China’s Gradual Economic Reform in Light of Income

and Wealth Distribution

by Zhao Renwei

Institute of Economics, CASS(2008-11-24)

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Contents1. Introduction

2. The characteristics of China’s economic reform

3. Income distribution: from prevailing egalitarianism to high inequality

4. Wealth Distribution: from nearly no personal property to wide disparity

5. Concluding Remarks

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1.Introduction

• China’s economic reform has lasted nearly 30 years.

• In order to reduce the costs we took the gradual way in the economic reform.

• The disparity of income and wealth increased rapidly in last two to three decades.

• How to check the costs of economic reform in the light of increasing inequality ?

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2. The characteristics in China’s economic reform

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Three characteristics of Asian pattern

Professor Dwight H. Perkins noted that there are three characteristics of Asian pattern of reform of socialist economic systems:

• Economic reform precedes political reform.• The socialist countries in Asia are much poorer

than their counterparts in Eastern Europe and the former Soviet Union.

• The majority of people in Asian socialist countries are employed in the agricultural sector.

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Five more characteristics of china’s economic reform

I’d like to plus five more characteristics （ related to above three characteristics)

of China’s economic reform:•Low coverage rate of the Planned economy .

•The starting point of China’s economic reform is lower than that of the former Soviet Union and Eastern European countries. (See Figure 1)

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•Economic reform in China was more closely related to economic development than was the case in the former Soviet Union and Eastern Europe. (See Figure 2).

•Economic reform and economic development go hand in hand. (See Figure 3 and Figure 4).

•The gradual way of economic reform to reduce the costs.

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Plan ( Centralization) Mark （ Decentralization)

War CommunistEconomy

Quasi-WarCommunistEconomy

PlannedEconomy(Stalinist Model)

Revised Planned Economy

Regulated Market Economy

Free Market Economy

Starting Point of China’s Reform

Figure 1. The starting point of economic reform in China

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Figure 2. China’s Economic Reform and Economic Development

Autarky economy Dual economy

Development

ReformPlanned Economy

Market EconomyModern Economy

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Figure 3. Reform at The Cost of Development

S R G

O Time

Output or Consumption

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S

OTime

Output or Consumption

Figure 4. Reform in Step with Development

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About the gradual way of China’s economic reform

• The sequence of the economic reform:

from rural to urban, from coastland to inland, from private sector to public sector, from outside to inside, ……

• So the gradual reform used to be defined as “ incremental reform” by many economists.

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• Generally speaking, we have taken the gradual way in China’s economic reform except the rural reform in the early 1980s and price reform in 1988 with which there were some radical elements.• Even Prof. W. Brus and Prof. J. Sachs recognized in the 1990s that China’s gradual way was a success.

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3. Income distribution:From prevailing egalitarianism

to high inequality

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China was an egalitarian society in pre-reform stage

• The Gini coefficients in China: Urban areas: Below 0.2 Rural areas: 0.21-0.24• The Gini coefficients in other developing c

ountries: Urban areas: 0.37-0.43 Rural areas: 0.34-0.40 （ See Table 1 and Table 2)

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Table 1. Some Estimates of Income Inequality

(Gini coefficients) on Pre-reform China

Urban Rural National Estimator

0.16 （ 1980）

0.185（ 1980）

0.16 （ 1978）

0.165（ 1978）

0.31 （ 1979）

0.237（ 1978）

0.212（ 1978）

0.222（ 1978）

0.33（ 1979）

World Bank（ 1983）

Li chengrui（ 1983）

Ren Fangcai（ 1996）

Irma Adelman（ 1978）

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Table 2. The Income Inequality in Some Asian Developing countries (Gini coefficients)

Countries and Years

Rural Urban National

India(1975/76)

Bangladesh（ 1985/86）

Indonesia（ 1976）

Thailand（ 1975/76 ）

Philippines（ 1985）

Korea（ 1971）

0.34

0.36

0.40

0.39

0.37

0.325

0.37

0.43

0.42

0.37

0.47

0.43

0.36

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1978 1988 1995 2002

The National Bureau of Statistics

RuralUrban

National

0.210.16

0.3420.280

0.3650.320

Institute of Economics,

CASS

RuralUrban

National

0.3380.2320.382

0.3810.2800.437

0.3660.3190.454

Table 3. The increasing inequality since the reform (Gini coefficients)

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Some different estimates of overall Gini coefficients

• Low estimate: around 0.40 (National Bureau of Statistics)

• Median estimate: around 0.45 (Institute of Economics, CASS)

• High estimate: around 0.50 (Nankai University in Tianjin)

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1

1. 5

2

2. 5

3

3. 5

1978 1985 1990 1994 2003

Urban/Rural ratio

Figure 5. The ratio of urban to rural per capita income

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Some different estimates of Rural/Urban income ratio

• Around 1: 3 (National Bureau of Statistics)

• Around 1: 4 (World Bank)

• Around 1: 5

(Mr. Song Xiaowu)

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How to evaluate the costs of gradual reform in the light of

increasing income inequality ? In my point of view, we have paid the

necessary costs, but we also have paid the over high costs. For example:

• In the land trade since 1990s, there were a lot of rent-seeking and rent-creating activities. The costs were very high.

• The public cars are still used in the old way and run counter to the gradual reform.

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A controversial issue: How to calculate the amount of rent income

and gray income?

• By Mr. Hu Heli’s calculation, the amount of rent based on dual price system in1988 was 356.9 billion Chinese yuan, accounts for 30%of GDP.

• By Mr. Wang Xiaolu’s calculation, the amount of gray income in 2005 was 4800 billion Chinese yuan, accounts for 26% of GDP.

No body can deny the big amount of the rent and gray income, even the data and methodology of above calculations have been queried.

