The conventional economic theories –classical, neoclassical and Keynesian- ignore the aspects of equality, while focusing mainly in economic growth. In terms of Figueroa Adolfo (2009) “A unified theory of capitalist development” the income inequality is an outcome of the economic process. Therefore, inequality should be viewed as an endogenous variable. Therefore as endogenous variable, it is important to analyze its determinants.
This author found out that the conventional theories have as one of their axioms the assumption that there is equal endowment of initial conditions. Therefore, he suggest start the analysis considering that there are different types of capitalist societies, the same which differs by basically two initial conditions: factor endowments and the initial inequality in the distribution of economic and political assets.
China and Taiwan represent two interesting cases for the analysis of the inequality. While Taiwan started having more unequal conditions, its capitalist process allowed it to became one the most egalitarian countries around the world. However, in China occurred virtually the opposite, before the economic reform China was one the most egalitarian countries around the world and today is considered one of the most unequal in Asia.
The inequality in both country will be explained analyzing its determinant from the respective capitalist process followed in each economy. Basically, we will be focus in three general aspects: (i) the kind of entrepreneurial structure and governmental policies and strategies, (ii) Land Reform applied and the facility of rural-urban mobility, and (iii) the supplying of public services. This categorization try to get the most relevant aspect of the capitalist process.
The first part of the article is the introduction. In the second and third part we will analyze China and Taiwan respectively, in each case following the three general aspect already mentioned in the previous paragraph, so it could help to ease the later comparison. The fourth part include the comparative analysis and conclusions, derived from the two previous parts. Finally, we present the bibliography and other sources of information
2. Capitalist and inequality in China
At the end of the Mao era, China had one of the most egalitarian distributions of income in the world, with a very low Gini of 0.33. At the grassroots level, the Gini was also egalitarian, while in the urban areas, it was exceptionally low with a value of 0.16 Blecher (2005). However, since 1978 increase in disparities has been inevitable as China introduced market reforms. Currently China is considered as one of the Asia’s most unequal societies.
Diverse scholars have analyzed the impact of the economic reform on the increasing of the inequality in China, for example Zhang and others (2001) have responded that by calculating the Gini coefficient for China and its three regions, namely the Eastern, Central, and the Western regions from 1952 to 1997. They have found that, in general, income disparity in China clearly increased over the 1952–97 period, especially after the initiation of economic reforms. It is important to highlight that the Gini coefficient for the three regions displayed different patterns of inequalities, with the Western region showing the lowest Gini coefficient in that period.
For Huang and others (2003), the primary finding is the levels of inequality in China’s regional economies clearly showed a slight upward trend after 1991. Where the inequality of the overall GDP is primarily attributed to the between-group effect rather than to the within-group effect. This uneven pattern of development has been a troubling issue for China’s regional economies ever since the country first embarked upon its bold program of reforms and opened itself up to the outside world in the late 1970s Huang and others (2003).
Thus, by Huang and others (2003), more than one-half of the inequality in the national income, in fact, was a direct result of inter-provincial inequality, while three-quarters of the inter-provincial inequality was due to inter-zone inequality. Moreover, the uneven development of enterprises in both townships and villages had seemingly been a major factor in the increased inequality in regional income.
With other approaches Kanbur and Zhang (1999), meanwhile, used a decomposition analysis to determine the relative contributions of rural–urban and inland–coastal inequalities to ascertain regional inequalities in China during the 1980s and 1990s. Their primary finding was that, in terms of levels, the contribution of the former was much higher than that of the latter.
According to the balance of the studies about inequality in China, the most appropriate approach, to follow, seem to be the urban-rural analysis. Thus, we can see more clearly the impact of the economic reform on the evolution of the inequality in China. In fact, the economic reform have had different influence in both areas.
In the following graph we can see that in 2002, according to Blecher (2005), the Gini coefficient would be around 0.4. Value higher to either the rural sector or urban sector, because as we said the disparity between these two groups is considerable high more grave than the disparities inside each sector. It is important to mention that the inequality is higher in rural sector, because in the urban sector there exist subsidies, which had benefiting urbanites Khan and Riskin (2001).
Graphic 1
Source: Blecher (2005)
According to graph 1, in the urban areas, income inequality was 0.32 in 2002. The main explanation of disparities in the cities lied on the urban per-capita wages, which has been more unequal after the economic reform, although it is important to consider that subsidies had benefiting urbanites in its equality Khan and Riskin (2001).
China’s working class began to develop at the dawn of the last century. Although during the Maoist period, it grew considerably, but they had wages very homogeneous. It is with the onset of the structural reforms, at the end of Mao era that China’s working class has become more differentiated in all aspects, especially in term of wages Blecher (2005).
In the urban areas, the income have been always explained largely by wages. In the past, almost everyone worked in state-owned enterprises, with a compressed wage distribution, and practically without returns to human capital. Differences in the standard of living between households in the same city were further limited by the rationing of many consumer goods on the basis of need. Regional income differences among cities were reportedly modest, and it is basically due to the cost of living, for example the higher cost of living in Shanghai.
After the reforms, wages in the state sector, became dependent on the economic fortunes of the enterprise, which of course rendered them much more differentiated and variable. Private-sector employment, in both domestic, joint-venture and foreign-owned firms, grew apace, especially in the 1990s. Unfortunately, a large informal sector developed, comprised both of rural migrants and unemployed urbanites, making a negative impact in equality.
