Traditionally, the foreign policy of China has an approach of the world divided basically in two groups: The developed countries and the developing countries. Thus, since Mao through subsequent chiefs exposed categorization for developing countries and colonies in Asia, Africa and Latin America, making demarcation with the developed countries such a Japan, Canada, Oceania as capitalism countries of Western, and especial categorization for superpowers such as US.
Despite old ideological rhetoric, China has finally been predominantly pragmatic in its foreign policy, however this pragmatism has improved in the current time, when China has as main objective its economic development. Thus, at the late of 1970s, once started the economic reform, China was inside its pragmatic orientation, while accentuating its economic development, firstly its relationship with the US became a priority Mitchell (2007).
After the end of the Cold War, China had as priority its relationship with developed countries, while with the developing countries became subordinated Mitchell (2007). Due to that US stayed as the only superpower, China started the promotion of a New World Order and regional and global multilateralism, apparently to diminish US power and increase Chinese one.
Nevertheless, continued its relations with the Third World, then using a rhetoric of mutual benefit of “win-win gain” and South-South cooperation. Likewise, China joined international organizations such as the Work Bank and the International Monetary Fund, and started a promotion of multilateralism and a new world order, nonetheless, apparently its objective of own economic development seem to be its main purpose.
In sum, the different reposition of the China’s foreign policy in response to the changing external environment has been successful in terms of achievement of economic development and economic growth. China’s leader have acted effectively to any circumstances, even in the recent context of the international financial crisis China overcame.
It is important to highlight that given the set of successful strategies of China, probably the most important is the sustainable supply input for its economy, which is feed mainly for both industrial goods and technology provided by developed countries, as well as raw materials provided which come from the developing countries.
A greater details of the diverse reposition of the China’s foreign policy is stated in the following two parts. In the first part, we describe the situation in the developed world, basically focusing in US and Japan. While in the second part, we can see the China’s strategies in the Third World, covering the regions of Central Asia, Southeast Asia, Africa and Latin America, as well as the Chinese policy with many important developing countries.
China and the developed countries
China apparently has gotten successfully its main goal in the developed world. Given its objective of economic development and high level of economic growth, China have attracted huge amount of foreign investment, and transfer of technology and industrial goods. In the developed world the main countries for China are US and Japan. Although China have not had excellences relations, its pragmatic foreign policy allow it desired results. Actually the relation China-Japan is much thinner than that of the China-US.
Although rhetorically at the 1980s, in the context of the Cold World, China proclaimed its “independent foreign policy”, making distance from the US and claiming leadership in the Third World, in the practice China always has a pragmatic behavior toward US and the Soviet Union Heginbotham (2007). Where the focus of China is the achievement of economic development, being necessary a peaceful and stable environment.
Additionally China’s pragmatic foreign policy it, during the 1990s, normalize relation with more and more countries among Singapore, Indonesia, Saudi Arabia, Vietnam, Israel, South Korea and so on Heginbotham (2007). Which is, definitely, an important contribution for a peaceful and stable environment.
One clear example of the result of the Chinese practical foreign policy is, as pointed out by many scholars, that the pragmatic behavior of China about having good relationship specifically with the US is to peacefully compete and surpass Japan.
In terms of Stallings (2008), China is playing well its cards, although is very diffused its demand for raw material, China need crucially of the US and Japan to provide capital and high technology products to its economic. Unbelievable, the large majority of imports to China are industrial good, including both inputs and equipment. Basically, this kind of good can come from industrial countries.
In fact, the Economic Interdependence theory has failed in the case of the China-Japan relations Yahuda (2006), but China would be getting its desired goals. Thus, there is a close and significant economic interdependence between them, and no a corresponding overflow to the other areas such as the social, political, intellectual, academic, civilian, even no security engagement.
Likely desired by China, there is a Chinese cliché that in its relation with Japan “economics are hot and politics are cold”, but being very well used by China. For instance, while China is improving its manufacturing capacity through Japanese industrial transfers, at the same time, China disqualifies Japan to be a permanent member of the Security Council and disputes some sovereign claims.
The pragmatism of China also could be viewed, when it joined regional multilateral consultative organizations, launched with a key role of Japan, and having as one of the objectives involve China into norms and restrictions. Meanwhile, China’s leaders, pragmatically, accept the challenges of take advantage of new opportunities.
