Maybe Inequality in China Isn't Soaring After All

Here's some counterintuitive thinking: conventional wisdom paints China as the poster child of rising inequality. For a supposedly "socialist" economy, inequality there has long since vaulted past that in the United States and is reaching even higher. I myself have subscribed to this point of view. After all, how can coastal-interior, urban-rural, and other divides partially reinforced by official diktat such as the hukou system [1, 2] be remedied in short order?

Andrew Batson of the WSJ alerts us of a study that may suggest just that based on a just-released OECD report on China's economy:

"We've already seen, in the last five years, a stabilizing of the disparities," Richard Herd, a senior economist at the OECD, told a press briefing in Beijing. Much of that is due to an enormous movement of rural people off farms and into urban jobs, a change which allows them to raise their incomes significantly. "You've had a major adjustment in the labor market since the mid-1990s," he said.

China's income inequality as measured by the Gini index—a scale on which zero is perfect equality and 100 is perfect inequality—was at 49.6 in 2005, already greater than the U.S., according to the Chinese Academy of Social Sciences [CASS]. But the OECD, using what it says are better estimates of price changes and the ranks of undocumented rural migrants in cities, puts the Gini index for 2005 at 41, and says the measure of inequality edged down to 40.8 by 2007.

Actually, the Gini coefficient for China I am more familiar with from Chen and Ravallion of the World Bank is somewhat lower at 45. (Also see here for a 2007 update from these authors):

Nevertheless, my interest piqued in the more optimistic OECD figures, I downloaded the entire report (sorry folks, SourceOECD requires an institutional subscription). The chart which graphically illustrates inequality trends in China using purportedly better measures is this one on p. 139 of the report. As mentioned above, it paints the most optimistic picture yet by (a) reducing the national Gini coefficient by five points or so and (b) showing a mildly diminishing trend from 2005 to 2007:

These results, however, are achieved by doing some fancy footwork with limited data. First, statistical authorities do not present a single national income distribution, and second, data for rural and urban households are presented differently. Combining these two disparate data sets is tricky and the OECD report offers this note:

The published data on the distribution of household incomes in China is sparse. For urban areas, it is limited to showing average incomes in the bottom 5 and 10% of the income distribution and in the five quintile levels for urban households. For rural households, the data is presented differently, as the proportion of people with nominal incomes between different levels. The latter intervals are only changed infrequently despite a generally-increasing price level. In addition, these presentational differences make it impossible to easily add the rural and urban income distributions to obtain a national income distribution. Indeed, the National Bureau of Statistics never presents data for the national distribution of income.

In order to overcome these problems, Chotikapanich et al. (2007) developed a method to transform the grouped urban and rural income distributions into a single continuous distribution. Their method estimates the parameters of a beta and Weibull distribution from the grouped data for urban and rural areas, respectively. The income levels used to estimate the distributions are deflated by the urban and rural CPIs, respectively. Chotikapanich et al.(2007) only present separate indices for the urban and rural populations. Here a national distribution is presented. The difference in price levels between rural and urban areas estimated by Brandt and Holz (2006) is used here to ensure that measured incomes in the two areas represent a comparable purchasing power. Finally, the two distributions have been combined by using series for the rural and urban population that take into account changes in the definitions of these sectors in the censuses of different years (Shen, 2006).

In any event, inequality in China may be higher than in the US. While some may regard inequality as a moot debate in capitalist societies where spoils should mostly go to the victors, a country like China affecting socialist principles needs to be concerned with inequality trends for obvious reasons. In any event, I leave you with the OECD's interpretation of what needs to be done to make further inroads into reducing OECD inequality:

In recent years, policymaking in China has put increasing emphasis on stemming the growth in inequality, which had been fairly steep since the 1980s. Policy action has taken the form of regional development measures and of reforms of various aspects of the social safety net broadly defined. The Western Development Plan has aimed at narrowing the income gap between the sparsely populated and underdeveloped West and the more prosperous and faster-growing East. The bulk of the expenditure, however, has been on large capital-intensive projects rather than on education and other social spending. More emphasis on education would help reduce the income gap, since human capital is a key determinant of income. Government policies to improve conditions in rural areas nationwide have involved a substantial reduction in the burden of regressive taxes and fees. Welfare assistance has also evolved: a minimum living allowance has been introduced in urban and more recently in rural areas, but it has not reduced poverty that much, not least because of how it is administered. Moreover, the financing of this allowance ought to rely more on national solidarity and its delivery needs to be better co-ordinated with that of other social benefits.

A set of new indicators of nationwide inequality, based on household survey data, suggests that overall inequality has ceased to increase in recent years, and may even have inched down. Alternative measures of income inequality across provinces show that, if migration is taken into account, disparities are markedly less, and have tended to decline somewhat in recent years. Even so, geographical inequality remains very high by international standards. It reflects intra- more than inter-provincial differences, pointing to persistent, if diminishing, labour market segmentation.