Inequality in China: Recent Trends and Future Prospects

Li Shi(Beijing Normal University, China)

Terry Sicular(University of Western Ontario, Canada)

Introduction

• Economic reforms of 1980s & 1990s brought rapid economic growth

• But accompanied by erosion of social safety net and public goods provision– Institutional reforms: rural collectives and urban

work units no longer provided social welfare and public goods

– Fiscal decline (through mid 1990s)

• Since 2000 under Harmonious Society agenda, China has entered a new policy era– Concerted effort to rebuild, extend social welfare

policies and social programs– Step by step movement towards nationwide,

universal, comprehensive social programs• World Financial Crisis (WFC) has brought new

challenges, new policies aimed at stabilization• But: Social policy agenda has continued

through and since WFC

• Despite shift in policy emphasis from growth to social policy, and despite WFC, overall GDP growth in past decade was rapid

• Size of the economic pie roughly doubled in the 2002-2012 decade

• Questions– What happened to the distribution of the pie?– What happened to trends in inequality and poverty?– What was the impact of the new social policies?

Aim of this talk

• In the spirit of, and following in footsteps of the Social Policy Network

• Provide a broad overview of past and recent trends in inequality and poverty

• Discuss some key recent policies aimed at redistribution and social welfare

• Draw some lessons, provide some food for discussion

Distributional Outcomes in Past Decade: Rising Inequality, Declining Poverty

• Income inequality in China as a whole has risen markedly since 1980s

China’s Gini Coefficient

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55

Chart Title

Sources: Ravallion and Chen (2004), Gustafsson et al. (2008), NBS.

National Inequality

• By 2007-08, Gini coefficient was 0.49– Latest estimate from NBS: 0.47 in 2012

• This level of inequality is moderately high by international standards– Among the top quarter of countries worldwide

ranked by degree of inequality– Near the top in Asia

• Two periods of substantial increase1. Mid-1980s to mid-1990s2. Late 1990s to late 2000s

• Leveling off since WFC• Trends reflect underlying trends in rural and

urban sectors– Through 1990s, both rising inequality within

sectors and widening urban-rural gap– Since 2000, mainly reflects widening urban-rural

gap

Rural Gini Coefficient

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

rural Gini

Source: NBS.

Rural Inequality

• Rural inequality increased in 1980s and 1990s– Partly associated with expansion of unequally distributed

income from off-farm wage employment in rural enterprises• Mid-1990s: increases in farm prices raised rural

incomes, moderated inequality• Late 1990s: inequality resumed its increase• Since 2000: rural inequality stabilized

– Robust growth in income from agriculture– Expansion of migrant employment– Related to policy changes

Urban Gini Coefficient

19781979

19801981

19821983

19841985

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

0.1

0.15

0.2

0.25

0.3

0.35

0.4

urban Gini

Source: NBS.

Urban Inequality

• Increased in 1980s through mid-1990s• Late 1990s: Asian Financial Crisis, enterprise

restructuring moderated urban inequality• Since 2000: some increase, relatively modest

– Associated with incomes from private business and assets and in monopoly industries

– Moderated by expanded urban social programs– Understatement of inequality may increased due to

difficulty of capturing high income groups in surveys

Urban:Rural Income Ratio19

78

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1.00

1.50

2.00

2.50

3.00

3.50

urban/rural income ratio

Source: NBS.

Urban-Rural Income Gap

• Overall, marked increase in urban-rural income ratio has increased markedly– From around 2.0 in 1980s– To well over 3.0 in 2000s

• High by international standards– Bangladesh, India, Indonesia, Malaysia < 2.0– Thailand, Philippines 2.2-2.3– South Africa, Zimbabwe > 3.0

• Changes in national inequality correlated with urban-rural income ratio, especially in recent years

• Can see this visually…

1978

1980

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

1.00

1.50

2.00

2.50

3.00

3.50 urban/rural income ratio

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

20092010

20112012

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55 Chart Titlenational Gini coefficient

• Inequality decompositions tell a similar story• Contribution of urban-rural gap to national

inequality increased in 2000s (Li, Luo, Sicular 2013)– 2002: 43%– 2007: 47%

Poverty

• Although inequality has increased, absolute poverty in China has declined substantially since the 1980s

• This finding confirmed by many studies, regardless of methodology and choice of poverty line

Poverty Incidence, 1978-2011

1978 1985 1990 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

5

10

15

20

25

30

35

old linelow-income linenew line since 2010

Observations

• Major reduction in poverty in 1980s, 1990s• After 2000: remaining poverty more difficult to

solve, but even so poverty reduced further• Poverty reduction continued during WFC• But: Many people remain close to poverty line

– Reflected in the sensitivity of poverty estimates to choice of poverty line

• And: Relative poverty has been stubborn– For relative poverty line of 50% of median income,

poverty rate remained at or above 13 percent in 2002-2007 (Li, Luo & Sicular 2013)

Redistributive Policies

• Rising inequality in 1980s-90s raised concerns about income distribution and social welfare