Some Japan’s measures are also exploited by China. For example, the fact that in Japan there are American military bases and the wishes of Japan’s of strengthening is security alliance with US, due to its wary about the rise of China; all this is taken, by China, as a way to encompass the necessary stability in order to achieve its principal goals of economic growth Yahuda (2006).
There are predictions about a positive future of the relationship between China and Japan, in favor of China. Although now a good relationship help to China to become stronger and there is a competition with Japan for the leadership in Asia, but according to Shirk (2008)in the future when China will be the number one, Japan will accept the situation and therefore the relation will be better.
China and developed countries’ interests sometimes overlap, in areas as of buttressing stability, fighting against terrorism and so on. But while China cooperate, at the same is improving it influence. For instance, in the past cut off support for communist guerrillas, improving cooperation with developed countries as US as well as official regimes of the Southeast Asia region.
But at the same time, sometimes China look for surpass other power in terms of influence, such as the case of the support to the countries affected by 1997 international crisis, while US and Japan wrongly delayed their response. Additionally, China has an aggressive promotion of FTA with Southeast countries, which soon will eclipse their trade with US and Japan Kurlantzick (2008).
China and the developing countries
In the Third World, China have been very dynamic; signing investment agreements, building public infrastructure, emphasizing and cultivating soft power, gaining membership in regional organization around the globe, etc. Thus, China had signed “strategic partnerships”, with Brazil (1993), Venezuela (2001), Mexico (2003), South Africa (2004), Argentina (2004), India (2005), Kazakhstan (2005), Indonesia (2005), Nigeria (2006), Algeria (2006), and so on.
China’s principal interest in the Third World is to get secured access of natural resources, and eventually has new markets to sell its own products. Also, China had realized that some developing countries are growing faster than developed ones, therefore the formers are potential partners in a future multipolar order. Then, China called itself the world’s largest developing country, appealing to a developing world that had also felt the impact of colonialism by powers.
The Shanghai Cooperation Organization (SCO) provide to China a key instrument to get its achievements in the Central Asia. One is the energy potential in Central Asian countries, which is a big interest for China. China National Petroleum Corporation (CNPC) have invested in many oil fields and the construction of the pipeline from the Caspian Sea area to China.
In Central Asia, China has achieved stability with an important part of its periphery. One important point, which also is their foundation, is the demarcation and demilitarization of the border between China and its Central Asian neighbors. Unbelievably, China ceded territories for Kyrgyzstan and Tajikistan, which initially were claimed as Chinese territories. Besides, there were established agreements of military-to military exchange.
China presents some achievements in Southeast Asia region. During the 1997 Asian financial crisis, while US and Japan delayed response, China refuse to devaluate its currency and stepped forward with aid for the countries affected, for example an aid package of US$ 1 billion for Thailand. The secretary general of the Association of Southeast Asian Countries (ASEAN), qualified the China behavior during the crisis as exemplary.
Additionally, Chinese soft power have improved considerably in favor of the Southeast Asian countries. According to one survey of the National Defense University, in 2003, the Chinese aid had vastly outstripped US aid in Laos, Philippines, Indonesia, Cambodia. The trend suggest that, to date, China would be the first supporter of aid in the Southeast Asia Kurlantzick (2008).
The main interest of China in African is the existence of natural resources, given particularly the Chinese need for energy. In this sector, China’s main energy presence is in Angola and Sudan Alden (2008). The increase of prices of oil and other commodities such as nickel, copper, gold, titanium, etc., had benefited South African and foreign companies, as well as the attraction of Chinese investment for African countries.
In Africa, China, through its companies, had quickly built a lot of physical infrastructure, including roads, railroads, telecommunications and so on. Due to sever critics, China had offered voluntary restraints on export in order to care African industries as well as compensation in case of any Chinese company would make inappropriate conduct.
Finally, also Latin America is viewed as a resource-rich region by China. In general, Venezuela is viewed as supplier of energy, Peru of mineral such as copper, tin, zinc, platinum, iron, while Brazil and Argentina of foodstuffs such as soybean and beef. In fact, the third of Chinese agriculture imports come from Latin America, explained almost totally by Brazil and Argentina Teng (2007).
