Some Got Rich First--and Richer Later: The Uneven Nature of China's Economic Development
DEVELOPMENTS
Over the last two months, a spate of violent attacks against schoolchildren in China’s eastern provinces has heightened authorities’ concerns about the instability of China’s poor and mentally ill, many of whom feel left behind as the rest of China gets wealthier. On March 23, a retired doctor, reportedly driven by a desire to take revenge on the rich, stormed a local elementary school in the southeastern province of Fujian and stabbed eight children to death, injuring five others. The shocking incident inspired four copycat killing sprees by unemployed or under-employed adult males, most of whom reportedly suffered from mental illness. The killings highlight the need for a better social safety net and social welfare services for the mentally ill, and put into sharp focus the uneven nature of China's economic development and its concomitant social pressures. Soaring income inequality, widespread perceptions of helplessness and the corrupt, self-seeking behavior of some Chinese government officials have become part of the public debate as the world seeks to understand these tragedies and China seeks to prevent future ones.
BACKGROUND
Since launching market-oriented economic reforms in the late 1970s, China has been lauded for lifting hundreds of millions out of poverty, but many have nonetheless been left out of the Chinese economy’s meteoric rise. Although it is common for countries in early stages of development to display increasing income inequality, as development proceeds, inequality tends to shrink. Familiar with the precepts of income inequality and industrialization, then-leader of the Chinese Communist Party Deng Xiaoping famously declared, “Let some get rich first,” with the unstated assumption that the rest would follow soon.
Unfortunately, this has not been the case. As Deng expected, inequality began rising in China in the mid-1980s. China’s Gini coefficient, a standard measure of inequality in which 0 represents complete equality and 1 represents complete inequality, was approximately 0.28 in 1983, making it one of the most equal societies in the world, comparable to those of Sweden, Japan, or Germany. Although China is now beyond the early stages of industrialization, in 2007, its Gini coefficient had risen to 0.41, putting inequality in China on par with its much less developed neighbors Thailand and Cambodia (but still beneath inequality in the United States) - not what Deng was expecting.
China’s economic development has been uneven for a variety of reasons. As in any large country, inequality results in part from the size and geographic variety of China. The key role of foreign trade and investment in China’s development has naturally concentrated growth in its coastal areas; more remote areas of China lagged behind. But growing inequality was also the result of policy choices and poor governance.
Prior to economic reform, social services were provided by state-owned enterprises (SOEs), which guaranteed lifetime employment, healthcare, education, and pensions. One of the policy choices made by China’s reformers was to allow SOEs either to prosper or fail in a market economy, without replacing the social services they provided. The resultant fraying of the social safety net has exacerbated inequality. Today, healthcare, education, and pensions are spotty throughout China, and their costs are borne by individual households. Unemployment insurance or a functioning welfare system remains almost entirely absent.
State-directed strategies for industrialization have played a substantial role in rising inequality. In the 1990s, then-President Jiang Zemin, a member of the ‘Shanghai gang,’ led a shift in economic policy towards an urban-oriented, highly capital-intensive industrial growth strategy. This has increased the demand for capital, led to sharply rising energy consumption, but resulted in slower growth in employment and less upward pressure on wages. However, it was good for capitalists. The share of profits in national income rose markedly, while the share of wage income fell, increasing inequality and constraining household expenditure. China also retained limits on internal migration imposed during the disastrous Great Leap Forward of the 1950s, and government services provided to internal migrant workers are sparse, preserving income inequality between rural and urban areas, as well as across regions.
Finally, in urban China, where inequality is often the most evident, corruption and cronyism create what euphemistically might be called market distortions. Individuals with government or Party affiliations frequently take advantage of their positions for commercial gain. Although the extent to which corruption contributes to inequality is unknown, its visibility remains high. Corruption of government officials is one of the Chinese citizenry’s primary concerns, a fact of which the Party-state remains painfully aware but attempts to downplay.
ANALYSIS
High and rising inequality exacerbates social and political tension, but the lack of legitimate outlets for releasing such tensions in China (through state-condoned protests, the legal system, or voting, for example) may threaten the current regime. Because the Chinese Communist Party’s legitimacy is tied up in its ability to deliver rapid economic growth and increased living standards to its people, the Chinese government simply must find a way to increase household incomes.
A shift in Chinese policy that reduces income inequality would also benefit the rest of the world. The current Chinese economic growth model relies largely on investment and exports to make up for the weak growth in household demand. Policies to raise household incomes and strengthen the social safety net, coupled with a greater emphasis on more labor-intensive services and light industry would lower inequality and boost the living standards of China’s households. It would produce Chinese growth that is less reliant on exports and less likely to produce tensions with China’s trading partners. Closing the income gap in China will not eliminate violence, but it may lead to greater social stability and decrease instances of tragedies caused by those who feel they have been left behind.
Marcy Nicks Moody writes about China. In 2007-08, she was a Fulbright Scholar in China, where she was also a Research Fellow with the U.S.-Asia Law Institute. She received an M.A. in East Asian Studies from Columbia University and graduated from Brown University.