Introduction 1.1
Over the past 50 years humanity has transitioned through a phase of great transformation in the form of technological advancement and globalization. Through these changes, societal differences have become apparent, and through their study insightful results and conclusions have been drawn. The knowledge gained from these studies now can be applied to the topic of economic inequality, particularly in the discussion of economic inequality in China as examined by this paper. The aim of this paper is to highlight evidence concerning economic inequality in China, through explanation of the components of economic inequality, analysis of Gini coefficients and the review of economic aspects such as efficiency, taxation and deadweight loss. Furthermore questions such as “to what extent do we need economic inequality?” and “how policies can be designed to reduce economic inequality?” as well as the advantages and disadvantages of economic inequality are explored.
The constituents of economic inequality 1.2
Economic inequality is a relatively broad topic, which can be investigated by analyzing a variety of economic metrics that can aid in the comprehension of the economic landscape of an economic entity. Among these economic metrics there are two factors which play a significant role in defining economic inequality: Income inequality and wealth inequality. Income inequality refers to the degree to which income is spread unequally among the population. Wealth inequality refers to the extent that assets are distributed unequally, assets in this context usually refer to cash in savings, investments in stocks and bonds, real estate properties owned and cars owned among others ("How is Economic Inequality Defined?", n.d.).
China’s economic growth over the past years has led to an increase in income inequality as the country has become increasingly industrialized. One of the main causes for the emergent income inequality is related to the disparity in quality of education received by Chinese citizens. As the country became industrialized, the demand for workers with competent skills rose, resulting in a significant increase in Chinese university graduates in recent years. China’s educational disparity issue lies in the fact that among all its urban and rural regions there are differing income levels and university education tends to be reserved for more wealthy citizens. Essentially in China the rich get smarter while the less well-off lag behind. Shanghai – the country’s biggest city and financial hub – has approximately 70% of its college age population attending education beyond high school levels. Comparing this to Guangxi, an autonomous region bordering Vietnam which mainly exports agricultural and mineral products, which only has 19% of its college age population enrolled in education above high school levels. It starts to become clear why income inequality is a real problem in China, generally higher education is linked to obtaining a higher income and it is worth keeping in mind that China has many provinces where the trend described above shows itself repeatedly creating the large disparity
(Trivedi, 2018).
When it comes to wealth inequality, China’s bottom 40% of the population own 2.57% of the total wealth of the country. Despite this, it is not necessarily true that all individuals who are members of the bottom 40% have a particularly low income. In contrast, China’s top 1% of the population owns 24.25% of the country’s total wealth. To add to the comparison, China’s top 20% of the population collectively own 79.25% of the total wealth (Tan, Zeng, & Zhu, 2017).
The Gini coefficient of China 1.3
Another metric that can be used to demonstrate the levels of economic inequality is the Gini coefficient. The Gini coefficient measures the inequality of a distribution, in an economics context the two variables measured against each other are the cumulative share of people from lowest to highest incomes and cumulative share of income earned. The Gini coefficient’s values range from 0 to 100 which are also expressed as percentages, values closer to 100 indicate greater income distribution inequality. China’s Gini coefficient has been trending downwards in the last decade from highs of 0.491 to 0.465 in recent measurements made in 2016 (“CEIC”, n.d.). On paper this is a positive development – as inequality is decreasing according to the metric – however the warning level set by the United Nations is 40 or 0.4 percent meaning that China is above this threshold ("China: Gini coefficient 2016", n.d.).
China’s implemented taxation system 1.4
From a taxation standpoint, China implements a tax system which enables 21st century socialist market economy needs to be fully met. On the income tax front, there is both corporate and individual income tax. Individual income tax in particular is based on a progressive tax rate, incomes from wages and salaries are progressively taxed from 3% up to 45%, incomes from “production and operation of self-employed producers and sellers” and “income from operation of contracted and tenanted enterprises and public institutes” are taxed progressively from 5% to 35%, other income types have a flat 20% taxation rate. Goods and services are taxed comprehensively, VAT is present with the following fixed taxation rates: 0%, 6%, 11%, 13% and 17% depending on the specific good, moreover excise tax is levied on products such as “tobacco, alcoholic drinks, cosmetics and refined oil products”. Rounding off the goods and services taxes are business tax, vehicle purchase tax and customs duty tax. The tax rates for business range from 5% to 20% for the entertainment sector and 3% to 5% for other sectors, vehicle purchase tax is 10% and customs duty taxes are ad valorem, in other words dependent on the monetary value of the good passing through customs duty. Finally under the property and behavior taxes there are a myriad of categories which include but certainly are not limited to: Land appreciation tax, real estate tax, and arable land use tax each with their own taxation rates ("China Tax System", n.d.).
Chinese market reforms of 1978 2.1
In 1978 China initiated market reforms which transitioned the economy from a centrally planned type to the market based economy that China is today (“China Overview”, 2018). One of the characteristics of market based economies is increased economic efficiency. Economic efficiency is the phenomenon where “every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency” (Investopedia, 2018), consequently, a centrally planned economy would be significantly less economically efficient, as it requires a central entity which is aware of all business activities of every economic entity. This is an unrealistic scenario in modern society as everything is highly interconnected, a market based economy is particularly effective in this aspect because the consumer, producer and the purchasing power of consumers regulates the efficient allocation of resources. Moreover, in 2001 China officially joined the World Trade Organization which benefitted China, in the form of tariff reductions which brought about a reduction in deadweight loss. Deadweight loss is defined by The Economic Times as “the loss of economic efficiency in terms of utility for consumers/consumers such that the optimal or allocative efficiency is not achieved” ("Deadweight Loss – What is Deadweight Loss ?", n.d.).
