Chapter 8

The high-speed railway

8. Economic Growth and Income (Re)distribution

8.1 Macroeconomic performance

8.2 Understanding economic growth

8.3 Income distribution and inequality

8.4 Income redistribution and social security

Keywords:

• economic growth,

• total factor productivity,

• underground economy,

• income distribution,

• egalitarianism,

• income inequality,

• Gini coefficient,

• redistribution policy,

• poverty,

• social security

8.1 Macroeconomic performance

8.1.1 How large is China’s economy?

8.1.2 Is Chinese GDP (under) over-estimated?

Chinese GDP could be underestimated:

• Real estate sector (10 percent),• Government, science and technology,

education, culture and health care sectors (4 percent),

• Self-service within enterprises (3 percent),• Rural construction (2.2 percent) and other

rural economic activities (2 percent), and• National defense and underground economic

activities (10 percent).

Source: Asia-Pacific Economic Times (1996).

Determinants of underground economy

• The level of taxes and regulations. • The determination of the authorities

to catch up with evaders, and the severity of the punishments for those found out.

• The size of the service sector relative to the manufacturing sector.

• The proportion of the population that is self-employed.

Figure 8.1 China’s economic growth rates, 1950-80

Figure 8.1 (cont’d)

Indicator China JapanUnited States

Nominal GDP ($ billions) 5,824 5,461 14,660

GDP in PPP ($ billions) 10,203 4,299 14,660

Nominal Per Capita GDP ($) 4,440 43,060 47,260

Per Capita GDP in PPP ($) 7,770 33,900 47,260

Source: Economist Intelligence Unit (www.eui.com).

Table 8.1 A comparison of Chinese, Japanese, and U.S. GDPs, 2010

8.2 Understanding economic growth

8.2.1 Literature review

8.2.2 Factors contributing to growth

1953-60

1961-78

1979-90

1991-99

Average annual GDP growth rate 9.40 4.70 9.00 10.30

Average annual GDP growth rate (adj.)

6.63 3.31 8.50 8.10

Factor contribution to average annual GDP growth rate (adj.)Capital contribution 2.90 2.40 4.85 5.45

Labor contribution 0.84 0.84 0.99 0.48

Human capital contribution 0.58 1.32 1.32 0.40

TFP contribution 2.31 -1.25 1.34 1.77Notes: GDP=gross domestic product; TFP=total factor productivity.Source: Wang (2000).

Table 8.2 Decomposition of the Chinese economic growth (%)

8.3 Income distribution and inequality

8.3.1 How (un)equal is the Chinese society?

8.3.2 Income inequality: causes

8.3.3 Income inequality: consequences

8.3.4 Poverty alleviation

Year Rural area Urban area China as a whole

1952 0.230 0.165 0.255

1979/80 0.310 0.160 0.330

1988 0.338 0.233 0.382

1995 0.381 0.280 0.437

2002 0.366 0.319 0.454

2007 0.370 0.399 0.496

Sources: (1) World Bank (1983, pp. 83 and 92) for 1979/80; (2) Zhao (2001) for 1988 and 1995; (3) Li (2004) for 2002 and (4) www.ahpc.gov.cn for 2007.

Table 8.3 China’s income Gini coefficients, selected years

Figure 8.2 Gini coefficients since World War II, selected nations.

Item Inequality within urban or rural areas

Inequality between urban and rural areas

1. Economic growth or developmentFaster growth of urban nonstate-owned economyFaster growth of rural nonagricultural economyDevelopment of agriculture

++?a

+--

2. Economic reform or institutional changesOrder changesPrice reform in rural areasHousehold responsibility system in rural areasInternal migration of rural laborersCommercialization of urban housingDisorder changesRent-seeking activitiesInsider controlc

MonopolyCorruption

--?b

+++++

---+?+++

3. Economic policy and its changesLow purchasing price for agricultural productsTaxation on agricultural productsExtra-taxational burden peasantsPersonal income taxReduction of urban subsidiesa) Per headb) By positionTransfer of urban residents’ benefits to private propertyAccess to the WTO

???-+-+?