The Brazilian case is very interesting and means a change in the type of Chinese investment toward a greater cooperation beyond natural resources. Where, the relation between both countries have extended to trade, technology, even international fora. Thus, Brazil is taking some opportunities such as the wider of its steel industry due to the Chinese demand, develop of aeronautic and satellites project, the possibility of construction of nuclear plants in China, and so on.
Bibliography
- Alden, Chris (2008), “China´s new engagement with Africa”, in “China’s expansion into the Western Hemisphere: Implications for Latin America and The United States”.
- Dittmer, Lowell (2004), “Ghost of the strategic triangle: The Sino-Russian partnership”, in “Chinese foreign policy: Pragmatism and strategic behavior”.
- Heginbotham, Eric (2007), “Evaluating China’s strategy toward the developing world”, in “China and the developing world: Beijing’s strategy for the twenty-first century”.
- Kurlantzick, Joshua (2008), “China´s growing influence in Southeast Asia”, in “China’s expansion into the Western Hemisphere: Implications for Latin America and The United States”.
- Mitchell, Derek and Carola McGiffert (2007), “Expanding the ‘Strategic Periphery’: A history of China’s interaction with the developing world”, in “China and the developing world: Beijing’s strategy for the twenty-first century”.
- Mochizuki, Mike M. (2005), “China-Japan relations: Downward spiral or a new equilibrium”, in “Power shift: China and Asia’s new dynamics”
- Oresman, Matthew (2007), “Repaving the silk road: China’s emergence in Central Asia”, in “China and the developing world: Beijing’s strategy for the twenty-first century”.
- Shirk ,Susan L. (2008), “Japan: "When the Chinese People Get Angry, the Result is Always Big Trouble”, in “China: Fragile superpower”.
- Stallings, Barbara(2008), “The US-China-Latin America Triangle: Implications for the future”, in “China’s expansion into the Western.
- Teng, Chung-china (2007), “Hegemony and partnership: China’s strategy and diplomacy toward Latin America”, in “China and the developing world: Beijing’s strategy for the twenty-first century”.
- Yahuda, Michael (2006), “The limits of economic interdependence: Sino-Japanese relations”, in “New directions in the study of China’s foreign policy”.
- Zi, Zhonryun (2004), “The clash of ideas: Ideology and Sino-US relations”, in “Chinese foreign policy: Pragmatism and strategic behavior”.
Showing posts with label China. Show all posts
Showing posts with label China. Show all posts
Saturday, July 16, 2011
Friday, July 15, 2011
Is (or not) a Beijing Consensus necessary?
1. Introduction
The necessity to achieve development, specially by developing countries, have generated the designs of diverse paradigms of development. Due to the impressive Chinese economic performance and the failures of the current liberal paradigm, today China offers a possibility to have a new paradigm and therefore to count with sustain economic growth.
To understand the ‘Beijing Consensus’ is necessary to know first that is the ‘Washington Consensus’. The present article is divided in three parts, where the two first ones analyze each consensus mentioned and the third one is the conclusion. The sources of information come mainly from Kennedy Scott (2010) “The Myth of the Beijing Consensus” and lesser extent from others authors.
Is it important to highlight that the creation of the Washington Consensus had as objective to provide of sustainable economic growth to developing countries such as Latin American countries. However, at the same time that this strategic had failed, it is contrasted with the success gotten by China, given its high rates of economic growth during the last 30 years.
Obviously, this sharp contrast had caused, by academic, the promotion of debates about to take serious considerations of key aspect of the China Model, especially in the wake of the recent global financial crisis. It is expected that given the necessity of sustain economic growth and the empirical evidence of China, the attention over it and the efforts to designing formulas or paradigms could have as foundation considerable aspects of the China Model.
2. Washington Consensus
The Washington Consensus (WC) was an invention of John Williamson at the late of the eighties, when in 1989 hosted a conference to draw attention to economic reforms for Latin America and identified areas of further reform. He is an economist who belong to the Peterson Institute of International Economics in Washington DC.
The WC includes 10 policies (see Table 1), thought more or less everyone in Washington would agree were needed more or less everywhere in Latin America or other region. As it is known these policies have as foundation the principle of the forces of the free market and liberalization as a strong instrument to achieve development.
