Question

1) What was the cause of coastal-inland income disparity after the economic opening in China?

2) What are the policy options to improve the efficiency in China to combat with the slowing down of the economy?

Answer 1

China’s current mainly market economy features a high degree of income inequality. According to the Asian Development Bank Institute, “before China implemented reform and open-door policies in 1978, its income distribution pattern was characterized as egalitarianism in all aspects.”At this time, the Gini coefficient for rural – urban inequality was only 0.16. As of 2012, the official Gini coefficient in China was 0.474, although that number has been disputed by scholars who “suggest China’s inequality is actually far greater.” A study published in the PNAS estimated that China’s Gini coefficient increased from 0.30 to 0.55 between 1980 and 2002.

In a landmark paper published in the Review of Development Economics, economists Ravi Kanbur and Xiaobo Zhang conclude that there have been three peaks of inequality in China in the last fifty years, “coinciding with the Great Famine of the late 1950s, the Cultural Revolution of the late 1960s and 1970s, and finally the period of openness and global integration in the late 1990s.”Their research indicates that these periods of inequality are driven by “three key policy variables – the ratio of heavy industry to gross output value, the degree of decentralization, and the degree of openness.” The study finds that the “heavy-industry development strategy played a key role in forming the enormous rural-urban gap in the pre-reform period, while openness and decentralization contributed to the rapid increase in inland-coastal disparity in the reform period of the 1980s and 90s.” In other words, heavy industry development in the cities formed the initial rural-urban gap leading up to the reform period, and decentralization increased overall inequality, rural-urban inequality, and inland-coastal inequality as the economy opened up after the 1978 economic reforms.Research conducted by Jeffrey Sachs on the entire period from 1952 to 1996 indicates that in general, regional income inequalities are driven by government policy, whereas income convergence is "strongly associated with the extent of marketization and openness."

is an emerging economy, with quarterly GDP growth rates averaging 9.31%for the past two decades, powered mainly by strong exports. However, China still faces a number of socioeconomic issues, including the increasing income disparity between different groups of citizens, largely characterized by rural-urban income inequality. Despite steady growth of China’s economy since economic reforms in 1978, the rural-urban income gap reached its widest in more than three decades in 2009.According to data from National Bureau of Statistics of China, at its widest disparity, city dwellers were earning 3.33 times as much as farmers (income ratio of 3.33:1), with per capita disposable income of urban households standing at RMB17175 while per capita net income of rural households at RMB5153. In contrast, the income disparity was at its narrowest in 1983, at 1.82:1, due to effects of the Household-responsibility system introduced in 1978.As of year 2010, income ratio was recorded at 3.23:1 and per capita disposable income of urban households stood at RMB19109 while rural households’ were at RMB5919.^[8] In 2014, according to an Institute of Social Science Survey, Peking University, income inequality among Chinese mainland citizens has reached severe conditions, with 1% of the Chinese population possessing 1/3 of the country's wealth.

In 2012, a report published by Southwestern University of Finance and Economics estimated the Gini index of China at 0.61^[11]

China's government publishes an official yearly calculation of the country's Gini index. According to these reports, the average Gini coefficient between residents was .475 between the years of 2003 and 2018, reaching a high of 0.491 in 2008 and a low of 0.462 in 2015.

According to research conducted at the World Bank, “inequality of access to education is an important source of inequality in China across people contemporaneously and across generations.”In fact, “a decomposition analysis based on household income determination shows that the largest proportion of changes in total income can be attributed to the increase in returns to education.”Urban-biased policies and inland-coastal inequality exacerbates the issue of education inequality in China. One of the primary issues is their generation of sector-biased income transfers and expenditures on health, housing and education, which "not only distort economic incentives of the workers in the sectors, but will also affect the human-capital attainments of their children, which may further widen the rural-urban income gap." In other words, inland and rural inequality can help create a vicious cycle by funneling money towards the coastal cities and away from investments in human capital elsewhere. Like in the United States, education funding is primarily the responsibility of local governments in China. As poor localities are less able to fund these services and poor households are less able to afford the high private cost of basic education, China has seen an increase in the inequality of education outcomes. “For example, in 1998, per pupil expenditure in Beijing was 12 times that in Guizhou, and the difference jumped to 15 times in 2001.”