There have also been an increasing inequality between male and female wages, which was greatest in the most marketized sectors. According to Blecher (2005) it is due to differences in labor market assets such as education and skills. That suggests that much of the source of the gender gap lies outside the labor market itself.
Nowadays, increasing returns to higher education is more important in explaining growing dispersion of wage earnings.
In the rural sector during the Maoist era, the Chinese people enjoyed a low but all of them had a secure standard of living. Public services such as health care was supplied through a combination of collective and state-run paramedical services, grassroots clinics and a hierarchy of hospitals that were virtually free. Schooling was also virtually free. All the families owned houses and belonged to collectives, in case of their earnings proved insufficient to meet the expenses, they received from their collectives food supplies, shelter, waivers for the minor school and health care fees, and burial.
Prior to reform, nearly 80% of China’s population lived in rural areas and 60% was primarily involved in agriculture. Land was collectively farmed, with income supplemented in some periods by income from small private plots. Income from collective farming was allocated at the level of the production team (25 to 30 households) on the basis of both household need and accumulated work points, with the weight between distribution on the basis of need and basis of labor.
Graphic 2
Source: World Bank, http://data.worldbank.org/country/china
Before the economic reform, the differences within localities among households were very small, and if so, largely associated with differences among households in dependency ratios such as the ratio of the number of individuals that worked to total household size or other indicator. Therefore, there population in the countryside enjoyed a relative equality system.
Due to, as we had mentioned, a host of services (health, education and so on) were collectively provided, getting equalizing results. While, in terms of prices and endowments, income was not sensitive to productivity than would likely be the case after the reforms were started. Naturally, after the reform them become dependent from productivity.
Once rural collectives were gone by the starting of economic reform and application of urbanization, automatically economic insecurity had returned to many farmers. There were ten millions of farmers, who have no land at all to work. These tens of millions with lack of land to support themselves have migrated to cities, where, if they are lucky, they can find work, often in sweatshops, in burgeoning informal and even illegal sectors, or with construction gangs Blecher (2005).
However, it is important o highlight that in the countryside, most of the level and growth of inequality is due to unequal access to non-farm family business income. Certainly the main source if inequality in the rural sector is the generation of non-farm income. While most families are getting greater income from these activities, there are some restriction for a considerable rural population.
However, rural equality also have get a little better in the recent years, because its extremely egalitarian distribution of land, which of course is a product of its land reform. Yet, it is important to reiterate that the inequality still worse than the time previously to the political reform.
The most relevant finding of the present research, is the existence of sizeable urban-rural income gap in China, that, according to scholars, was enforced through strict restrictions on migration from the countryside. Factoring in the value of a host of subsidies, Rawski (1982) suggests that on the eve of economic reform, average differences between the city and the countryside were on the order of 5:1. Now it is expected to be higher.
This phenomena about rural-urban gap could be seen easier in the performance between interior and coastal provinces of China. In the inland part there is a greater significant the improvement of inequality dynamics Benjamin (2004). There the inequality increased more rapidly, where rural areas become more unequal, and at the same time, showing a widening urban-rural income differential.
It seem contradictory, although the cities may be in their infancy or under development, China has yet to develop the array of acceptable social policies with the breadth and level of other transition economies. However, in rural areas the primary safety net has been practically the egalitarian land allocation mechanism, basically guaranteeing land to all rural households.
We can find a big gap between rural and urban sectors, if it is used any indicator of income or welfare. In the following graph we are using the percentage of population with access to water. There we can see the big differences between these two sectors.
Graphic 3
Source: World Bank, http://data.worldbank.org/country/china
A. Entrepreneurial structure and governmental policies
Theoretically is established that the market forces is able to produce rapid economic growth, but at the same time higher inequality. In case of China, scholars affirm that the specific governmental policies involved in its economic reform, have exacerbated this theoretical relation, resulting toward higher level of inequalities.
The leader of China, who implemented the economic reform, Deng Xiaoping was fond of saying, some much “get rich first”, putting the emphases on the role of market mechanisms. This strategy, undoubtedly, broke the previous policy concerning about egalitarianism, and apparently was designed to make only a small portion of the Chinese population rich first.
One of the most relevant characteristic about Chinese economy is its current trade surplus, the same that would be exacerbating disparities within the country. It is because, the famous dynamic export sector is no longer an important source of job creation; it is too capital intensive and has too rapid productivity growth, concentrated in the urban areas.
The liberalization in the labor market would have led to greater wage inequality. The most successful enterprises could pass profits to workers through bonuses and higher base wages, and also the restructuring of state-owned enterprises, led to significant layoffs, unemployment, and at least short-term inequality of access to new jobs.
In the urban areas, these transition-oriented changes, was considerably affected by the development of a vibrant private sector, with wage and employment determination entirely outside any kind of control of prices, instead following criteria of returns to human capital and skill, which would transmit to higher inequality of earnings and income.
Since the readily accessible geographic location of the coastal areas promised a much higher rate of return on investments, compared with other parts of China, the central government established special economic zones, and opened cities and regions along the coasts with the aim of attracting enormous flows of foreign direct investment.
In terms of development, such rapid growth along the coasts has, by default, continued to widen the gap between the coastal and interior areas of China, and has thus brought about additional social, economic, and political repercussions. In the following table we can appreciate the special economic zones.
