The Distribution of Income in China

The distribution of income in China is a subject of great interest and considerable controversy. Part of the interest is due to the sheer size of the country: more than a billion people or one in every five persons on earth lives in China and this alone commands attention and interest. China is also the world’s largest developing country — by some indications one of the poorest of the developing countries — and the combination of a huge population and massive poverty attracts the interest of those concerned with world development. Finally, China is a socialist country undergoing major economic reforms, and after the collapse of communism in eastern and central Europe and in the former Soviet Union, China stands almost alone — with Vietnam and Cuba — in advocating a socialist path under the guidance of the Communist Party. This too focuses interest on China.

The distribution of income in China has been a subject of great interest to economists and others both inside and outside the country. Scholars have wanted to know whether a socialist strategy of development has resulted in an egalitarian society and, more generally, how the distribution of income in China compares with that in other developing countries that have relied more on market forces. Policy makers have wanted to know, especially after the economic reforms introduced since 1978, whether the institutional transformations and policy interventions ameliorated or aggravated existing inequalities. Unfortunately it has not been possible to address these questions systematically because of inadequate statistical information. There were few estimates of the distribution of income in China and the available estimates were fragmentary and unreliable.

It is nearly fourteen years since the first reforms of China’s economic system were introduced. Great changes in patterns of inequality, in the distribution of income and wealth, have occurred during this period. The process is not yet over — indeed we are only in the middle of the reform process — and our data provide only a snapshot of a system undergoing radical transformation. In this chapter we focus on three features of the distribution of income which are prominent in the current transition to reform.

During the period after 1978, China’s countryside experienced sweeping changes in economic and social institutions and incentives. The result has been an unprecedented growth in household income as well as an increase in inequality in the distribution of income. To understand these two related phenomena, it is important to know what factors determine household income in rural China. This chapter tries to shed light on this question by making use of the data from our 1988 household survey.¹

Estimates of the distribution of wealth in the rural areas of developing countries are virtually unknown. In some countries there are of course data on the distribution of land, but even where such data exist, they are woefully inadequate. First, land is measured in physical units. Adjustments seldom are made to take differences in the quality of land into account, although rough corrections occasionally are made to distinguish between irrigated and unirrigated land. Almost never is land measured in value terms and hence all factors apart from irrigation which affect the economic value of land are ignored. Second, where data exist, they often refer to the distribution of operational holdings rather than to units of ownership. In countries where large farms are broken up into small tenant holdings, data on the distribution of operational holdings tend to understate the degree of inequality in land ownership. This problem is compounded in countries where large landowners own more than one farm, often in different localities. Third, the data on the distribution of land usually focus on the distribution among tenant cultivators or, alternatively, among landowners. In both cases landless agricultural wage workers are excluded from consideration. What is needed however are data which refer to the distribution of land (correctly valued) among the entire rural population, including those who possess no land at all as well as small and large landowners.

This chapter investigates the extent and nature of poverty in rural China, using survey data from our household income survey of 1988. The first section contains some historical background and introduces the data set. Next we discuss the conception and measurement of poverty, derive a direct nutrition-based and an income-based poverty line, and present alternative headcounts of rural poverty. The major characteristics of poor households are discussed in the third section. The fourth section presents and estimates a model of per capita income distribution. Based on this model, some simple simulation exercises are carried out in the fifth section to illustrate the effects of changes in the independent variables on the incidence and intensity of rural poverty and derive suggestions for policy. Our major conclusions are presented in the final section.

In this chapter we examine the incomes of employees in China’s rural enterprises, often referred to as township, village and private enterprises (TVPs). This rapidly growing group — now numbering almost 100 million — occupies an intermediate position between the highly regulated urban wage employment sector, on the one hand, and the mass of rural peasant household producers, on the other. We begin with the macroeconomic context, showing the crucial role that rural enterprise employment now plays in absorbing the increment to the rural labour force. In the second section we present estimates of income functions for the rural enterprise sector, using data from the 1988 survey. The third and fourth sections are comparative: we compare the income functions of rural and urban wage employees, and rural households receiving income from enterprise employment with other rural households. We also investigate access to rural enterprise employment. The final section contains a summary and conclusions.

The ultimate concerns of this book are with the levels and distribution of economic welfare. Owing to income-pooling within the household, household income per capita is likely to be the best indicator of welfare levels. This chapter, however, relates to the urban sector only and, within that sector, to the incomes of working members only. It should be seen as a building block, therefore, rather than an end-product.

The evidence presented in this volume indicates that the distribution of income in China is less unequal than in many developing countries. The Gini coefficient in 1988 was 0.34 in rural areas and 0.23 in urban areas.² This low degree of income inequality is partly attributable to the restrictions on the personal ownership of land and capital. Human capital, by contrast, is intrinsically attached to the person. It is possible, therefore, that education is an important determinant of such income inequality as exists in China.

To date, it has not been possible to address questions of income distribution in China systematically because of inadequate statistical data. There were few estimates of the distribution of income in China and the available estimates were fragmentary and unreliable. Our study begins to fill this void, providing relatively reliable and conceptually sound estimates of household income in both rural and urban areas.