Income Distribution and Economic Growth in China During Past Three Decades

1. Income Distribution and Economic Growth in China During Past Three Decades Xie Jing Renmin University of China

2. Main points • Introduction of the problem of China’s growth and income distribution • Main problems of income distribution • How does income distribution affect China’s economic growth • Conclusions

3. Introduction of China’s growth and income distribution • During 2001 to 2003, Chinese economy increased by 10% every year; but the real income of the 10% poorest people decreased by 2.4%. China’s gini coefficient has reached 0.45.(world bank) • Russia’s economy increased by 6% from 1999 to 2006, and the total salaries and individual income increased by 500%. Considering the inflation, real salary income in Russia increased more than 200%. • The lowest living standard in Moscow is 5124 ruble (1700 RMB) per month, while this number in Beijing is 448 RMB, 26% of Moscow. In Harbin, the capital of Heilongjia province which borders on Russia, this number is 200 RMB. This standard was made in 1997, and had not been changed till now.

4. Introduction of China’s growth and income distribution • The income of top 20% people is eighteen times of that of the lowest 20% people. (Chinese Academy of Social Science) • According to UN’s poverty standard (1 dollar consumption per person a day), there are still 200,000,000 poor people in China, the second largest number in the world, just a little smaller than India. • In 2006, salaried persons contributed 60% of the whole tax income, while the rich contributed only 10%.

5. Introduction of China’s growth and income distribution • Did the income difference stimulate China’s economic development, or will it harm the future growth in China? • Unequal income distribution and poverty has been the main obstacles of China’s growth.

6. Main Problems of Income Distribution Ceaseless widening of the income gap

7. Main Problems of Income Distribution Concentration of amassed wealth

8. Main Problems of Income Distribution Concentration of financial wealth in urban family(%)

9. Main Problems of Income Distribution Most of rural families get low income Pure income of different regions (RMB)

10. Main Problems of Income Distribution Extraordinary Gap Between Urban and Rural Families Urban-rural gap and its contribution to general income difference

11. Main Problems of Income Distribution Increasing Division Among different regions with rapid economic growth • The average income in China's east has been 2.26 times that of the west and it saw a three times difference between the highest and the lowest. • In 2005, disposable income of west urban people was 66.7% of that of east, while in 2004 this rate is 69.7%. • In 2005, disposable income of west rural people was 44.2% of that of east, while in 2004 this rate is 48%. • In 2005, total regional economic growth rate in the west reached 12%.

12. How does income gap affect Chinese growth? • Two opinions: income difference improves economic growth; income difference harms economic growth. • Different analyzing method and empirical model. • First analyze the channels through which income gap affects economic growth. • Then test whether the income gap explain the different growth performance of regions.

13. How does income gap affect Chinese growth? The formation of human resource Yield of education (by year)

14. How does income gap affect Chinese growth? The formation of human resource Yield of education (by educated level) University college technical school high school Primary school

15. How does income gap affect Chinese growth? The over deposit and over production effect Gap between deposit and loan increased from 1995 (billion)

16. How does income gap affect Chinese growth? The over deposit and over production effect • social capital formation was mainly driven by government

17. How does income gap affect Chinese growth? The over deposit and over production effect Excess producing capability, decreasing CPI and PPI (last year=100)

18. How does income gap affect Chinese growth? Unstable social and economic circumstances • Laid-off people, unemployment, lack of social security reduced the general consumption desire. • Income gap between urban and rural area distort the structure of macro-economy. • Unequal income distribution pattern encourages corruption and injustice, intensifies social conflicts.

19. How does income gap affect Chinese growth?--------Empirical Analysis Income difference effects on economic growth (panel data)

20. conclusions • The conclusion made by Barro(2000) that the enlargement of income difference is harmful to the economic growth in the country with per capita GDP lower than 2000 dollars is correct. • Behind the rapid increase of growth rate there do exist some problems of income distribution which can not be neglected. • Large income distribution gap is to be the serious obstacle of China’s healthy economic development. • To make the virtuous circle of economic growth and impartial income distribution has been the important task for China.

21. Resolutions • Establish the redistribution system based on the benefit of disadvantaged group. • Improve the taxation system, and reduce the burden of low income group. • Break the separation in regions and sectors, improve the reasonable market competition. • Improve the social security coverage in urban and rural families.