China can still reverse inequality before it’s as bad as the U.S.

A homeless man in China sleeps on Ronald McDonald's lap (Credit: Denis / Flickr)

Income inequality in China is worse than previously estimated, according to a new paper published last week by the National Bureau of Economic Research. Still, it’s not as bad as the U.S.

Estimates by the new World Wealth and Income Database (WID.world) – an ongoing project of the authors, economists Facundo Alvaredo, Lucas Chancel, Thomas Piketty, Emmanuel Saez and Gabriel Zucman – reveal that China’s richest 1 percent actually holds at least double the share of national income originally reported.

“With previously available data for China, based on surveys, the top 1 percent income share was thought to be 6.5 percent. China was therefore seen as one of the most equal country (sic) in the world,” Chancel said in a January press release announcing the launch of the WID.world website.

“New estimates on WID.world show that top 1 percent income share is in fact 13 percent – and this should be viewed a lower bound,” he said, due to tax evasion and limited data.

However, even with this higher estimate, China’s poorest 50 percent still holds a larger share of national income if just barely: 15.1 percent in 2015.

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Compare that to trends in the U.S., which the authors described as a “complete collapse of the bottom 50 percent income share.” From 1978 to 2015, the income share held by the U.S.’s bottom 50 percent dropped from 20 percent to 12 percent. Meanwhile, the income share of the top 1 percent rose from 11 percent to 20 percent.

1978: China's poorest 50 percent (blue line) held 27.5 percent of national income while richest 1 percent (red line) held 5.8 percent; 2015: 15.1 percent held by poorest half compared to 12.7 percent held by top 1 percent

1978: China’s poorest 50 percent (blue line) held 27.5 percent of national income while richest 1 percent (red line) held 5.8 percent; 2015: 15.1 percent held by poorest half compared to 12.7 percent held by top 1 percent

A complete reversal – 1978: bottom 50 percent in U.S. held 20 percent of national income while top 1 percent held 10.8 percent; 2014: bottom half only holds 12.5 percent compared to top 1 percent's 20.2 percent share

A complete reversal – 1978: bottom 50 percent in U.S. held 20 percent of national income while top 1 percent held 10.8 percent; 2014: bottom half only holds 12.5 percent compared to top 1 percent’s 20.2 percent share

“Higher income inequality and severe bottom income stagnation mechanically contribute to higher wealth inequality in the U.S.” Saez said in the press release.

While China’s top 1 percent has experienced significant growth, so has the average incomes of its bottom 50 percent – by 401 percent between 1978 and 2015. This growth has pulled more than 500 million people out of extreme poverty, according to the World Bank, and has masked the effects of inequality in China.

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“In contrast, in the U.S., there was no growth left at all for the bottom 50 percent (-1 percent),” the report said.

Although China currently may not be experiencing the same gaping divide as the U.S., “unequal privatization and access to equity” is quickly pushing China in that direction. A zoomed out look at the share of national income held by the top 10 percent, not just the top 1 percent, reveals that familiar disparity.

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1978: bottom 50 percent and top 10 percent held 27.5 percent and 26.3 percent of national income respectively; 2015: shares shifted to 15.1 percent for the bottom 50 percent and 40.2 percent for the top 10 percent

These differences suggest that while inequality is a rising problem globally, country-specific policy solutions “matter considerably,” the report said. Because of the increase in private wealth at the expense of public wealth – a significant contributor to inequality – the government’s ability to redistribute income to mitigate inequality is severely limited.

Therefore, the report suggests that leaders must prioritize improving education and access to skills, progressive taxes, reforming corporate governance and increasing workers’ bargaining power – policies that “equalize the distribution of primary assets, including human capital, financial capital and bargaining power.”

The authors cannot say for certain that the trend of rising inequality will continue. However, they do have a clear message for economies like China’s that are emerging in a globalized world.

“High growth rates in emerging countries reduce between-country inequality, but this in itself does not guarantee acceptable within-country inequality levels [or]ensure the social sustainability of globalization.”

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About Author

Joanne Lu

Joanne Lu is a South Carolina-based writer and editor dedicated to global development, poverty alleviation and social justice. After a year in Rwanda, she now covers the Asia-Pacific and economics. Find her on Twitter @joannelu or email joanne@humanosphere.com.