Table 1
Once the WC failed to get sustainable growth in Latin America, Africa and the former Soviet bloc, immediately arose innumerable critics. Where appear Joseph Stiglitz as one of the most famous critics. In fact, the critics are various such as minimalist state that did not provide welfare or address toward income distribution. But, also was pointed out that the WC has never been a consensus in Washington.
Worse, although not getting sustainable growth, the policies of the WC had been the cause of international financial crisis, such as the 1997 Asian financial crisis. The critics point out that the liberalization and deregulation made that the capital account allowed fast incomings and outgoing of money, speculation and finally the outbreak of the crisis.
After the critics, Williamson quickly answered arguing misinterpretation of the WC. First, he made a demarcation between the WC and the kind of conditionality and policies applied by the Bretton Woods institutions (Work Bank, International Monetary Fund, World Trade Organization). For him the latter would be the responsible of the financial crisis, and not the WC.
One important argument, was when he said that the WC should not be copied mechanically, as it is conditioned by the Bretton Woods institutions, instead it should be adapted locally. And continuing with his arguments, he said that the WC not means that liberalization is not regulation to protect people’s safety and the environment, or that the government should not regulate the public goods.
To hold each one of the 10 policies of the WC, not only makes demarcation, as already noted, also suggested to complementation with additional local, and also consensus policies such as liberalized labor markets, adoption of crisis avoidance mechanism, support of national innovation system, education and technology, provision of R&D tax incentive, support for industrial clusters, etc.
But, until now the justification is not enough and the supplementation continue. This time the new proposals look toward the strengthen of the national institutions. These new proposals are so-called as WC’s second generation:
A. Strong judiciary.
B. Efficient civil service.
C. Effective prudential financial supervision.
D. An independent Central Bank.
E. An anti-corruption agency.
F. Social safety net.
Despite all the Williamson’ efforts, the critics remain. Therefore, in search of formulas to achieve sustain economic growth, analysts persist in the investigation, this time, pointing out market failures and the necessity of the governments to do more than the measure viewed till now. Thus, it is made appeals for the following several alternatives:
Table 2: Alternatives consensus to the Washington Consensus
However, it is important to emphasize that the most substantial challenge to the WC has been: The “Developmental State Model”, related to the success of Japan and the Tigers of Asia, although also attributed to France, Ireland, Israel. But, the important point is the necessity and space for the creation of a paradigm able to do which the WC failed. In this wake, the economic growth of China in the past 30 years and the new proposal of Beijing Consensus deserve great attention.
3. Beijing Consensus
The Beijing Consensus (BC) was created by Joshua Cooper Ramo, in 2004, who belong to the same line of Goldman Sachs, the creator of BRIC in 2001. Unfortunately, the Beijing Consensus of Joshua also has strong critics about it born as opposition to the WC, and that its three items (see table 3) is incongruent with Chinese reality. Worse, the Beijing Consensus is not accepted by Chinese governmental leaders.
In fact, in the following table we can see the BC that consist is three items, which try to explain both economic development and international influence. The first item is based upon recently improvement of technology and productivity in China. The second item is related to the concerns and efforts of equitable distribution and the reduction environmental damage. Finally, the third item is the ability of China to maintain control over its own development path, while challenging US.
Table 3
About the first item, although apparently, China had gotten achievement in technology and productivity, since we can see incremental innovations, growing pool of scientists, engineers, increase of patents, copyrights, trademarks, etc. Notwithstanding, this technology had been developed outside China and adapted internally by subsidies of multinationals or joint venture. Worse, China has failed in its objective of create indigenous innovations internally.
Concerning the second item, it is true that Chinese governmental leaders are concerned about the levels of inequalities and had even initiated a regulatory frame for environmental protection, for example including the environmental damage in the accountability of the rate of economic growth, reducing it. But, due to that exist a tradeoff between these and economic growth.
China had preferred the latter. In consequence, China still its preferential policy for coastal region to assure economic growth, while other discussed policies such as social spending in rural areas and the accounting and inclusion of environmental damage in the reduction of economic growth have been practically ignored.
In relation to the third item, a strong critic toward the self determination of the development path is that it is contradictory, since China has a “unique” development strategy, then it is impossible that other country of the world could copied it, because it is only unique for China. Therefore, there is not possibility to be a model o paradigm, which could be applied for others. Due to that no other country could copied the same Chinese policies, either would get the same successful result of China.
