Why has improvement in income distribution become the toughest task for China

He Qinglian on March 9, 2012
(translated by kRiZcPEc)

Just like the “Two Meetings” last year, issues on the people's livelihood remained what the delegates could discuss freely without worrying the potential consequences. Included in this year's list of livelihood issues were housing and commodity prices, social morality, food safety, and income distribution—a topic that has been discussed annually. In the Government Work Report Premier Wen tirelessly repeated his call for “deepening the reform of the income distribution system and wasting no time in formulating a comprehensive package of reform of the income distribution system.”

Why has the issue of income disparity, to which the government seemingly attached considerable importance and a topic that the peoples' delegates have been discussing every year without effecting any improvement, become the toughest problem for China? Worse still, the income disparity has seen no improvement, and the income level for the majority of the Chinese people has been falling.

The Widening Gap of Income Disparity
Two sets of figures illustrated the current income distribution in China has been deteriorating. Before the “Two Meetings” commenced, all provinces in China disclosed two statistical indicators that directly reflected the income level of the residents: “disposable income for urban dwellers” and “net income for rural residents”. In 2011, the income growth rates of both urban and rural residents in eighteen provinces outran the growth rate of the GDP; income for rural residents in twenty-five provinces grew at a rate faster than that of the GDP; and the overall increase rate of income for rural residents in twenty-nine provinces was faster than their urban-dwelling counterparts. 

At first glance, this appeared to be a piece of good news. But look closely and one would realize glossy report technique has been employed to conceal the facts—
For starters, China has in total thirty-one provinces, municipalities and autonomous regions, even if eighteen of them outperformed the GDP, thirteen other did not;
Second, outrunning the GDP and not the inflation rate meant a decline in actual income. Regarding the inflation rate, the officials and the general public have been saying different things. One of the indicators used to gauge the inflation level is the consumer price index (CPI), and for example, last year the price of agricultural produces drove up the commodity prices; in particular, pork price surged noticeably. However, the inflation rate revealed by the government stood at slightly over six percent. Therefore, when the National Bureau of Statistics revealed the CPI figure, the general public did not believe it, and the media were skeptical about it;
Third, the size of the middle class has been shrinking. According the National Annual Statistics Report published on February 22, the per capita disposable income for urban dwellers in 2011 was 21,810 yuan, and the median of per capita disposable income was 19,118 yuan. But at the moment the income level for roughly sixty percent of urban-dwellers was lower than the median, this indicated the middle class has been shrinking and the poorer classes were expanding.
It is clear from the facts above that the majority of the Chinese people now face not the widening wealth gap, but rather a continuous dive of their living standard.

Counting from the beginning of the fourth generation of CPC leadership, it has been ten years since the issue of income distribution improvement first appeared on the “Two Meetings” agenda, only that the order of arrangement might be different each year. During the “Two Meetings” last year, the “Song of happiness” was being sung out loud to demonstrate the uppermost importance the government attached to the well-being of the people. However, the Gallup'sGlobal Well-being Survey2010 showed that 71% of the Chinese people found their life difficult, and 17% others said they were living in hardship. Even if the overly low poverty standard the country customized was used, there were still 100 million poor people in rural China who earned less than the per capita annual net income of 2,300 yuan (361 dollars).

Underlying causes of unfair income distribution in China

The cause of income distribution inequality in China lies with the government, which itself is exactly what brings about the problem of unfair distribution.

First of all, the Chinese government takes away too big a share from the GDP—from one-forth in 2003 to a third in 2010, a reflection of the unreasonable ratio of initial income distribution between the government, enterprises and the public. The Financial Minister Xie Xuren said on March 6 that “[State] revenue and resident income is not a simple shift of balance”, and indicated that the significant increase in state revenue was not a result of the government competing with the people. Such a remark was sheer quibble.

Second, the public property in government control became a source from which a few of the privileged and the stakeholders grabbed their wealth. According to the Chinese constitution, resources such as urban land, forest, rivers and mineral reserves belong to the state and are public property. All incomes derived from these are at the government disposal. In 2010, I pointed out that in the marketization process that started since the beginning of the economic reform, the above resources remained in government hands. Those in power manipulated the allocation of national resources resulted not only in serious corruption but also severe social injustice. In the past two decades China's growth in wealth concentrated mainly in public resources—the land, mineral resources, finance, and stock market—from which the emergence of the upstarts has been inseparable.

Third, the leverage of the marketized power in wealth distribution determines how income is distributed in China.

Prior to the economic reform, there was power but no market in China. The power could not be cashed in and there were limits to the extent of corruption. Since the economic reform, however, there has been at one end the power in control of the resources and at the other the market which the official could turn the resources into money. And thus gave rise to the wealth gap in today's China:

1. Wealth Disparity: The “gray income” the officials grab through corruption lead to severe chaos in the distribution order and the wealth being concentrated in the hands of a few. There is an estimate that the high income group earns up to fifty-five times more than the low income group, and “grey income” is the main reason such a huge difference appeared. And as for the exact amount of wealth in the rich's possession, there is a figure that makes one sad and angry: 1.5 million households (approximately 0.4% of the country's total households) possess 70% of China's total wealth.
2. Reverse Distribution: A form of social redistribution, social welfare means basically to provide relief for the poor and weak; however, China's current social welfare policy, covering chiefly civil servants or quasi-civil service groups working for the organs of the party and the government, fails to provide the poor with relief, and on the contrary, it makes the lives of those with an advantage in social distribution even better.
3. Regulation Failure: With the gray income so sizable and so concentrated in the hands of the privileged and powerful, all sorts of income regulation policies, including tax, has lost the basis premise of their systemic design.
4. Widespread Corruption: The brazen corruption of the Chinese officials is facilitated by a factor that did not exist before globalization: Emigration. Before the wave of globalization, there were not many chances to emigrate, and all sorts of financial services were somewhat backward, those who corrupt more or less had some scruples. But after the wave of globalization swept the world, capital flows have become the international norm. As a result, huge quantity of “naked officials”—officials who sent their spouses and children abroad and continued to work inside the country—emerged in China. Since they could move their family elsewhere in advance, these officials plunder in ways all the more unscrupulous.
Forth, an income gap exists between the industries with monopoly and those without. The six key industries of China including civil aviation, railways, finance, and electricity are state-owned monopolies from which competitions are excluded. They charge high costs, provide low services, and frequently push up prices. The public still have the haunting memories of how the “special interest groups” of real estate, oil, electricity monopolies joint hands to push for price gain and reap huge profits in the last inflation cycle. These state-owned enterprises dominate public resources and reap excess profits with the government-granted monopoly status. In the end the profits are shared only between the enterprises and the government, the real owners of public resources—the public—have to hand over their money as there is no other consumption alternative and stand not to benefit from the profits derived.

Presently the various social conflicts in China are closely related to income disparity, which has become a primary issue that would affect the nation. And if the root of this income disparity is traced, one would see it is originated from the Chinese political system. So long as the political system of one-party dictatorship remains unchanged, there is no hope that China's income distribution system could see any improvement.