Table 1: Special economic zones
The impulse of the capitalist coastal area could represent the most determinant long-term structural policy that have led to large disparity in China. But there is a big imbalance concerning the surplus gotten by China, through international trade. We can analyze this problem throughout the trade imbalance between China and the U.S., which is exacerbating disparity in both countries.
Economic theory suggests that the U.S. or any economy gain overall from the interaction with China, but that there winners and losers. At the beginning of the Chinese opening up, U.S. economy have grown. The benefits to the U.S. come in various forms, including opportunities to buy low-cost imports of Chinese things, as well as opportunities to sell more American products and for Americans who own multinational companies also benefit from the opening up.
Graphic 4
Source: World Bank, http://data.worldbank.org/country/china
It is clear that the integration is putting damage on American workers with low skills. Also, it is clear that integration with China has been a prime cause of rising inequality for the U.S. While, at the same time, there are great new opportunities for high-skilled professionals, there are diminishing opportunities for manufacturing factory American workers.
This imbalance has both a demand side source and a supply side source. On the demand side, there is a serious structural deficit fiscal stimulus to the economy. And there is also a supply-side problem. Productivity growth has been very rapid in China, and this requires a real appreciation of the exchange rate to prevent an unhealthy trade surplus.
However, Chinese authorities are reluctant to do a big appreciation, due to Japanese experience when it allowed a very large appreciation in the mid-1980s, leading to an asset bubble, its subsequent collapse, and ten years of lost growth. The current Chinese policy is only of allowing a very modest appreciation.
Currently, trade surplus means that China is exporting capital and invested the profits mostly in low-return American bonds. Naturally, China’s trade account is so stimulative of the economy. But, it is important to consider, that while the government is making some effort to make social spending, it is hampered by the hot state of the overall economy, which already is rising 10% annually in average.
Graphic 5
Source: World Bank, http://data.worldbank.org/country/china
The great solution, would be further appreciation of the currency, which would tend to cool off the export sector, would open up space to expand social spending for reducing inequalities. But, one of the things China fears about appreciation is that it will choke off job creation, because, the export sector has been a good source of job creation in the past.
However, in recent years it has not been a source of net job creation. China’s manufacturing sector has become more capital intensive and in recent years has created few new jobs. According to official statistics, recently the industrial sector in China created less jobs per year, compared to the created in the service sector.
Therefore, there should be a combination of exchange rate appreciation with greater public spending on services could create more jobs than currently occurs. This policy could be designed to be equalizing compared to the current situation. Reducing China’s trade surplus would mean that China could put more of its resources into meeting its own domestic needs.
The current export boom benefits basically urban property owners and existing urban workers, while making it difficult for the government to increase public spending on rural development and social services. This set of two policies, exchange rate appreciation and more social spending would help to reduce China’s disparities.
B. Land reform and rural-urban mobility
At the beginning of the economic reform China counted with a positive measure in favor of capitalist and equality, it is the land reform, which allowed one base for the development with egalitarian process. However, this one was no enough, because we can see in the evolution of income inequality increasing in disparities. It is because, the other measures countered completely this positive effect.
Another measure is when the Household Responsibility System permitted farmers to retain a greater share of the returns to their own labor and entrepreneurial talent in managing farms. Liberalization with respect to farm sidelines and the establishment of family run businesses provided another avenue to potentially earn more than neighbors.
There was also the establishment of Township and Village Enterprises, and therefore the development of off-farm opportunities more generally, would likely have also provided households a way to earn a living off the farm, potentially generating greater differences in income across villages. These opportunities also have significantly changed the structure of income for households.
In the countryside, households also faced increasing integration with the broader Chinese economy, as well as international markets. For farmers, this generated changing terms of trade between agricultural and non-agricultural goods prices. Due to during the period of reform, agricultural prices declined significantly, there was another factor of leading to a rise of inequality.
Similar to the cities, in the rural sector also the industrialization and the economic development would have provided rising returns to human capital and skill, leading to higher income inequality. However, to the extent this development was uneven across provinces, it might lead to widening income gaps across regions, too. Thus, we have more evidence of inter-groups negative effects on the overall inequality.
Probably, the main finding about the hampering to the convergence between rural and urban income, is the kind of “Hukou System” which had been applied in China during all greater time of the economic reform. In fact the rural-urban gap is a featured of China that deserve to be analyzed. The previous point mentioned are not able to explained that.
Thus, through most of the period analyzed there remained considerable restrictions on migration. While these restrictions ended recently, the constraints on mobility would have reduced the convergence of rural-urban incomes. There had been a kind of distortion about the structure between rural and urban population as well as the persistence of income disparities.
Lastly, the evolution of the rural-urban gap depends on the economic growth rates, or development, of industrial and service sectors. It is known that such development was concentrated in cities, reasonable due to the pre-existing and continuing advantages of infrastructure like schools and roads and so on. Therefore, it is expected that average incomes of urban residents to grow faster than those of rural residents. And because the mobility remains imperfect, the urban-rural income gap easily rise.
Chinese population have been either urban or rural people, while land in China is zoned as either rural or urban. However, in urban areas people can easily sell their land and buildings, or mortgage them to borrow. whilst, although in rural areas, peasants have long-term tenure of the land, but they cannot mortgage or sell the use rights in the same way.
