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The Sunday Paper – Inequality in China – Trends, Drivers and Policy Remedies

We all know the story; but seeing this picture prompted an audible ‘Wow!’ from me nonetheless.

This is the good news; the near eradication of poverty in China in just 40-years. History contains no precedent, no nation will ever best this.

The bad news though is in this process income inequality increased dramatically and in 2013 China was one of the most unequally-distributed-income economies in the world.

The researchers in the paper highlighted this week, another in the Working Paper series from the IMF, note the trend has improved a little from a peak of inequality in 2008 when the Gini coefficient peaked at 49.1. In 2016 it had declined to 46.5 (N.B. a lower Gini implies fairer income distribution) but unless the government takes a more proactive approach, the paper argues, it could begin to rise again.

The problem persists due to certain structural issues. Urbanization is being encouraged but that’s a big driver of inequality. Ageing is a fact in plain sight but the government seem behind the curve in providing comfort for this increasing demographic. The shift in the economy to services benefits those able to make the change but punishes leftovers. Finally, education remains a big divider; you have a good one, count your blessings. You don’t? You’ll suffer, and not because you’re not smart. It’s just maybe not an option in your locale?

The IMF suggest some practical fixes. There are two areas where most good could be achieved with reform.

First, tax. Not enough people pay even basic income tax in China. The government need to reduce exemption thresholds while at the same time reducing regressive taxes such as VAT and social security payments. Property and wealth taxes should be introduced, the rich have freeloaded too long.

Next, expenditure. Sort out the hukou mess. It’s not good to encourage people to better their lot by moving to cities and then treat them as second-class citizens when they’ve made the move. Then, and of course, spend more on education and pensions especially in areas that are having trouble self-funding these increases.

The paper draws attention to other literature on this subject that suggests persistent income inequality, ultimately, results in slower growth. That fact alone should wake up planners to this increasingly pressing issue.  Let’s hope so.

The paper (with some other Wow! charts like the one above) can be accessed via this link Inequality in China.

Happy Sunday.

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