• Response: the Harmonious Society policy agenda– Concerted policy effort since early 2000s– Wide array of policies, some new, some building on

earlier programs– Step by step development of universal programs

available to eligible individuals and households nationwide

• Elements of the Harmonious Society policy program discussed in paper include– Tax reforms: personal income tax, removal of taxes on

rural households– Minimum living standard guarantee (dibao) program– Urban labor market policies, e.g., minimum wage

regulations, collective bargaining– Easing of restrictions on mobility & migration– Pension and health care programs– Agricultural support programs– Regional development strategy– Poverty alleviation program

• Discuss evidence on the impact of some of these recent policies– In talk discuss a few of these policies; more in the paper– Detailed analysis beyond the scope of this talk;

nevertheless, discuss some informative evidence– Keep in mind that overall distributional outcomes

reflect other policies and macroeconomic trends• Main theme: The impact of recent distributional

policies on inequality and poverty has ben uneven: some have been more effective than others

Tax Reforms: Rural Taxes and Fees

• Historically, rural population has had to pay agricultural taxes

• During 1980s & 1990s, burden of taxes and fees on rural population increased

• E.g., Development Research Center field study of several counties found that in 1997 the tax rate for farmers averaged 12%, and with the tax rate in one county as high as 28% (Chen Xiwen, ed.)

• Structure of these taxes and fees was regressive

• Government undertook to address this problem with a series of policy measures– Elimination of fees on rural households– Abolition of agricultural taxes in 2006– Aim was to ease burden on lower income rural

households

Average tax (fees) rate of different income groups in rural China

(estimates based on CHIP data)

Decile income groups 1988 1995 2002 2007 Lowest 10％ 7.5 13.9 6.2 0.3 Lowest 20％ 6.5 12.0 5.4 0.3 Highest 20％ 4.1 3.4 1.7 0.3 Highest 10％ 3.8 3.0 1.5 0.4 Average 5.0 5.3 2.8 0.3

Impact of these tax changes

• Helped reduce poverty– Analysis by Luo & Sicular (2013) finds that in 2002

taxes and fees paid by poor households were equivalent to 25% of the poverty gap

– After abolition of rural taxes, taxes and fees paid by the poor were close to zero

– Note: some concerns, though, that the policy reduced local fiscal resources for social programs in poor areas

• But: Impact on inequality was mixed– Within rural areas: little impact– Difference between pre- and post-tax rural Gini

coefficient was less than 1% even in mid-1990s– May have moderated national inequality, as it

reduced the urban-rural income gap by about 5%

Tax Reforms: Personal Income Tax

• China began to implement a personal income tax in 1980s

• This tax applied to earnings in urban areas• Tax rates were progressive (5% to 45%)• Threshold was very high, so initially few

people paid income tax, and no impact on income distribution

Ensuing years

• With income growth, number of taxpayers and amount of income tax collected has increased substantially

• This is true despite increases in the minimum threshold over time

• Total personal tax reached 483.7 billion yuan in 2010, with a growth rate of 23% in real terms from 1999 to 2010

Impact of Personal Income Tax on Urban Inequality(source: Li et al. 2011)

Year

Pre-tax Gini coefficients

Post-tax Gini coefficients

Percentage change in the Gini coefficient

1997 0.301 0.296 -1.7% 1998 0.301 0.295 -2.0% 1999 0.297 0.292 -1.7% 2000 0.323 0.317 -1.9% 2001 0.324 0.316 -2.5% 2002 0.325 0.318 -2.2% 2003 0.344 0.336 -2.3% 2004 0.345 0.335 -2.9% 2005 0.352 0.342 -2.8% 2006 0.347 0.337 -2.9% 2007 0.345 0.332 -3.8% 2008 0.363 0.351 -3.3% 2009 0.347 0.335 -3.5%

• Analysis by Li et al. and others finds impact on inequality is minimal– Tax is on individual incomes rather than integrated

tax based on family income and household size– Problems with tax administration and collection

allow higher income groups to avoid taxes– Increases in thresholds exempt too many households

• E.g., after threshold increase in 2011, fewer than 10% of income earners pay income tax

• Without significant reconfiguration, personal income tax not effective mechanism for addressing distributional concerns

Minimum Wage

• Introduction of minimum wage began in 1999• In 2004 the central government issued a

Minimum Wage Regulation, required provincial governments to set and implement minimum wage standards for their cities.

• In practice, minimum wage standards vary among cities and provinces

• In principle, intended to help lower-wage workers

• Few empirical studies have assessed the impact of the minimum wage regulations

• Evidence, however, suggests it has had little impact on inequality

• Problems include:– Incomplete coverage and enforcement: difficulties

implementing minimum wages in the informal sector (Ngok, 2008)

– Applies only to wage earnings, but a substantial portion of urban incomes is non-wage income

– Relatively low minimum wage standard

Minimum wage as a % of the average urban wage(Li and Ye 2012).