There is a big distortion about the moving land from rural to urban use. Currently, China has as comparative advantage more in manufacturing and services than in agriculture. Therefore, peasants cannot earn a decent living as farmers, and it is reasonable to think that the labor force would be more useful in urban employment. But, the alienate of the land out of agriculture for urban use, have been very inefficient.
In China, that conversion is handled administratively. Farmers are compensated based on the agricultural value of the land, but the reason to convert land is for commercial exploit of the land or urban use, which of course is higher than its value for agriculture. Hence, the conversion does not generate a high income for the peasants, and the peasants still get relatively poor recompense, some studies found that the majority of displaced peasants were worse off after land conversion.
In China it is diffused many cases where peasants complain and make demonstration, due to the conversions have not been done in a transparent way, and even there are accusations of corruption of local officials. The government has published statistics on violent protests involving more and more, and that number grew steadily.
For some scholars the way in which agricultural land is converted to urban land is contributing unnecessarily to increasing inequality. It is important to consider as positive aspect the fact that in China virtually all peasants have land. Contrary to the current situations, the land should used as a good instrument to get appropriate gains inside the market system.
The right way would be, using the land either as collateral for borrowing, or could be sold to provide some capital before migrants moved to the city, then it would have been helping those who were in the poorer part of the income distribution. Unfortunately, the administrative way, rather than market-based, conversion of land is reducing the value of the main asset held by the poor.
Graphic 6
Source: World Bank, http://data.worldbank.org/country/china
It is known that during the pre-reform, China had a system that completely restricted people’s mobility, and that system has only been slowly reformed until now. Where each person has a registration (hukou) in either a rural area or an urban area, and cannot change the hukou without the permission of the receiving jurisdiction.
Actually, Chinese cities basically give registration to skilled people, who have offers of employment, however have generally been reluctant to provide registration to migrants from the countryside. Nonetheless, these migrants are needed for economic development, and large numbers have in fact migrated.
There are hundreds of millions rural residents who spend many months working in urban areas, many of them fall into the category of “floating population”. Although these people have for all practical purposes moved to a city, they do not have official registration. However, beyond the floating population, there are a small group of people who have left rural areas and obtained urban hukous.
Although there is a significant rural-urban migration in China, it seems likely that the hukou system has resulted in less migration than otherwise would have occurred. There are several pieces of evidence to support this view. Mainly, the gap in per capita income between rural and urban areas widened during the reform period, which is a very high gap by international standards.
Another evidence, is the fact that manufacturing wages have risen sharply in recent years, at double-digit rates, so that China now has considerably higher wages than much of the rest of developing Asia countries such as India, Vietnam, Pakistan, Bangladesh and so on. It is hard to imagine that manufacturing wages would have risen so rapidly if there had not been such controls on labor migration.
Recent studies focusing on migrants have shown that it is difficult for them to bring their entire families to live in the cities, put their children in school, and obtain healthcare. Although it is not directly related with Hukou system, the growth of the urban population must have been slowed down by these restrictions.
In the graph 5 we can see that urbanization have gone on. Thus, the urban share of China’s population has risen from 20% to 40% during the course of economic reform. Due to that the hukou system has slowed and distorted urbanization. The system has likely contributed to inequality by limiting the opportunities of the relatively poor rural population to move to better-paying employment.
In conclusion, according to scholars, the kind of Hukou System designed in China would be the main explanation of the lack of convergence between rural and urban income. Because, there had been restrictions for mobility the urban-rural gap in China would be higher than other countries where there would not be these kind of restrictions.
C. Public services
Nowadays, public services are consider as ones of the most powerful instrument to face social problems such as inequalities. The appropriate way is through the enable of human capital, which allowed people free mobility with an adequate and enough skills.
The main problem for China is the high degree of decentralization. Thus, the central government would not have the enough resources to invest in public services, while the richest regions are able to invest greater resource, at the same time that the poorest regions are not able to afford the required necessities to reduce inequalities.
It has been noted that one important effect of market reform in China was to dramatically increase the return to education. This basically would be a positive advantage and good opportunities for skilled people. At the same time, it creates a powerful incentive for families to increase the education of their children.
However, in China there needs to be strong public services for education and health, thus as reasonably fair access to the system. Otherwise, inequality become self-perpetuating, because only high-income people can educate their children, then that group would remain as a privileged, high-income group permanently.
Unfortunately, China is at some risk of falling into this trap, although China is much more decentralized than most countries in the world, but the structure of government and some unusual expenditure assignments give rise to spending pattern. Functions such as social security or justice are largely decentralized in China.
This decentralization make fiscal disparities among subnational governments are larger in China than most countries. These disparities have emerged alongside a growing disparity in economic strength among the provinces. Thus, the ratio of per capita GDP of the richest to poorest province grew considerably. As consequence, in China, the richest province has more than times the per capita social public spending than the poorest province.
As a result of the differences in public spending it is translated into differences in social outcomes. For example, the differences across provinces about infant survival rate, had emerged to a very sharp difference, closely related to the province’s income level. The same situation could be found fo other indicator such as the high-school enrollment rate, which was nearing 100% in the wealthier provinces while still very low in poor provinces.
Poor areas have very little tax collection and hence cannot fund decent basic education and health care. For reasons of both national efficiency and equity, it would make sense for the State to ensure that everyone in China has good basic education and health care, so that when people move they come with a solid foundation of human capital.