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4. Wealth Distribution:From nearly no personal

property to wide disparity

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The distribution of wealth has become a new focal point. Because:

• Chinese people have experienced rapid accumulation of wealth in last two decades.

• The distribution of wealth becomes more and more unequal.

• The people’s well-being depends on not only the income status but also the wealth status.

• The inequality of wealth becomes one of the causes of income inequality.

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The composition of overall wealth

• Housing 57.88%

• Financial assets 21.79%

• Land 9.35%

______________________________

89.02%

(See: Table 4)

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Table 4 . Mean and composition of overall wealth ,2002

Wealth & CompositionMean value

(yuan)Percentage of t

otal（%）Total wealth（ net value）Of which：Land valueFinancial assetsNet value of housingFixed productive assetDurable consumption goods Estimated value of other assetsNon-house liability

25897.03

2420.7675642.68414989.261037.3091784.31

241.6361

-218.9326

100

9.3521.7957.884.016.89

0.93

-0.84

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The distribution of overall wealth

• The ratio of highest 20% to lowest 20%: Housing: 62.7:1 Financial assets 29.13:1 (See Table 5)

• The concentration ratio: housing: 0.6302 Financial assets: 0.6291 (Gini coefficient of total wealth: 0.55) (See Table 6)

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Table5. Percentage of wealth of National Population in decile groups,2002

Decile groups Total wealth（ net value）

Land value

Financial assets

Net value of house

Fixed productive assets

Value of durable consumption goods

Estimated present value of other assets

Non-house liability

1 （ lowest）23456789

10（ highest）

0.682.122.953.814.846.238.3211.7617.8941.41

4.438.6711.0313.8615.0115.7614.058.345.843.00

0.9971.311.802.123.164.417.1611.8719.4047.80

-0.181.231.932.593.625.097.6312.1519.3046.54

2.824.525.408.078.9011.8010.7410.1213.9223.72

2.842.813.493.884.946.088.9613.0218.2235.77

0.960.780.631.111.553.046.6412.3524.1648.80

30.398.395.975.786.946.828.645.0710.9510.80

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Table 6. The overall distribution of wealth,2002

WealthMean value（ yuan）

Percentage of total（%）

Gi Ci Contribution percentage

Total wealth（ net value）Of which：Land valueFinancial assetsNet value of housingFixed productive assetsDurable consumption goodsEstimated PV of other assetNon-house liability

25897.03

2420.7675642.68414989.261037.3091784.31

241.6361-218.9326

100

9.3521.7957.884.016.890.93-0.84

0.550

0.66860.74040.67360.83730.64310.96690.9674

0.550

-0.04520.62910.63020.29630.480

0.6885-0.1749

100

-0.7724.9266.322.166.011.160.27

An international comparison How to make a comparison with the other countries in wealth inequality ?

•The developed countries:

Gini coefficient of wealth 0.5 to 0.9

Gini coefficient of income 0.3 to 0.4

•China:

Gini coefficient of wealth 0.55

Gini coefficient of income 0.454

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The issue of personal property and its income has brought the decision makers’ attention.

The 17th Congress of CPC pointed out that we must “ create the conditions to let more people can get the property income”.

I think this recognition has great significance:

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•Points out the great importance of personal property (wealth): reflects the idea of storing the wealth among the people ； also embodies the spirit of constructing Xiaokang society.•Makes clear that the people not only can earn the labor income but also can earn the property income. Thus the people can fine multi-channels to increase their income. •Of course, pay great attention to the property income doesn't mean that we can ignore the labor income.

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According to <The Report on China’s Enterprises Competitiveness(2007)>, the proportion of labor payment accounts for 53.4% of the GDP in 1990; but dropped to 41.4% in 2005. In other words, dropped 12 percentage points in 15 years. I think that is why the 17th Congress of CPC also pointed out that “ increase the proportion of the labor payment in the income distribution”.

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Wealth and income distribution in urban and rural china

• Wealth distribution in urban areas

• Wealth distribution in rural areas

• Income distribution in urban areas

• Income distribution in rural areas

(the percentage of residents)

(See: Table7 and Figure 2)

• The explanation of above results.

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Table 7. Distribution of Income and wealth of Urban-Rural China in decile groups,2002(%)

Decile groups

Per capita income Per capita wealth

Rural residents

Urban residents

Rural residents Urban residents

1（ the lowest）

98.73 1.27 75.26 24.74

2 97.26 2.74 89.78 10.22

3 94.96 5.04 89.41 10.59

4 90.64 9.36 90.63 9.37

5 79.36 20.64 83.03 16.97

6 62.18 37.82 72.63 27.37

7 43.87 56.13 55.02 44.98

8 22.48 77.52 29.21 70.79

9 12.69 87.31 18.08 81.92

10（ the highest）

6.91 93.09 5.99 94.01

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0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10

decile groups

po

pu

latio

n s

ha

re(%

)

Percentage of rural residents in each income decile

Percentage of urban residents in each income decile

Percentage of rural residents in each wealth decile

Percentage of urban residents in each wealth decile

Figure 6. Income-wealth distribution in Urban and rural China

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5. Concluding Remarks

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•Deepen the reform. The increasing inequality is not the error of market oriented reform, but is the phenomena of increasing costs of the gradual reform, therefore, deepening the reform, not only the economic reform, but also the political reform, is necessary. Only in this way, we can decrease the rent-seeking, rent-creating and power-money deal activities.

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•Pay close attention to the interaction between income distribution and the wealth distribution: avoid the vicious circle; promote the virtuous circle.

•Strengthen the redistribution function of the government, especially overcome the inverse (reversed) redistribution.

(The end)

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Thank you!