Actually, for some analysts, it is not true that China has an independent development path, which it can control, instead China had to make liberalization and now follow, unless, 8 of the 10 items of WC. For other scholar China belong to the group of countries who followed the Developmental States Model, which also initiated with a liberalization process.
Finally, China does not have an antagonistic against US or the global community, instead has a friendly and pragmatic behavior, one clear example is its efforts for joining the WTO. Also, having the same problem of the WC, the BC has not have any kind of consensus, and basically had been created individually by Joshua. Worse, in China the BC is not accepted by no Chinese governmental leader.
Despite, apparently the BC had failed due to its critics, it is important to note that the BC no represent the real Chinese experience. The BC is not only the individual interpretation of Joshua, actually there had been different interpretations with different names for China, such as ‘Capitalism with Chinese characteristics’, ‘authoritarian capitalism’ and so on, while every time more and more countries and analysts are interested in learning from the Chinese success.
A BC should be interpreted as the China Model, even the term ‘consensus’ causes fears, since it suggests confrontation with US and the international system. Some characteristic of the “real” BC or the China Model would its gradualism, more state intervention, the application of economic reform while simultaneously maintaining political institutions and so on.
An interesting suggestion to define the China Model is a set of policies designed by the elites, bureaucrats and interested groups in response to short-term problems as well as long-term plans. In other terms, the China Model would be reduced to modifying Chinese policies according to new circumstances. Although is necessary greater work to get a appropriate paradigm able to supply a guide for sustain economic growth, China Model could offer a promising solution.
4. Conclusion
As we had seen, the WC is a proposal that includes 10 general policies of liberalization, design for Latin America or other region in order to the sustain economic growth. These policies have as foundation the principle of the forces of the free market as a strong instrument to achieve development. In spite of being a liberal proposal, the creator of the WC had made some efforts of demarcation with similar proposal, as those which come from the Bretton Woods institutions in order to delimit responsibilities with international financial crisis.
On the other hand, the BC or China Model, derived from the Chinese experience, presents features such as gradualism, more state intervention, the application of economic reform while simultaneously maintaining political institutions and a set of policies designed by the elites, bureaucrats and interested groups in response to short-term problems as well as long-term plans or modifying Chinese policies according to new circumstances.
The main different between the WC and the BC or China Model is that, while the former has as foundation the forces of the free market, for the latter it is necessary a greater intervention of the government in order to achieve the necessary sustain economic growth. Thus for example, even, although the creator of the WC had emphasis additional governmental measures such as the WC’s second generation (ie. strong judiciary, anti-corruption agency, social safety net, etc.), for the BC or China Model the appropriate role of the state should have more intervention in the economy.
Following the evolution described by Charles Gore (2000) in “The rise and fall of the Washington Consensus”, since the time of Adam Smith in the world the liberal policy had been doubtless predominant, however the with the great depression of 1929 and the entire world in crisis, in 1936 Keynes’ proposal of state intervention and stimulation of the demand, allowed the solution of crisis successfully. But Keynes’ paradigm did not last long, due to was challenged by supply shocks as was the international crisis of oil at the 1970s.
In consequence, Keynes’ policies no longer were effective and represented the cause of more inflation due the high price of the oil plus greater stimulation of the demand. Then the liberal paradigms back, this time Milton Friedman and the WC. At the beginning the liberal proposal attacked the inflationary expectation exacerbated by government spending intervention and then promoted a set of policies such as privatization, fiscal discipline, trade liberalization and so on. Today, in the context of a International financial crisis, accompanied with severe critics against the liberal paradigm (WC) and the successful China Model, the history suggest that is it likely that a BC could replace the WC, although not forever.
Finally, in the case there is a predominant BC or China Model, it could shape the international system and the Bretton Woods institutions, but not necessarily affect the future world order. It is reasonable to suggest that a BC era could be similar to the Keynesian era, when there was a redesigned of the international institutions in order to improve the globe economic performance. Actually, today some institutional organizations as the World Bank highlight and recommend some policies derived from the China Model.