Due to China’s highly decentralized fiscal system, in poorest local government there are not having adequate resources to fund basic social services. It is known that in China poor households either forego treatment or face devastating financial consequences. According to some studies, many poor households identified a large health care expenditure as the reason that they were in poverty.
The situation in education is similar. For a family living just at the dollar-a-day poverty line, would not have enough resources for sending children to school. Not surprisingly, then, enrollment rates are relatively low in poor areas and for poor families.
In the following graph, we can see that, in China, the educational expenditure as a share of GDP is only around 2%. This is negative, not only because under the international standards, but also because is no enough to solve the terrible problems of inequalities. Worse, in the same graph, it can be viewed that there is a descending tendency, since in 1985 it was 3% of the GDP.
Graphic 7
Source: World Bank, http://data.worldbank.org/country/china
3. Capitalist and inequality in Taiwan
Diverse authors such as Schultz (1997), affirm that Taiwan, since started its capitalist life, is noted as a country that has grown rapidly without increasing income inequality. Today, this country enjoyed one the best income distribution around the world. This fact is contrary to the majority of cases where capitalist process had exacerbated inequalities, especially at the beginning of the process.
In the following graphic, we can see clearly that the evolution of Taiwan’s GINI coefficient is very low, practically trough all the Taiwanese capitalist life, being its GINI’s highest value 0.35 in 2001. However, one important fact to highlight is that at the beginning the of its capitalist process, when the country experimented an industrialization process and economic growth rate around 10% the equality, unbelievable, improved since 0.32 in 1967 to 0.27 in 1980.
Graphic 8: Evolution of the Income Distribution in Taiwan (GINI coefficient)
Source: Chuang (2011) and Schultz (1997)
It is important to emphasize that previously to the beginning of the capitalist process (1949), the initial condition were not so equal, since the island’s population had followed a migration process from the Mainland China. In fact, Taiwan’s early economic history is a story of migration and land settlement, being, at that time, basically a traditional peasant economy.
That migration process meant a sources of inequalities. The new manpower to the island came with skills and technology more advanced than those possessed by the aboriginals, and in 1949 a small, but important group of managers, technicians, and entrepreneurs. The migration also caused inflation, give the greater demand, and theoretically is known that inflation affects more negatively to the poorest.
To understand how the Taiwan’s capitalist allowed a more egalitarian society, we will analyze this equalizing of the income distribution, focusing in three parts. La first governmental capitalist policies, which involves the encourage of Small- and medium-sized enterprises, labor-intensive industry. The second part involves the rural areas and the land reform. Finally, the third part involves public goods.
A. Entrepreneurial structure and governmental policies
The main features of the Taiwanese capitalist is the predominant presence of Small and Medium enterprises. Actually, Taiwan is so-called as the King of the Small and Medium enterprises around the world. The first thing that is clear is that this kind of entrepreneurial structure make the Taiwanese economy to have a labor-intensive industry.
As Pack (1992) stress, unlike other newly industrializing or developed countries, the Taiwan’s economy is dominated by small-scale manufacturing. These Small plants have more flexible operations and lower capital-labor ratios. In consequence, there is a key contribution which lets their growth, having as foundation possibilities of improving the factor of productivity.
In fact, concerning the flexibility mentioned, it allowed more feasible movements among different product lines, Small firms are likely to manage employees more intensively to obtain high and growing productivity from a given set of factors and are allowed the benefits of considerable subcontracting and the realization of economies of scope and technology diffusion.
Based upon different theories and empirical evidence about SMEs growth and different variables to measure their growth; Liu (1999) found out for the case of the Taiwan electronic industry, a inverse relationship between plant’s size and growth. Thus, small plants grow more quickly than larger plants and hence generate proportionally more jobs.
Additionally, for the same Taiwan electronic industry case, Liu (1999) holds that R&D investment and labor productivity are, also, found to be important determinants of plant growth. Therefore, the fact that smaller plants were generating proportionally more jobs, suggests that subsidies to larger firms to stimulate job may be redirected to smaller plants.
The expanding of the middle class in Taiwan, also had given a strong contribution to the improvements of distribution of income. Since this middle class had been a natural consumers of manufactured goods made in the country. This fact had been despite some trade or non-trade barriers to the world markets, because the preferences of the local demand composition for Taiwanese goods.
The agriculture sector had also played its role in improving the equality. Initially, this sector allow the feeding of the population and the creation of important saving rates, which were led to the investment in the industrial sector. But additionally, the labor from agriculture sector also was absorbed by the job opportunities generated in the industry. Therefore, equalizing the income distribution.
Accordingly, developing labor-intensive industry had been good for the economy to create more job opportunities to absorb surplus labor-intensive industry trickles down the economic gains to general workers and thus improves income distribution. In the following graphic we can see clearly as, since the beginning of 1960, the labor income surpass the capital revenue in Taiwan.
Graphic 9: Economic fruit goes to labor income more than capital revenue
Source: Chuang (2011)
In Taiwan, the majority of small-scale firms use to employ fewer than 20 workers, while medium size employing up to 50 workers. Small firms, in particular, predominate in the manufacturing of textiles, apparel, leather goods, wood and bamboo products, basic metals, metal products, machinery equipment, and miscellaneous industrial products.
On the other hand, more large firms could be found in the industries producing food, beverage, tobacco, paper, printing, chemicals, and nonmetallic mineral products.
Since the beginning of the capitalist process (1949), the Taiwanese government had participated actively, through friendly intervention in developing the economy, respecting the principles of free market. Firstly, getting high saving rate from the Agriculture sector, to sustain capital accumulation required for the economic take-off.
