Avoiding the Trap -- Beijing Review

COLORFUL CONTAINERS: The East China Import & Export Fair exhibits jugs emblazoned with animal cartoons. Exports drove much of China's economic growth over the past few decades (PEI XIN)

Three decades of fast growth have exacerbated the gap between high- and low-income groups, and between cities and rural areas. "Growing income disparity and social disorder are the major causes of the middle-income trap," the economist said.

According to NBS statistics, China's Gini coefficient, a widely used measure of economic inequality, reached 0.474 in 2012. An index reading between 0.3 and 0.4 means the rich-poor gap is relatively reasonable, according to UN standards.

"The statistics highlight the need for China to speed up income distribution reforms to narrow the wealth gap," said Ma Jiantang, commissioner of the NBS.

According to Ma, the average income of urban residents in China is about three times that of rural people. While in urban areas, the average income of high-income group is about four times that of the low-income group.

The average per-capita disposable income of urban residents in 2012 was 24,565 yuan ($3,943), while the average per-capita net income of rural residents was 7,917 yuan ($1,271), with the income ratio reaching 3 to 1, according to the NBS.

After dividing the urban residents into five groups according to their incomes, the average income of the highest-earning group reached 51,456 yuan ($8,259), almost five times that of the lowest-earning group with an average income of 10,354 yuan ($1,662).

"China's Gini coefficient is relatively high compared with the warning level of 0.4, reflecting the severity of the yawning wealth gap," said Wang Jun, an economist at the China Center for International Economic Exchanges.

"High inequality will hinder future growth, as low-income households contribute little to demand and are unable to invest in skill training and development," said Zhuang. Beyond direct economic impacts, inequality has the potential to generate social instability, the ADB economist added.

To address the problem, China has vowed to double the country's 2010 GDP and per-capita income for both urban and rural residents by 2020, according to the 18th CPC National Congress in November last year.

It is the first time that China has detailed its objective on per-capita income, an internationally accepted indicator for gauging people's living standards, in the country's blueprint for future development. Targets set at the 16th and 17th CPC national congresses back in 2002 and 2007 respectively merely called for more GDP growth.

But Ma said that only doubling the GDP and per-capita income is not enough. "China should make endeavors to better distribute the cake of its economic growth while trying to make it bigger, and strive to make the incomes of low- and middle-income residents grow faster," he said.

To this end, an improved tax system has been proposed as a solution. According to experts, a well-designed tax system assists in wealth redistribution by transferring resources from the rich to the needy.

Gan Li, Director of the Economics Department at the Southwestern University of Finance and Economics in Chengdu, Sichuan Province, said that the Gini coefficient is remarkably lower in developed economies with a mature tax system.

"In China, taxation has so far failed to shape a healthy income distribution, which it is supposed to do," Gan said.

But it is not only about how taxes are collected, but how they are spent, said Wang Yukai, Vice Chairman of the China Society of Administrative Reform. According to him, education, medical services and social security account for 56-70 percent of government spending in Western countries, while in China, only 28.8 percent is spent on these areas.

Gao Shangquan, Honorary President of the China Society of Economic Reform, said that one third of China's occupational disparity could be attributed to monopolies, so reform in the railway, petroleum, electricity and telecommunication sectors is urgently needed.

During the First Session of the 12th National People's Congress, China's top legislature, in early March a plan was adopted to streamline the government and transform its functions. The former Ministry of Railways, which has long been at the center of controversy for being both a policymaker and a service provider, has been broken up into administrative and commercial arms—namely the State Railway Administration and the China Railway Corp.

Aware of the problems, the Chinese Government has taken a slew of measures including improving the social security system, raising the individual income tax threshold and capping the salaries of senior executives at state-owned enterprises. The country has also encouraged economic development in the central and western regions to benefit local residents.

Meanwhile, more effort, experts say, is needed to solve income disparity through institutional reforms such as breaking monopolies, wiping out unreported income, improving residents' employability and ensuring equal opportunities. Only in this way can more people share the fruits of China's fast economic growth, Ma said.

The concept of middle-income trap was first put forward by the World Bank in 2006. It refers to the economic phenomenon of a country reaching the middle-income stage, then being incapable of completing an economic transformation to become a highincome country , due to problems such as an unbalanced industrial structure and lack of policy innovation.

According to statistics by the World Bank, eight major Latin American economies, including Argentina and Brazil, were caught in the trap when they tried to shift their growth model from low wages to high skills, a step that is critical to evolve into higher-income economies.

Only 13 of 101 countries and regions that entered the middle-income stage in the 1960s had escaped the middle-income trap by 2008, World Bank figures show.