In any case, the future world order will depend of the number of powers or superpowers in the world. In fact, today some countries are rising more faster than other, for example in the first group we have Brazil, China, India, etc, while in the second are even western developed countries. A BC or China Model, basically would affect the future world order to the extent that is well adapted and benefits the economic growth of a certain country or groups de countries, but the same case is applicable for any model even for the WC.
The necessity to achieve development, specially by developing countries, have generated the designs of diverse paradigms of development. Due to the impressive Chinese economic performance and the failures of the current liberal paradigm, today China offers a possibility to have a new paradigm and therefore to count with sustain economic growth.
To understand the ‘Beijing Consensus’ is necessary to know first that is the ‘Washington Consensus’. The present article is divided in three parts, where the two first ones analyze each consensus mentioned and the third one is the conclusion. The sources of information come mainly from Kennedy Scott (2010) “The Myth of the Beijing Consensus” and lesser extent from others authors.
Is it important to highlight that the creation of the Washington Consensus had as objective to provide of sustainable economic growth to developing countries such as Latin American countries. However, at the same time that this strategic had failed, it is contrasted with the success gotten by China, given its high rates of economic growth during the last 30 years.
Obviously, this sharp contrast had caused, by academic, the promotion of debates about to take serious considerations of key aspect of the China Model, especially in the wake of the recent global financial crisis. It is expected that given the necessity of sustain economic growth and the empirical evidence of China, the attention over it and the efforts to designing formulas or paradigms could have as foundation considerable aspects of the China Model.
2. Washington Consensus
The Washington Consensus (WC) was an invention of John Williamson at the late of the eighties, when in 1989 hosted a conference to draw attention to economic reforms for Latin America and identified areas of further reform. He is an economist who belong to the Peterson Institute of International Economics in Washington DC.
The WC includes 10 policies (see Table 1), thought more or less everyone in Washington would agree were needed more or less everywhere in Latin America or other region. As it is known these policies have as foundation the principle of the forces of the free market and liberalization as a strong instrument to achieve development.
Table 1
Once the WC failed to get sustainable growth in Latin America, Africa and the former Soviet bloc, immediately arose innumerable critics. Where appear Joseph Stiglitz as one of the most famous critics. In fact, the critics are various such as minimalist state that did not provide welfare or address toward income distribution. But, also was pointed out that the WC has never been a consensus in Washington.
Worse, although not getting sustainable growth, the policies of the WC had been the cause of international financial crisis, such as the 1997 Asian financial crisis. The critics point out that the liberalization and deregulation made that the capital account allowed fast incomings and outgoing of money, speculation and finally the outbreak of the crisis.
After the critics, Williamson quickly answered arguing misinterpretation of the WC. First, he made a demarcation between the WC and the kind of conditionality and policies applied by the Bretton Woods institutions (Work Bank, International Monetary Fund, World Trade Organization). For him the latter would be the responsible of the financial crisis, and not the WC.
One important argument, was when he said that the WC should not be copied mechanically, as it is conditioned by the Bretton Woods institutions, instead it should be adapted locally. And continuing with his arguments, he said that the WC not means that liberalization is not regulation to protect people’s safety and the environment, or that the government should not regulate the public goods.
To hold each one of the 10 policies of the WC, not only makes demarcation, as already noted, also suggested to complementation with additional local, and also consensus policies such as liberalized labor markets, adoption of crisis avoidance mechanism, support of national innovation system, education and technology, provision of R&D tax incentive, support for industrial clusters, etc.
But, until now the justification is not enough and the supplementation continue. This time the new proposals look toward the strengthen of the national institutions. These new proposals are so-called as WC’s second generation:
A. Strong judiciary.
B. Efficient civil service.
C. Effective prudential financial supervision.
D. An independent Central Bank.
E. An anti-corruption agency.
F. Social safety net.
Despite all the Williamson’ efforts, the critics remain. Therefore, in search of formulas to achieve sustain economic growth, analysts persist in the investigation, this time, pointing out market failures and the necessity of the governments to do more than the measure viewed till now. Thus, it is made appeals for the following several alternatives:
Table 2: Alternatives consensus to the Washington Consensus
However, it is important to emphasize that the most substantial challenge to the WC has been: The “Developmental State Model”, related to the success of Japan and the Tigers of Asia, although also attributed to France, Ireland, Israel. But, the important point is the necessity and space for the creation of a paradigm able to do which the WC failed. In this wake, the economic growth of China in the past 30 years and the new proposal of Beijing Consensus deserve great attention.