Taiwan also characterized by a gradualism process to get its labor-intensive to capital-intensive and then to knowledge-intensive economy. Starting with the food processing , to manufactured products such as textile products, electronic processing and assembling, and chemical products, and finally toward information and communication products.
Also it is important to mention the export-oriented promotion policy, for which was established a export process zone, among other important policies such as the implementation of 10-major construction project in the 1970s, the establishment Hsin-tsu Science-based industrial park of high technology, the set up of the Industrial Technology and Research Institute and son on.
There was a dichotomy in the Taiwanese economy, while Small and Medium Enterprises focused on export market, large firms concentrated on domestic market Chuang (1999). The large enterprises consisted in attracted Foreign Direct Investment , while small and medium enterprises focused on the export market, following the export-oriented policy.
Although, SMEs are more productive and engage in more R&D than large ones do, FDI and R&D had been a positive impact on productivity. But, there is a little negative effect, since Taiwanese labor market is considered a competitive market for unskilled labor, there is a wage gap implies that foreign-owned firms are paying a higher wage premium for white collar workers.
In the following graph, we can see that Taiwan had had a high annual economic growth rate of 8% from 1952 to 2000. Its agricultural output increased more than 7-fold in the 20th century, however its industrial output increased much more nearly 20-fold from 1952 to 1974, while the Taiwanese per capita income from US$145 in 1951 to around US$18 000 in 2010 Chuang (2011) and Taiwan Statistical Data Book 2006.
Graphic 10
Source: Chuang (2011)
It is important to highlight that, although Taiwan had enjoined high level of economic growth accompanied with good process of egalitarian income distribution, it had been basically explained by great number of Small and Medium enterprises of the manufactures sector. However, today Taiwan is suffering a process of deindustrialization, due to the outflow of Taiwanese investment to China.
Therefore, the industrial sector is losing importance in the total GDP, while the service sector is growing faster (see graph ). This empirical evidence should be consider in order to take policies of solution in the face of the increasing of unemployment and deterioration of the income distribution. In this manner, the service sector, also characterized by absorbing a lot of labor could be a current good tool to enhance the income distribution.
Graphic 11
Source: Chuang (2011)
A. Land reform and rural-urban mobility
The Land Reform, implemented in early 1950s, constitute a structural basis able to tender the foundation for a egalitarian income distribution enjoyed in Taiwan. Under the line of the “land to the tiller program”, Taiwan’s leaders made a governmental intervention with successful positive result in both rural and urban areas.
For obvious reasons at the beginning of the 1950s, there was a fierce competition for the scare land. The small size of the island plus the increase population from mainland Chinese. Also there were some social and political instabilities. Given the loss of mainland and the social unrest threatening in Taiwan. It was necessary to stabilize the regime in a kind of pluricultural society Pye and others (1985).
Before the Land Reform, the situation was very unfavorable for famers and also for an egalitarian situation. Basically, there was a relationship between landlords and tenets. Where the rents could be equal to 50% of anticipated harvest, informal contracts were oral; despite part of the rent payments had to made in advance, there were no adjustments in case of for crop failures.
From 1949 the Taiwan’s leaders started to change the situation, giving the foundation for a more egalitarian society. First, in that year, there was a compulsory rent reduction of annual yield crops, besides, if harvest had failures due to natural disasters, then was possible to apply to further reduction rent payment. The tenant farmers no longer had to pay their rent in advance and written contracts and fixed leases of three to six years had to be registered. Finally, the tenants had the first option to purchase land from its owners.
Taiwan’s leaders started a sell public land in 1951 to tenants at the price of 2.5 times their annual yield, despite the market value was about 4 to 8 times the annual yield. In that frame, 35% of Taiwan’s arable public land was sold during 1948 to 1953, while 43% during 1953-1958. As positive impact, in 1952, Taiwanese agriculture production could recover its highest peak Chuang (2011).
Finally, in 1953, was released the “Land to the tiller Act”. There was a compulsory sale of land by landlords, while individual landowners were allowed to retain some land. The landlords were paid 70% of the purchase price in land bonds denominated in kind and 30% in industrial stock of four public enterprises Chuang (2011) and Pye and others (1985).Thus, the landlords were encouraged to participate in the industrial development of Taiwan, basically, through the ownership of large-scale industrial enterprises.
It is important to stress that the selling price and conditions of repayment of the Land Reform, were the same as those provided in the sale of public land at that time in Taiwan. Through the year 1953, tenant households acquired 244 000 hectares of farmland, equivalent to 16.4% of the total area cultivated in Taiwan at that time Chuang (2011).
The free mobility between rural and urban areas in Taiwan also allowed the strengthening of a egalitarian income distribution. Thus, during the first year after the Land Reform, the annual growth rate of labor leaving the agricultural sector to manufactured-goods sector and then never returning was considerably high. Actually, in this noted period the migration from the rural area to urban area was the most rapid in Taiwan’s entire economic history.
In conclusion a free mobility as the describe help significantly to the income distribution. Theoretically, while there was a wage gap between agriculture sector and manufactures sector, people would feel attracted to move to the sector of highest wages till the gap tend to decrease. As result, the conditions offered in Taiwan such as Land Reform plus free mobility, apparently, represent initial settings that had supported positively to the beginning of the income distribution evolution in the island.