.2

.3

.4

.5

.6

1995 2000 2005 2010 year

minimum wage/average wage

• Wage growth has outpaced minimum wage standards

• By 2010, on average, minimum was well below 30% of the average wage

• Therefore, even with increasingly strict enforcement in recent years, likely plays a limited role in reducing urban inequality

Rural-Urban Migration

• Since 1990s and through 2000s easing of restrictions on short-term migration

• Accompanied by rapid growth in number of migrants– 1999: 50 million / 15% of rural labor force– 2006: 130 million / 26% of rural labor force– Sheng (2008)– By 2007, 40+% of rural household participate in

migration (Luo & Sicular 2013)

• All else equal, would expect increased migration to narrow the urban-rural gap, moderate inequality

• Recent studies find that rural households’ earnings from migrant work is quite equally distributed across income groups, and so has moderated inequality within rural areas

• Also, it has contributed to solid growth in rural incomes, so moderating the urban-rural gap

Relationship b/ Poverty and Migration

• Migration also appears to be poverty reducing

• Luo and Sicular (2013)

Type of household Share of rural

population (%) Poverty

headcount (%) Share of poor rural

population (%) 2002 No migrant workers 63.7 28.3 65.6 With migrant workers 36.3 26.1 34.4 2007 No migrant workers 51.6 16.6 61.6 With migrant workers 48.4 11.0 38.4

• In 2002, the poverty rates for migrant and nonmigrant households similar, 26% and 28%

• By 2007, poverty rates had declined both for households with and without migrant earnings, but more so for households with migrant earnings

• These statistics are consistent with a scenario in which migrant work provided a path out of poverty

• Similar results from World Bank study (2009)

Minimum Living Guarantee (dibao) Program

• Urban dibao program began in early 1990s, extended nationwide by early 2000s

• Rural dibao program began later in 1990s, widened in early 2000s, adopted nationwide in 2007

• Basic design: – Localities set minimum income thresholds– Poor households with incomes below the threshold are

eligible– Beneficiary households receive income transfers to

bring them up to or above the threshold

Expansion of Dibao Programs since 2000(numbers of beneficiaries, millions)

• Urban program stabilized at 20+ million after 2002• Rural program stabilized at 50+ million after 2010• Government spending on the programs also grew,

e.g., 2011 rural dibao expenditures 67 billion yuan, or 1250 yuan per recipient

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Urban 4.0 11.7 20.6 22.5 22.1 22.3 22.4 22.7 23.3 23.5 23.1 22.8

Rural 3.0 3.0 4.1 3.7 4.9 8.3 15.9 35.7 43.1 47.6 52.1 53.1

Impact of urban dibaosources: Li and Yang 2009; Chen et al. 2006

• Targeting is fairly effective: benefits mostly go to the urban poor

• Impact on poverty: findings differ– Li and Yang (2009) find the program significantly

reduces poverty—poverty incidence reduced by >40%– Chen et al. (2006) find the impact is small—poverty

incidence declines by less than 10%– More research needed

• Agreement that impact on urban inequality is small– Main reason: the number of beneficiaries is small

relative to total number of low income urban residents

Impact of rural dibao sources: Deng and Li 2010; Luo and Sicular 2013; Golan et al. 2013; World Bank 2010

• Rural dibao program does largely benefit the poor, but there is leakage

• For dibao recipients, the dibao allowance has a noticeable impact, reducing poverty incidence by 21%, the poverty gap by 33% and the squared poverty gap by 38% (Deng & Li)

• Overall impact on rural poverty, however, is small: poverty rate reduced by less than 3%

• Can infer that impact on inequality is minimal

• Reasons for limited impact of rural dibao on poverty and inequality– Coverage is small relative to the total poor and low-

income rural population– Thresholds and funding vary and are lower in poorer

localities– Difficulties in measuring rural incomes and thus targeting– Large scale of program with limited resources for

administration, implementation– Insufficient checks and oversight

Summary/Conclusions

• Ambitious redistributive policy program commendable• Results mixed

– Successful poverty reduction– Inequality continued to rise– Some policies more effective than others

• Of course, these broad outcomes reflect other influences– Macro trends– Other policies and programs with distributional impacts

• Also, must acknowledge that reducing poverty & inequality is hard to do anywhere

Lessons

• Uneven impact of redistributive policies reflects– Problems with effective administration

• Insufficient monitoring, oversight on the ground• Lack of sufficient administrative resources

– Competing interests or goals dilute the impact• Target group is appropriate, but leakage• Programs not well targeted in design: measures benefit not

just the poor, but also middle and higher income groups

– Insufficient or limited coverage• Beneficiaries benefit, but benefits limited• Share of poorer population reached is insufficient

Lessons, cont.

• Aiming at a moving target– For poverty: with growth and development,

relative poverty, not just absolute poverty, an increasing concern

– For inequality: Emergence of new factors and new sources of inequality

• Asset and property ownership an important issue• Role of WFC, as yet unexplored

• Need to constantly review, reshape, and develop new policy approaches

Final message for this audience:

• Senior researchers working on social policy: No rest for the weary!

• Junior researchers interested in social policy: Plenty of opportunities and work ahead!