Further Reforms Needed to Close Income Gap

Income among Chinese urban residents has increased sharply along with economic development in the past decade. Per capita income grew by 16.25 percent over 10 years ago, very close to the 16.23 percent increase in China's industrial and service sectors in the same period.

However, problems such as the widening gap between the rich and the poor have risen. Reforms on the distribution system need to go further to tackle these problems.

From 1990 to 1999, the per capita disposable income of urban residents increased by 5.7 percent, according to the China Statistics Yearbook.

More than 7 percent of urban families earned more than 10,190 yuan (US$1,230) per capita in 1999.

About 61 percent of urban families had an income of more than 4,316 yuan (US$520) per capita that year. The per capita income of the rest of the urban families was lower than that figure.

Statistics show that the gap between the rich and the poor is widening by 3.1 percent each year in terms of the amount of income.

Generally speaking, the income gap of urban residents is widening with a proper ratio, given that the Gini Coefficient -- an index measuring wealth -- of their income climbed to 0.3015 in 1999 from 0.2754 in 1994.

The income gap is widening between different careers. Traditional labour-intensive sectors are on a relative decline. A typical example is the mineral exploration in which income topped other sectors in 1990, but fell to the third from the bottom of the income list in 1999.

Incomes in high-tech sectors and capital-intensive sectors are rising sharply. In 1990, incomes in the financial sectors ranked the last but three among all sectors, but by 1999 it had jumped to the top.

Staff in government departments, public institutions and some business sectors such as real estate and commercial brokerage enjoyed a rapid increase in income in the same period. Average incomes in State entities increased by the most of all sectors, 2.74-fold, in the decade.

The gap is reasonable to some extent. On the one hand, many high income earners are high-level management personnel in high-tech sectors. Their gains are commensurate with their ability and job performance.

On the other hand, increases in the incomes of the working class have been curbed because of the large surplus of labor force in China.

The high income in some state-monopolized sectors has become a prominent issue. In 1999, income in some monopolized sectors is 1.38 to 2.36 times the income in average sectors.

The income gap between different regions, especially between the prosperous eastern provinces and less-developed western regions, is also getting wider.

China also risks a brain drain under the current distribution system. The income of Chinese citizens is only a fraction of those in developed countries. Lured by handsome salaries, domestic professionals are expected to flow into foreign enterprises once China joins the World Trade Organization (WTO).

The gap between the rich and the poor has put great psychological pressure on low-income earners. An extreme gap between the rich and the poor is unfair and will distort the value of labor. It has become the top job in the reform of the distribution system to bridge the gap.

The government hopes the levy of individual income tax will help narrow the gap, but in fact the tax is just peanuts for the high-income group. Many fat cats even manage to evade individual income tax.

Another problem is inadequate social security funds. It is getting increasingly tough to improve the social security system as laid-off workers and aged population increases in Chinese cities.

Between 1998 to 2000, the central government invested 9.6 billion yuan (US$1.16 billion), 25.7 billion yuan (US$3.1 billion) and 47.8 billion yuan (US$5.8 billion) a year in the social security system. A bigger budget will be made this year.

The intensified investment in social security funds indicates the government's efforts to better redistribute social wealth optimally and further improve living standards of urban residents.

Looking ahead gives a mixed picture of the development of China's urban income distribution system over the next five years.

On the one hand, urban residents will enjoy a new round of increases in their income.

One reason is that the gross domestic product (GDP) will continue to grow by 7 percent a year, according to official predictions.

Domestic investment will also be boosted because the government plans to expand the scale of infrastructure construction when implementing the western development strategy.

On the other hand, the gap between the rich and the poor will inevitably get even wider in the coming years.

As a natural result of urbanization, more and more farmers will flood into the cities. This will curb the price of the labour force and make it even harder for them to increase their income.

With China's entry into the WTO, the fight for professionals between different enterprises will be fiercer. It will result in a sharp rise in the income of high-level workers.

It is recommended that the government intensifies the levy of income tax on the rich and enhances the social security system to improve the living standards of low-income earners.

It is also critical to smash the monopoly and moderate the high income of monopolized sectors.

But a more effective way to optimize the income ladder is to help the average income group to earn more.

State-owned enterprises can introduce an incentive mechanism to help increase the income of their staff, who also make up a major part of the average income group.

Government departments can also streamline their functions and raise the salary of public servants.

Such measures will help expand the middle-class group in China. This will help to narrow the gap between the rich and the poor and promote common prosperity in China.

(China Daily 05/25/2001)

In This Series

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Measure Spelt Out to Solve Irrational Income Distribution

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