3. Beijing Consensus
The Beijing Consensus (BC) was created by Joshua Cooper Ramo, in 2004, who belong to the same line of Goldman Sachs, the creator of BRIC in 2001. Unfortunately, the Beijing Consensus of Joshua also has strong critics about it born as opposition to the WC, and that its three items (see table 3) is incongruent with Chinese reality. Worse, the Beijing Consensus is not accepted by Chinese governmental leaders.
In fact, in the following table we can see the BC that consist is three items, which try to explain both economic development and international influence. The first item is based upon recently improvement of technology and productivity in China. The second item is related to the concerns and efforts of equitable distribution and the reduction environmental damage. Finally, the third item is the ability of China to maintain control over its own development path, while challenging US.
Table 3
About the first item, although apparently, China had gotten achievement in technology and productivity, since we can see incremental innovations, growing pool of scientists, engineers, increase of patents, copyrights, trademarks, etc. Notwithstanding, this technology had been developed outside China and adapted internally by subsidies of multinationals or joint venture. Worse, China has failed in its objective of create indigenous innovations internally.
Concerning the second item, it is true that Chinese governmental leaders are concerned about the levels of inequalities and had even initiated a regulatory frame for environmental protection, for example including the environmental damage in the accountability of the rate of economic growth, reducing it. But, due to that exist a tradeoff between these and economic growth.
China had preferred the latter. In consequence, China still its preferential policy for coastal region to assure economic growth, while other discussed policies such as social spending in rural areas and the accounting and inclusion of environmental damage in the reduction of economic growth have been practically ignored.
In relation to the third item, a strong critic toward the self determination of the development path is that it is contradictory, since China has a “unique” development strategy, then it is impossible that other country of the world could copied it, because it is only unique for China. Therefore, there is not possibility to be a model o paradigm, which could be applied for others. Due to that no other country could copied the same Chinese policies, either would get the same successful result of China.
Actually, for some analysts, it is not true that China has an independent development path, which it can control, instead China had to make liberalization and now follow, unless, 8 of the 10 items of WC. For other scholar China belong to the group of countries who followed the Developmental States Model, which also initiated with a liberalization process.
Finally, China does not have an antagonistic against US or the global community, instead has a friendly and pragmatic behavior, one clear example is its efforts for joining the WTO. Also, having the same problem of the WC, the BC has not have any kind of consensus, and basically had been created individually by Joshua. Worse, in China the BC is not accepted by no Chinese governmental leader.
Despite, apparently the BC had failed due to its critics, it is important to note that the BC no represent the real Chinese experience. The BC is not only the individual interpretation of Joshua, actually there had been different interpretations with different names for China, such as ‘Capitalism with Chinese characteristics’, ‘authoritarian capitalism’ and so on, while every time more and more countries and analysts are interested in learning from the Chinese success.
A BC should be interpreted as the China Model, even the term ‘consensus’ causes fears, since it suggests confrontation with US and the international system. Some characteristic of the “real” BC or the China Model would its gradualism, more state intervention, the application of economic reform while simultaneously maintaining political institutions and so on.
An interesting suggestion to define the China Model is a set of policies designed by the elites, bureaucrats and interested groups in response to short-term problems as well as long-term plans. In other terms, the China Model would be reduced to modifying Chinese policies according to new circumstances. Although is necessary greater work to get a appropriate paradigm able to supply a guide for sustain economic growth, China Model could offer a promising solution.
4. Conclusion
As we had seen, the WC is a proposal that includes 10 general policies of liberalization, design for Latin America or other region in order to the sustain economic growth. These policies have as foundation the principle of the forces of the free market as a strong instrument to achieve development. In spite of being a liberal proposal, the creator of the WC had made some efforts of demarcation with similar proposal, as those which come from the Bretton Woods institutions in order to delimit responsibilities with international financial crisis.
On the other hand, the BC or China Model, derived from the Chinese experience, presents features such as gradualism, more state intervention, the application of economic reform while simultaneously maintaining political institutions and a set of policies designed by the elites, bureaucrats and interested groups in response to short-term problems as well as long-term plans or modifying Chinese policies according to new circumstances.