Breaking down the post-1978 reforms, the Chinese citizen had more autonomy to pursue an entrepreneurial path. Initially, the quick establishment of non-agricultural businesses took place, explained by the fact that, for the first time, entrepreneurs where able to sell their own products at their own prices in the private markets, hire or fire employees and make profits that could be reinvested into their businesses or be spent on their own needs. In context, prior to the 1978 reforms, nearly 80% of Chinese citizens worked in the agricultural sector which steadily decreased as individuals pursued different business sectors with their endeavors. The reforms of 1978 – very importantly – opened China up to foreign trade, it was possible to import and export a greater variety of products and it was possible to obtain direct foreign investment. Direct foreign investment in particular spawned many factories which created jobs and has shaped the perception of China, known today as the origin of manufacture for many products sold and used around the world (Hu & Khan, 1997).
The advantages and disadvantages of economic inequality 2.2
Economic inequality is often directly associated with negativity, likely due to the word “inequality”. Admittedly there is merit to that assumption, however there are reasons why having economic inequality is a benefit. The advantages and disadvantages are discussed below, starting with the advantages as discussed in the article by (Pettinger, 2017). The first advantage of inequality is that it creates an incentive for people to work harder, knowing that there is a possibility of greater income in the future. This brings about a boost in productivity, as individuals pursue their aspirations. The second advantage of inequality is the incentive for entrepreneurs to set up new types of businesses thereby expanding the business opportunities available. Thirdly – again related to entrepreneurship – is the so called trickle-down effect, as an example, if an entrepreneur sets up a business and is able to employ other individuals as a result, then there is benefit to the economy as well as the employees who are employed. If this business didn’t exist then employees would not have the opportunity to be employed. Finally, the last advantage of inequality is fairness. If an individual’s skills, hard work or other means of obtaining a high income has put them in a strong economical position then this is their advantage, society cannot reduce their success in the name of more equality.
Moving on to the disadvantages, firstly economic inequality reduces the growth potential of an economy, this is explained in part due to negative public behavior such as crime and other factors which have a negative impact on the economy. Secondly, leading from the first disadvantage is that economic inequality increases crime rates, some explanations mention “disadvantaged members of society may be more likely to suffer from resentment and hostility as a result of their economic position” (Birdsong, 2015). Thirdly disadvantaged members of society tend to face an increased probability of falling sick under various illnesses, essentially inequality is found to decrease health quality. Next, inequality has been found to skew political inequality by transferring political power to the individuals of higher wealth. Individuals with higher wealth are able to manipulate governments to account for their wishes through legal processes but also through nefarious processes. Finally high economic inequality is linked to decreased education levels. In countries where this high economic inequality is prevalent, the individuals of that society on average are less well educated.
Having discussed some of the advantages and disadvantages above, the question to ask is, to what extent do we need economic inequality? From the points above, the disadvantages seem to outweigh the advantages, however it is important to conserve the advantages that inequality brings about. According to this reasoning, each society should strive to eliminate inequality to the extent that its least well off members of society no longer feel resentful or hostile to others within that society, the criteria to achieve this vary with each society, hence this should happen on a per case basis.
Reducing economic inequality through effective policy design 2.3
It seems worthwhile to consider how policies could be designed to reduce economic inequality. As stated above, every society will need to bring about changes given the context of their own economic inequality, however as a general guideline, policy makers should consider the following: should the policy be focused on helping the less advantaged while not affecting affluent citizens or should the less advantaged be aided while reducing the affluency of wealthy citizens? Both of these general guidelines would reduce inequality, the later perhaps to a greater extent but psychologically more important even, due to the fact that less-advantaged citizens see that affluent citizens are being actively disadvantaged. One of the possibilities is that the affluent are taxed with higher rates, however in reality this could only be justified and work if the additional tax revenue is actively and transparently used in the aid of less-well off citizens. Given this, the next step that needs to occur is identifying where the tax revenue can be spent to reduce the inequality gap, it follows naturally that giving disadvantaged citizens a share of tax revenue by deposit into their bank account is not viable, as this ultimately creates discouragement through increased economic comfort for these individuals thereby diminishing advantages brought about due to economic inequality.
Conclusion 2.4
In conclusion, China’s economic and overall progress as a country is impressive. Three decades ago the country was significantly less well developed when compared to most nations, however through economic reform drastic changes have occurred and China is now considered a powerful nation. Through the analysis of aspects of China’s growth, the effects of economic inequality have been observed, as mentioned before, in the context of education, the wealthier population has the ability to follow higher education while the less well-off have a lower college age population attending higher education. The Gini coefficient also showed that while the coefficient’s value is decreasing in recent years, overall China still is above the threshold for significant economic inequality. Moving forward, China as well as every other nation on the planet will need to reduce economic inequality within society, through further extensive policy redesign, with the end goal of increasing the wellbeing of all citizens. However after investigating, the existence of some economic inequality within society is necessary as there are certain benefits associated to this inequality.