Inequality In China

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Sonali Jain-Chandra

More than two decades of spectacular economic growth in China have raised incomes dramatically and lifted millions of people out of poverty. But growth hasn’t benefited all segments of the population equally. In fact, China has moved from being moderately unequal in 1990 to being one of the world’s most unequal countries.

Inequality is likely to rise further without additional policy changes.

The Chart of the Week tells the story. It shows that the Gini coefficient, a widely used measure of income inequality, has risen by 15 points since 1990 to 50 (a reading of zero would indicate that everyone has the same income, while a reading of 100 would mean that the richest person gets all the income.)

That is a big change, even though some increase in inequality could have been expected as the level of development improved.

What accounts for the jump? Differences in education are one important driver of inequality, according to a recent IMF working paper. Rapid technological change and industrialization have boosted demand, and therefore incomes, for highly skilled workers. Differences in incomes between urban and rural areas another major factor. Educational attainment is lower in rural areas, and China’s hukou system of household registration limits migration to urban areas, where wages are higher.

China has implemented policies to limit inequality, which helps explain why it has leveled off and even declined slightly since 2008. China has raised the minimum wage and the minimum threshold for income taxes multiple times. It has also helped farmers by abolishing agricultural taxes and improving public services and social protection in the countryside.

However, inequality is likely to rise further without additional policy changes. For example, China could rely more on the personal income tax and less on regressive consumption taxes. The design of personal income taxes and social security taxes could be made more progressive. And there is also room to further increase spending on social services, especially in rural areas, reducing inequality even more.