+?+---++d

Table 8.4 Determinants of income inequality for the reform era

Notes to Table 8.4:

(1) Usually, if an item is related to urban (or rural) areas, its effect on inequality is also related to the urban (or rural) areas. (2) “+” denotes increase of inequality; “-” denotes decrease of inequality; “?” denotes difficulty to judge. (a) According to Li et al. (1997), although inequality within rural areas had slightly increased from 1979 to 1984, it is hard to attribute this result to the development of agriculture. (b) Generally, internal migration of rural laborers has enlarged income differentials within rural areas as a whole, but it has narrowed the gap in some specific rural areas (Zhao, 2001, p. 38). (c) ‘Insider control’ is described here as a mechanism through which public assets can be appropriated to serve the interests of particular departments, regions, work units and individuals (Massahiko and Qian, 1995, p. 17). (d) Based on Li and Zhai (2000). However, Wei and Wu (2003) conclude with a negative relationship between urban-rural disparity and the trade/GDP ratio.

Source: Zhao (2001, p. 36) except those that are noted otherwise.

China‘s provinces can be classified into five groups by the incidences of ‘broad poverty‘ :

(i) The incidences of ‘broad poverty‘ are lower than 2% (including Beijing, Jiangsu, Zhejiang, and Guangdong)

(ii) The incidences of ‘broad poverty‘ range from 2% to 4% (including Shanghai, Fujian, Hunan, Guangxi, Yunnan, Anhui, and Jiangxi)

(iii) The incidences of ‘broad poverty‘ range from 4% to 6% (including Hebei, Hubei, Guizhou, Chongqing, Qinghai, Shandong, and Sichuan)

(iv) The incidences of ‘broad poverty‘ range from 6% to 8% (including Tianjin, Inner Mongolia, Liaoning, Jillin, Hainan, Xinjaing, Shanxi, Heilongjiang, and Gansu) and

(v)The incidences of ‘broad poverty‘ are higher than 8% (including Henan, Shaanxi, Ningxia, and Tibet)

Source: Asian Development Bank (2002)

8.4 Income redistribution and social security

8.4.1 China’s existing tax system

8.4.2 Personal income tax

8.4.3 Social security

Source: NBS, 2010.Figure 8.3 Ratios of enterprise and personal income taxes to GDP

Figure 8.4 The Lorenz curve

Annex: The Gini Coefficient:

Mathematically, if the area between the line of perfect equality and the Lorenz curve is A, and the area under the Lorenz curve is B, then the Gini coefficient is A/(A+B). Since A+B=0.5, the Gini coefficient becomes A/(0.5)=2A=1-2B.

Case study 6

Transition and growth: A tale of two companies

The full version of this research is available at: http://www.elsevierdirect.com/companions/9780123978264

Guangzheng Chuangda1997 2001 1997 2001

All staffExcl.

laid-off staff

All staffExcl. laid-off staff

Total earnings (yuan)(%)

490.64（ 100.

0）

723.39（ 100.

0）

735.54（ 100.

0）

493.97（ 100.

0）

528.20（ 100.

0）

660.63（ 100.

0）Wages (yuan)(%)

490.64（ 100.

0）552.07(76.3)

563.63（ 76.6）

493.97（ 100.

0）

447.14（ 84.7）

566.38（ 85.7）

Share bonus(%) NA

171.32（ 23.7）

171.91（ 23.4）

NA81.06（ 15.3）

94.25（ 14.3）

Of wagesBasic wage (yuan)(%)

340.36（ 69.4）

376.60（ 52.1）

384.48（ 52.3）

354.90（ 71.8）

260.86（ 49.4）

330.42（ 50.0）

Bonus (yuan)(%)

NA49.89(6.9)

50.95（ 6.9） NA NA NA

Subsidy (yuan)(%)

150.28（ 30.6）

125.58（ 17.4）

128.20（ 17.4）

139.07（ 28.2）

186.28（ 35.3）

235.96（ 35.7）

Earnings inequalities (Gini coefficients)Total earnings 0.265 0.345 0.326 0.186 0.414 0.276Wages 0.265 0.362 0.320 0.186 0.405 0.247Share bonus NA 0.595 0.601 NA 0.592 0.590Of wagesBasic wage 0.355 0.423 0.411 0.247 0.394 0.233Subsidy 0.524 0.387 0.373 0.419 0.594 0.461Samples 229 390 382 36 437 345

Table 8.5 Level, composition and inequality of earnings per worker, December

Notes:

(1)monetary values are represented by current prices. From 1997 to 2001, the consumers price index (CPI) decreased by 2 per cent (NBS, 2002, p. 296).(2)“NA” denotes not available. (3)The samples of Chuangda only come from office workers in 1997, which are not comparable to those in 2001.

