By Gary Lai
Inequality is a growing problem in China, not only in rural but also in urban parts of the country. People recognise it as a social problem that needs to be addressed. In a 2012 national survey, income inequality was ranked a greater problem than corruption and unemployment.
There are problems associated with the concentration of revenue, wealth, and power, including the creation of too-big-to-fail entities in the economy and the resulting systemic instability, which require market-based solutions along with state intervention.
The history of income inequality in China can be described in two distinct periods: before and after the 2010s. Reforms that started in 1978 have dramatically reduced poverty, yet increased income inequality. Income inequality is steadily rising in urban and rural China, although inequality remains higher in rural areas than in urban areas.
In the meanwhile, China’s Human Development Index,as reported in a new paper by Barry Naughton this year, has improved from the “low human development” of 0.42 in 1980 to the “high human development” level of 0.73 in 2014. As measured by the Gini coefficient, inequality increased from 0.327 to 0.508 from 1980 to 2008, as Macquarie University’s Pundarik Mukhopadhaya reported; rural inequality increased from 0.275 to 0.371, while urban inequality increased from 0.162 to 0.328. Income disparities rose along urban-rural as well as the east-west and the coastal-interior divide.
Thomas Piketty plotted data from the tax records of emerging economies and found that inequality in China increased at an extraordinary rate from 1990 to 2000. From 2000 to 2010, the upper 1%’s share of total national income was 10-11%, less than the 12-14% of India, Indonesia, Britain, and Canada. Moreover, China’s top centile’s share of total income was much lower than the 16-18% held in South Africa, Argentina, and the US.
In the 2010s, the consensus is that income inequality in China has become greater than that in the US. China’s Gini coefficient hovered above 0.5, versus 0.45 in the US in 2010 (Hong Kong’s Gini coefficient in 2016 was 0.539, according to the Census and Statistics Department).
As China’s GDP converges towards the US, inequality is also increasing to its level. As Facundo Alvaredo and his colleagues at the National Bureau of Economic Research found this year. The share of pre-tax income going to the poorest half of the population has decreased to 15%, which is close to the US figure. Ten percent of the wealthiest in China own 70% of private wealth, up from 40% in 1995. The private wealth-income ratio was over 450% in 2015, approaching the US’s 500% and 550-600% in the UK and France.
Despite the meritocratic nature of formal schooling, the IMF found that education is a significant driver of the increase in income inequality in China, alongside structural factors like the rural-urban divide and differences between provinces.
There are different views on how education leads to income inequality. One view presumes an intergenerational transmission of education, the magnification of the advantages gained through education in terms of earnings, and the reinforcement of those economic gains by the formation of barriers to entry into the labour market. Another possibility is through unearned privilege and corruption.
The Chinese government, recognising income inequality as a major social problem, has addressed the issue, and the Hong Kong government should follow. Chongqing’s government integrated the Gini coefficient in its 12th Five-Year Plan by promising to bring it down from 0.42 to 0.35.
China has also increased access to higher education by building universities at an increasing rate, and allowing foreign universities to operate in partnership with domestic schools.
The number of universities in China increased from 1,022 to 2,263 between 2001 and 2011. The government allowed private companies abroad to set up campuses in the country, like the AKC Group, which currently serves 135,000 students in India and other countries.
The Hong Kong government, too, can encourage a stronger private sector presence in higher education, which is currently dominated by public universities with weak ties to privately-run and weakly-connected vocational schools in the city. It should aim to raise spending on education in the direction of the central government, which raised spending on a portfolio of projects that included education from 30% of the budget in 2008 to 36% in 2013.
The Chinese government should continue to monitor the Compulsory Education Law to ensure all citizen have access to lower levels of education. The law requires nine years of compulsory schooling. Children cannot be charged for school, and they cannot work during their compulsory education.
While Hong Kong’s schoolchildren have a high primary and secondary school attainment rate, the government and its various agencies should make sure that all school-aged children complete school and are free from distractions like domestic violence and drugs.
The Chinese government also needs to give secondary school students from rural areas greater access to the sort of National Higher Education Entrance Examination preparation enjoyed by their urban counterparts. Hong Kong’s government, likewise, can sponsor remedial as well as supplementary classes for students from low-income families.
In Shanghai municipality, spending on students in rural areas is only 50-60% of those in urban areas. This is reinforced by the hukou household registration system, which restricts the mobility of rural citizens who might wish to pursue educational, job training or work opportunities in the cities. Ameliorating this situation may require reform, which is necessary if income equality is necessary in a wealthier society.