis of income inequality in China. From the data set, it is evident that regional coverage changed over the two years covered by the survey. Thus, in order to ensure comparability between the results of the two years, the essay uses a subsample. The essay also assumes that data for each location was present in the survey data for the two years under investigation. The rural sample covers Beijing, Anhui, Gansu, Guizhou, Guangdong, Henan, Hebei, Hunan, Hubei, Jiansu among other nine locations. The urban sample covers Beijing, Anhui, Gansu, Henan, Guangdong, Jiangsu, Hubei, Shanxi, Liaoning, Sichuan, and Yunnan. From the data set, the unadjusted prices of the rural income ratio aresubstantial, and close to or exceeding 3 in the two years. The prices are considered high with respect to international standards. Similar ratios for other Asian countries in the same period fall between 1.3 and 1.8, with Philippines recording a higher outlier at 2.17. China’s ratio exceeds that in other countries at the same time in history. Even though the ratios recorded for other countries include housing components of income, they are not adjusted to cover for spatial differences. The PPP columns on the data sets give income that is adjusted to control for the spatial differences in the cost of living. The Yuan units recorded in these columns reflect on the purchasing price parity of the national average consumer prices over the urban and rural areas. The incomes after adjustment for the spatial price differences are often referred to as purchasing price parity incomes. The adjustments for the spatial price differences reduce the relative gap substantially since the costs of living are often higher in the urban areas. Ideally, the estimated cost of living prices in the urban areas were about 36 percent higher than that of the rural areas in 1995. Also, the prices were 39 percent higher in 2002. With the deflation of spatial prices, the relative gap declined markedly from 3.1 to 2.2 in 1995 as well as from 3.2 to 2.3 in 2002. However, the ratios recorded for China for this data set were relatively high compared to the required international standards. A comparison of the PPP figures in the constant prices reveals that China’s income gap has increased over time. Between the two years, the adjusted relative gap rose by 1 percent. However, the absolute gap increased by about 64 percent from 2360 to 3867 in 1995 constant prices. Also, the urban-rural gap in China is not uniform in all its regions. For instance, the relative gap is considered to be high in the West, where the unadjusted ratios exceeded 4, as compared to about 3 and less recorded for the center and east. Adjusting for the spatial price differences reduces the relative gaps immensely. The urban/rural differential in the cost of living are recorded to be high in the west, and the PPP adjustments narrow the gap more in the west than anywhere else. From Table 2 below, it is also evident that the relative gap in 1995-2002 rose in the west and center but deteriorated in the east. The trends recorded in the west and center indicates that those parts of China with a more concentration level of poverty are falling farther behind in relative terms. The trends recorded in the East, which is China’s most developed region indicate that perhaps that urban-rural gap could narrow or stabilize easily. Suggestion and conclusion The urban-rural income inequality is considered a serious and persistent problem that affects rapid development within the Chinese economy. Certainly, there is a high risk of oversimplification in the attempt, to summarize the key finding and apply it to China as a whole. Ideally, only a few of the provinces were samples and the underlying data used is based on a few household surveys in each wave. However, the results can still represent the situation of the urban-rural income inequality for a greater part of China. The assumption is made in the light that provinces do not develop at an extreme fast speed like that of Beijing or Shanghai. In regard to the findings from data analysis, the essay provides policy suggestions that intend to narrow the existing urban-rural income gap. The policy recommendations cover the planned urbanization process, investment in development infrastructures, and more investment in the education sector for the rural areas. It is also obvious that the allocation of resources is always biased towards the urban areas during the rapid development process. These factors together with low productive agricultural sector and service industry sectors leads to inequality, divergence, and growing inequality between and within the urban and rural sectors. First, the Chinese government ought to develop the agricultural sector in the rural areas (Su & Muennig, 2013). Farming activities have low productivity due to the outdated technology used in the distribution system. Family farms are often vulnerable to the effects of natural disasters, and the government should provide more financial and technical supports to rural farmers to counter these. Second, economic policies should focus more on the development activities in rural areas. Such developments could include investments in enlarging the TVEs and developing new ones locally or in the cities and towns that are located within community distance. Above all, the rural educational system should be transformed to provide similar opportunities for the rural students as available in the urban areas (Su & Muennig, 2013). The equality of the rural schools must be upgraded to a level equal to that of urban schools. Another important issue is the access of rural students to senior high school as well as tertiary education. Also, the long-standing university exam system, and the skyrocketing fees and tuition should be regulated to allow the rural students and equal opportunity for education. If income inequality is to be equalized in China, the differences in opportunities and schooling must be eliminated. References Burianek, I. E. (2009). China in the 1970s - From Cultural Revolution to Emerging World Economy. German: München GRIN Verlag GmbH. Chen, Z., & Zhou, Y. (2004). Income distribution during system reform and economic development in China. New York: Nova Science Publishers. Lin, C. Y.-Y., Edvinsson, L., Chen, J., & Beding, T. (2012). National Intellectual Capital and the Financial Crisis in China, Hong Kong, Singapore, and Taiwan. Dordrecht: Springer. Lin, J. Y. (2012). Demystifying the Chinese economy. Cambridge: Cambridge University Press. Liu, C., Chang, J., & Yang, A. (2011). Information computing and applications : second international conference, ICICA 2011, Qinhuangdao, China, October 28-31, 2011 : proceedings. Berlin; New York: Springer. Liu, G. G., Zhang, S., & Zhang, Z. (2010). Investing in human capital for economic development in China. Singapore; Hanckensack, NJ: World Scientific. Su, C., & Muennig, P. (2013). Introducing global health : practice, policy, and solutions. San Francisco, Calif: Jossey-Bass. Wu, Y. (2004). Chinas Economic Growth: A Miracle with Chinese Characteristics. New York: Routledge. Read More