Income Disparity in China-Growing Social Instability Caused by Entrenched Income Stratification-

RIM Dec 2005, No.19

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Income Disparity in China-Growing Social Instability Caused by Entrenched Income Stratification-

Yuji Miura

Summary

China has achieved a massive reduction in its impoverished population. However, regional disparity between urban and rural areas, and between coastal and inland regions have been expanding steadily since the second half of the 1980s, leaving inland rural areas at the bottom of the scale. Disparity between income strata widened throughout the 1990s, spawning the new problem of savings disparity, which has the potential to cause entrenched income stratification.
An international comparison based on the Gini index, which measures inequality in income distribution, shows that China's index has risen rapidly over a short period of time, and that the level of inequality in China is now among the highest in the world. The Great Western Development Strategy was launched with the aim of correcting regional disparity, but its effects have been limited. China will find it difficult to reduce income disparity unless it modifies its existing extensive growth track, which relies mainly on inputs, and adopts an approach that places greater emphasis on distribution.
Fiscal policy has not functioned as a mechanism for income redistribution. The high ratio of indirect taxation and the fact that allocations from the central government are linked to the size of each province's revenues are reflected in widening disparity between income strata and between regions. The personal income tax burden does not necessarily fall heavily on those with high incomes, while the negative progressivity of the agricultural tax systems causes the burden to increase as income decreases. It is possible that regional income disparity will expand further as a result of value added tax reforms, which are expected to begin in earnest soon.

The economic reform and open-door policy has caused regional disparity to expand and spread into disparity between urban and rural areas, and between income strata. However, the expansion of urban-rural disparity and disparity within urban areas in recent years are attributable to systems and policies that are peculiar to China. Increased competition in agriculture following China's admission to WTO membership is one of many factors that are causing the expansion of gaps to accelerate. Unless China takes determined action to correct income disparity, its ability to maintain the size of its market and its growth potential will be placed in jeopardy, and there is a danger that human capital formation will cease to function as the basis for sustainable economic development.

To assess the impact of income disparity on political and social stability, it is necessary to understand the entrenchment of income strata and movement in the subjective poverty line, which is the level at which people perceive themselves to be poor. The reason for the increasing policy emphasis on rural problems in recent years is not rural poverty, but rather the rising level of the subjective poverty line at which people perceive themselves to be poor, as income strata begin to become entrenched. This is the core of China's disparity problem and the real threat to political and social stability.

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