B. Public services
The supplying of public good have also been a successful Taiwanese governmental policy in terms of egalitarian income distribution, for example the impulse of infrastructure and education. Actually, Taiwan inherited some positive aspect from the Japanese colonial such as an acceptable agriculture infrastructure or literacy of the population and received considerable amount of American aid used to develop public goods.
The balance of the supplying of public goods consists in a society which enjoy of the covering of basic necessities such as roads, electricity, water and so on. Likewise, the health and education system let to supplying of services of quality, practically to the entire society. All these aspect contribution to the improvement of income distribution, give the high probability of each person to have these services, for instance access to infrastructure and educational services.
Making a historical review. In spite of the fact that the colonial education system discriminated against the Taiwanese people, restricting them to certain levels, qualities, and types of education, in favor of Japanese. However, it allowed to provide formal education for the first time in Taiwan. Another critical aspect for equality was the fact that the Chinese immigrants, as already noted, were generally more educated people, especially the migrants of 1949.
Since 1949, given acceptable endowment of public goods, Taiwan leaders had as two of their pillar the development of infrastructure and enhance of human capital (health and education services). For example, there was approved the compulsory nine-year education in 1968. In fact huge amount of many were invested in public goods.
At the beginning of the Taiwanese capitalist process, Taiwan received important American aid, which majority was directed toward the development of infrastructure and human capital. Thus, in the following table, we can see that the 63% of the total American aid (from 1951 to 1965) were allocated in the two items mentioned.
Table 2:
Source: Chuang (2011)
At the beginning, the upgrading of human quality was more viewed as a tool to develop the industry sector and for the successful of the export-oriented policy. Thus, given the liberalization and as open trade enlarges of markets and competition, besides considering the technology sector as one of the competitive advantage chose by Taiwan, human capital investment was a necessity.
known the entrepreneurial structure dominated by Small and Medium enterprises, the upgrading of human quality, also was viewed as a way to enhance the capability to access, absorb, and apply new technology and information. The relation between technology change and human capital development enables the country to climb the technological ladder and stay competitive.
It is important to highlight that there would be a better effect of human capital in the public sector. There were significant influences of family background on worker’s wage, especially in the private sector. On the other hand, the public sector is more meritocratic and not suffering of the nepotism and family connections of the private sector. It is really, good since is the public sector the responsible to design the development policies Liu (1998).
According to Liu (1998), in Taiwan there is a estimated wages function which is convex, it means that the returns to schooling increase considerably with the level of education. That had helped that despite negative effects such as of family connections and nepotism, already mentioned, Taiwan has one of the highest degrees of earning equality around the world Liu (1998).
After many foundations of the Taiwanese economy and its egalitarian income distribution; today, in the current changing environment, this foundation is represented by the level of human capital. As already noted, Taiwan is suffering a process of deindustrialization and the service sector is becoming the most important as percentage of the GDP.
Thus, this structural change toward more service-oriented economy, is helped by higher educated workers in the service sector than in manufacturing sector, likewise, in Taiwan, the value-added is also higher in service sector. Due to that the capabilities required for service sector is relatively unobservable, is required workers with higher education.
It is expected that the current level of human capital as well as public good as public infrastructure is acceptable to face to new challenge to the service-oriented economy. Thus, will be possibly the maintain both the normal development of the economy and still with an egalitarian income distribution. For that, it is necessary to keep the adequate level of public good.
For example, in the following graph we can see that the total education expenditure as a share of the GNP is around 6%, this percentage is according to international standards, since allow and satisfactory development of human capital and the equality of opportunities of the population.
Graphic 12
Source: Chuang (2011)
Another positive aspect derived from development of public good and human capital is the reduction of gender inequalities. In fact, this explains why recently the return to education is increasing. According to some scholar in Taiwan, the returns to education is higher for females than for males, besides that the former are more suitable for the service-oriented economic structure.
4. Comparative analysis and conclusion
China and Taiwan had initiated their capitalist process in the second half of the XX century. Although there are some similarities among both process such as strong intervention and a gradualism process, the number of differences are larger. However, the main divergences could be appreciated in table 3, which are: (i) the kind of entrepreneurial structure and governmental policies, (ii) Land Reform and rural-urban mobility, and (iii) the supplying of public services.
It is important to highlight that the result in terms of economic growth, practically, had been similar. In both cases, they have presented initial growth rate around 10%. More specifically, in the case of Taiwan the process, which initiated at the beginning of 1950s, it enjoyed this rate till the 1980s and then a soft moderation. In the case of China, since the beginning of the 1980s till now maintain the same growing. It is expected that China will have a longer period of greater growing, given its features such as the size of its population, and its initial very low income per capita.
The main distinction is the level of income distribution generated by the two countries. While Taiwan started having more unequal condition, its capitalist process allowed it to became one the most egalitarian countries around the world. In the case of China occurred virtually the opposite, before the economic reform China was one the most egalitarian countries around the world and today is considered one of the most unequal in Asia and under, but very close to Latin America (the region most unequal over the world).