Table 8.6 Average earnings by groups of workers (yuan/person, December)

Chapter conclusion:

This chapter sets out to examine various factors (sources) contributing to China’s rapid economic growth. While China’s reform since the late 1970s has been a strong driver of its economic growth and of the increased levels of income, it has also caused a series of socioeconomic problems. In the initial stage of the reform, the policy of ‘letting some people get rich first’, adopted to overcome egalitarianism in income distribution, to promote efficiency with strong incentives and ultimately to realize common prosperity based on an enlarged pie, has quickly increased income gaps between different groups of people. This chapter test, qualitatively and quantitatively, the causes and consequences of China’s increasing income inequalities. Finally, China’s poverty reduction and social security are briefly discussed.

Suggested reading

Ash, Robert (2006). “Squeezing the Peasants: Grain Extraction, Food Consumption and Rural Living Standards in Mao's China,” The China Quarterly, Volume 188, pp. 959 - 998.

Bloom, David E., David Canning, Linlin Hu, Yuanli Liu, Ajay Mahal, Winnie Yip (2010). “The contribution of population health and demographic change to economic growth in China and India,” Journal of Comparative Economics, Volume 38, Issue 1, pp. 17-33.

Brandt, Loren and Dwayne Benjamin (1999). “Markets and Inequality in Rural China: Parallels with the Past,” American Economic Review, Volume 89, Issue 2.

Chi, Wei, Bo Li (2008). “Glass ceiling or sticky floor? Examining the gender earnings differential across the earnings distribution in urban China, 1987–2004,” Journal of Comparative Economics, Volume 36, Issue 2, pp. 243-263.

Suggested reading/2Ding, Sai, John Knight (2009). “Can the augmented Solow model

explain China’s remarkable economic growth? A cross-country panel data analysis,” Journal of Comparative Economics, Volume 37, Issue 3, pp. 432-452.

Du, Yang, Albert Park, Sangui Wang (2005). “Migration and rural poverty in China,” Journal of Comparative Economics, Volume 33, Issue 4, pp. 688-709.

Griffin, Keith, Azizur Rahman Khan and Carl Riskin (1999). “Income Distribution in Urban China during the Period of Economic Reform and Globalization,” American Economic Review, Volume 89, Issue 2.

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Suggested reading/3Klotzbücher, Sascha, Peter Lässig, Qin Jiangmei and Susanne

Weigelin-Schwiedrzik (2010). “What is New in the “New Rural Co-operative Medical System”? An Assessment in One Kazak County of the Xinjiang Uyghur Autonomous Region,” The China Quarterly, Volume 202, pp. 38 - 57.

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Taylor, J. Edward, Scott Rozelle and Alan deBrauw (1999). Migration, Remittances, and Agricultural Productivity in China,” American Economic Review, Volume 89, Issue 2.

Walder, Andrew G. and Litao Zhao (2006). “Political Office and Household Wealth: Rural China in the Deng Era,” The China Quarterly, Volume 186, pp. 357 - 376.

Suggested reading/5

Young, A. (2003). “Gold into base metals: Productivity growth in the People’s Republic of China during the reform period,” Journal of Political Economy, Volume 111(6), pp. 1220-61.

Yusuf, Shahid (1994). “China's Macroeconomic Performance and Management during Transition,” Journal of Economic Perspectives, Volume 8, Issue 2.

Zhang, Yin, Guanghua Wan (2006). “The impact of growth and inequality on rural poverty in China,” Journal of Comparative Economics, Volume 34, Issue 4, pp. 694-712.

Zhou, Yingying, Han Hua and Stevan Harrell (2008). “From Labour to Capital: Intra-Village Inequality in Rural China, 1988–2006,” The China Quarterly, Volume 195, pp. 515 - 534.