Inland-coastal inequality

As is well documented in many studies, rural-urban inequality is a major contributing factor to general income inequality in China. However, “while the contribution of rural-urban inequality is much higher than that of inland-coastal inequality in terms of levels, the trend is very different. The rural-urban contribution has not changed very much over time, but the inland-coastal contribution has increased by several fold,” meaning that inland-coastal inequality is playing an increasingly important role in the formation of general income inequality across China.A study found that variations across Chinese provinces account for about 12% of the country’s overall income inequality. Research on economic growth after the opening of the Chinese economy has shown that between 1989 and 2004, income in coastal provinces more than tripled whilst that in inland provinces doubled.^[17] Research on inland-coastal inequality indicates that "since being a coastal province is a geographic advantage that will persist, this tendency for divergence will also probably continue," but institutional factors still have a significant effect.Economists Ravi Kanbur and Xiao Zhang propose that the “greater ease of rural-to-urban migration within provinces, compared to the institutional and other difficulties of migrating from inland to coastal provinces” can partially explain this phenomenon.China's Hukou system is an institutional factor that significantly inhibits interprovincial migration. Recently, the government has introduced policies that relax Hukou related restrictions in small and medium-sized cities, in an effort to encourage growth.^[18] “Currently rural incomes are less equally distributed than urban incomes but urban inequality is increasing faster than rural inequality” (Wu, 2005, p. 773).

During its reform era China has experienced, and become accustomed to, high rates of economic growth, and rapid jobs growth particularly in the rural collectives and, more recently, private enterprises. Strong fixed asset investment and consumer demand in conjunction with a strong growth of net exports, provided the foundations for this. However during the latter part of 1997, after four years of monetary austerity measures, there were worrying signs that the growth of the economy was slowing considerably, primarily from a weakening of consumer and investment demand. While the growth of net exports initially remained buoyant, this has become threatened by the financial crisis afflicting other East Asian economies. Such developments are of particular concern to China where jobs growth and social cohesion is paramount. It is widely perceived that the country must keep growth above 7-8% if enough new jobs are to be created to absorb the unemployed, and that without appropriate action by the authorities the economy will be dangerously close to this in the foreseeable future. This sharp economic slowdown will also threaten the government’s attempts to restructure the country’s SOEs as well as the debt laden state banks. It will have broader adverse implications for other Asian nations attempting to export their way out of their financial difficulties. The Chinese authorities currently face a severe problem of domestic deflation rather than inflation, while on the international front the country is playing a pivotal role, particularly with regard to the exchange rate, in maintaining currency stability within the Asian region. The paper briefly reviews recent macroeconomic developments in China, focusing upon the factors contributing to the economic slowdown. The consequences of such a slowdown in terms of unemployment, social unrest, attaining further economic reform of the state owned enterprises (SOEs) and banking sector, as well as broader regional implications, is analysed. Appropriate policy responses to increase growth and expand employment opportunities, while maintaining low inflation, will be identified and evaluated.

During the early part of the 1990s, encouraged by Deng Xiaoping’s exhortations2 for the economy to invest and grow, China experienced a major increase in investment, funded primarily through bank loans. As a consequence inflationary pressure built up within the system and became particularly acute during 1994 and 1995. In an attempt to restore order to the economy the government introduced, in June 1993, a so called 16 point austerity program. This involved pursuing deflationary policies largely through controls on state investment via credit rationing and administered price controls, with the objective of lowering economic growth to a sustainable rate and to slow the rapid increase in prices. By 1996 it appeared that a soft landing of the economy had been achieved, in which GDP growth had declined to a more sustainable rate of 9.7% and the rate of inflation3 had been reduced to less than 6.1%. It was widely anticipated that the economy was in a position for a soft take off thereafter. However this has not eventuated, and instead a further slowdown of the economy is occurring. As can be clearly seen from Table 1 GDP growth continued to decline after 1996, falling to an annual growth rate of 7.2% by the first quarter of 1998, the lowest quarterly figure in at least 6 years and less than the government’s hoped for 7.5%, from 8.2% during the last quarter of 1997 and from 8.8% for the whole of 1997. The growth rate deteriorated further to 6.8% for the second quarter of 1998, giving a growth rate of 7% for the first half of 1998. For industrial production, similarly, growth has fallen steadily since 1994, as state firms became afflicted with declining profits. Further evidence of this slowdown in production can be found from Table 2 which identifies year on year changes in the production of major commodities in China. The production of coal, oil, vehicles and fertiliser are all lower in the first quarter of 1998 in comparison to the same period in the previous year. This declining growth of output is reflected in a steady decline in inflation, and by the second half of 1997 and into 1998 price deflation and not inflation has been occurring (see Table 1). A number of factors have contributed towards this slowdown of the economy, some of which have arisen due to the excesses of the economic boom of 1992-95: · Successful macrostabilisation policy action. The austerity measures implemented against the 1992-95 overheating of the economy since mid 1993, achieved major success in reducing inflationary pressure within the economy. · Excess investment in real estate. The country experienced over the boom period 1992-95 major property overdevelopment arising from overly loose credit to this sector and from significant foreign investment. This has resulted in vacant office premises. As an indication of this, the office vacancy rate in December 1997 was 37.4% in Shanghai and 32.5% in Beijing4 .