Table 3: Main differences between China and Taiwan’s capitalist process
Concerning the entrepreneurial structure and governmental policies, in Taiwan the structure composed by Small and Medium enterprises had allowed that its industry become in a labor-intensity one, where the most small plants could have around 20 employees and the Medium plants could have around 50 workers. Scholars found out that Taiwan has one of the most egalitarian wages over the world due to the described structure, where these enterprises had growth successfully helped for the conditions of the country as well as the set of policies applied by Taiwan’s leaders. These policies were: To get high rates of investment, first was generated high rates of saving from the agriculture sector. Then the development of the manufacture sector was encouraged first in short time of industrialization for substitution of imports policy, followed by the export-oriented policy and the usage of the competitive advantage strategy, and finally the liberalization.
On the other hand, in China the divergence of wages had been the main determinant of the inequalities in the urban areas. Due to the availability of some infrastructure, at the beginning of the economic reform China’s leaders decided, as strong measure, to create special economic zones most of them located in the coastal areas. There was attracted huge amount of foreign direct investment and big companies, which explain an important part of the high economic growth presented by the Chinese economy. Then, the urban areas developed faster than other areas, and inside the urban areas the meritocracy replaced party influences. Also the real initial endowments of human capital started to generate inequalities, before the party used to pay similar wages and support with subsidies.
Relating to Land Reform, in Taiwan due to the scarcity of land and the social and political instability, the leaders applied policies which allowed contribution to the economic development and the equality. Basically, the tenant farmers, who were the poorest and had to pay rents, had support to became in proprietary of land, unbelievably since the beginning of the reform the agriculture produced increase to reach the previous highest level, in the new context of more egalitarian distribution, while the former owners received governmental bonds and shares of public enterprises, which also contributed to boost the industrial development. It is important to highlight that in Taiwan was a free mobility between rural and urban areas, which improved the income distribution, because when there were wages differences between areas, industrial sector could absorb easily workers from the agriculture sector.
In contrast, in China, although there was a long and gradual reform which finished at the beginning of the economic reform, this still being incomplete. Rural workers basically won extra rights such as the possibility to sell surplus to the market, after they had delivered the main profits to the government, likewise the land reform did not allow a better connection among the rural sector and the rest of the economy. Most scholars match that the most important determinant of the inequalities in China is due to the restriction against the rural sector. First, there is no a free mobility between the rural and urban areas, which is constrain by the “Hukou System”, in which the government has all the information of the citizens, and they can move to the cities or urban areas, only is that is allowed by the authorities.
In that context, although there are enormous differences in terms of wages and modernization between areas, rural works never could be absorbed by manufacture sector, for instance, if it is no permitted by the government. Secondly, rural people cannot use these assets freely, for example getting loans or selling these land to invest in other sectors or their human capital, instead when the government decide to expand the urban areas, some rural areas are purchased, but not to market prices, officials use to pay a value as rural land, instead of the real urban value, which will be its final destination. This has a consequence that rural families receive much less money of corresponding and could invest less in themselves.
Finally, regarding the public services Taiwan inherited important endowment of infrastructure of the Japanese colonial, especially in the agriculture sector, also counted with an acceptable educational system. At the beginning of its capitalist process, Taiwan received important amount of American aid, which was mainly invested in public services such as public infrastructure and human capital. The governmental expenditure and policies of Taiwan’s leaders had put great efforts in the supplying of public services. Thus, at the beginning of its capitalist process, Taiwan’s government developed a good enough infrastructure, where the road allowed the communication of all the country from north to south. Although, at the beginning the developed of human capital was more related to the supplying of inputs for the manufacture sector as well as the development of knowledge and technology. Today, the level of human capital in Taiwan is viewed as a strong foundation to maintain an egalitarian society in addition to face the new challenge in the development path. The process of deindustrialization, suffered by Taiwan, has as one of its solutions the development of the service sector. This sector is also featured to be labor-intensive, and therefore another possibility to improve the income distribution. Is it important to mention that the continuous upgrading of human capital is reducing the gender gap in the country. In Taiwan 6% of the GDP is directed to the educational expenditure, which is chord to the high international standards.
Conversely, although recently China had been increasing its social expenditure, the country has at least two terrible restrictions. Firstly, the high level of fiscal decentralization had caused that the central government extracts high amounts of taxes from the other levels such as province and counties. In consequence, the poorest provinces and counties are unable to supply themselves of the enough infrastructure, education and health services, while the human capital in those places is deteriorating the inequalities of the country. Worse, I the poorest places children and not capable to the school and people in general in unable to afford health services. Secondly, the current situation make the government powerless to increase the social spending or additional spending in infrastructure (road, water, electricity and so on), due to that the Chinese economy is growing to economic rates of 10% annually, it is at the limit to be a hot economy. It means that if the economy would grow more than 10%, then there will be some instabilities such as inflation. Therefore, although China has wide infrastructure deficit and social deficit, the country cannot invest more in that, otherwise will be a economy instability. Unfortunately, the current economic growth rely basically on the urban and coastal areas of China, while the rest of country is isolated of the modernity. To solve this complex situation and implement policies in favor of a more income distribution, scholars recommend make appreciation of the currency in order to reduce the exports and cool, a little, the economy. Then there will be the enough space to increase the social spending, infrastructure spending, more concentration in the internal market than external, and therefore considerable improvement in the equality, it is possible given the huge amount of saving that has the country. It is important to highlight that in China the education expenditure is only 2% of the GDP.
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Other source of information:
An important source of the information come from Chuang , Yih-chyi (2011), from the academic semester 2011 presented at International Master in Asia and Pacific Studies - IMAS program, National Chengchi University, Taipei, TAIWAN, R.O.C.
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