The main different between the WC and the BC or China Model is that, while the former has as foundation the forces of the free market, for the latter it is necessary a greater intervention of the government in order to achieve the necessary sustain economic growth. Thus for example, even, although the creator of the WC had emphasis additional governmental measures such as the WC’s second generation (ie. strong judiciary, anti-corruption agency, social safety net, etc.), for the BC or China Model the appropriate role of the state should have more intervention in the economy.
Following the evolution described by Charles Gore (2000) in “The rise and fall of the Washington Consensus”, since the time of Adam Smith in the world the liberal policy had been doubtless predominant, however the with the great depression of 1929 and the entire world in crisis, in 1936 Keynes’ proposal of state intervention and stimulation of the demand, allowed the solution of crisis successfully. But Keynes’ paradigm did not last long, due to was challenged by supply shocks as was the international crisis of oil at the 1970s.
In consequence, Keynes’ policies no longer were effective and represented the cause of more inflation due the high price of the oil plus greater stimulation of the demand. Then the liberal paradigms back, this time Milton Friedman and the WC. At the beginning the liberal proposal attacked the inflationary expectation exacerbated by government spending intervention and then promoted a set of policies such as privatization, fiscal discipline, trade liberalization and so on. Today, in the context of a International financial crisis, accompanied with severe critics against the liberal paradigm (WC) and the successful China Model, the history suggest that is it likely that a BC could replace the WC, although not forever.
Finally, in the case there is a predominant BC or China Model, it could shape the international system and the Bretton Woods institutions, but not necessarily affect the future world order. It is reasonable to suggest that a BC era could be similar to the Keynesian era, when there was a redesigned of the international institutions in order to improve the globe economic performance. Actually, today some institutional organizations as the World Bank highlight and recommend some policies derived from the China Model.
In any case, the future world order will depend of the number of powers or superpowers in the world. In fact, today some countries are rising more faster than other, for example in the first group we have Brazil, China, India, etc, while in the second are even western developed countries. A BC or China Model, basically would affect the future world order to the extent that is well adapted and benefits the economic growth of a certain country or groups de countries, but the same case is applicable for any model even for the WC.
Tuesday, July 5, 2011
The China model: Pragmatism, flexibility and gradualism
There are a lot of theoretical discussions about which development model is able to explain the Chinese capitalism, but all without success. For example Chen (2002) pointed out a lot of contradictions among capitalism theories and the reality of Chinese capitalism, which sometimes is classified as non-capitalist, because its socialism system as economic foundation and other issues.
One the main theories predict that capitalism produces a middle class and a bourgeoisie independent of the state power, pressuring to democracy, as it had occurred in western, liberal democracy grew out automatically of capitalism system. But also in the case of China this theory failed. The Chinese system receive the manes of socialist market economy, since one important feature is that it include market forces and a central political elite, but with preferences for the political domain.
Of course there some differences between Chinese capitalism and western capitalism, for example it is pointed out that for the former, the private sector suffer from state discrimination policy, such as of bank loans or taxation. There are not certainly answer about Who are the beneficiaries of these policies? How unfair is this situation of unequal market competition environment?
Even for some Asian economies with similar cultures to China, such as Taiwan and Korea, it is known that after a short time of capitalism, political control by an one-party were eroded, emerging political opposition, multiparty system and autonomous civil society. Yet, in the case of China it is said that CCP never tolerate any strong group of entrepreneurs as bourgeoisie emergence out of the market.
This kind of “Chinese capitalism” could be seen deeper at the local level. Where, the CCP had not sought other sociopolitical forces than its bureaucracy, and where the implementation of the market reform had created a kind of patron-client relationship between local governments and private business. Being state dominance worse than at the central level.
The situation is ambiguous, because although CCP had rejected a return to central planning of the past, also they no tend to go toward a true economic liberalism, even less to democracy Chen (2002). Besides, there still a flagrantly unfair offering state resources and opportunities to the Children and relative of official and cadres.
For some scholar, the Chinese entrepreneurs still very suspicions about the commitment of the CCP with capitalism, since remaining anti-capitalism practice, ranging from the registration of a company to the sale of products, which always required governmental approval, pretty different of a capitalist society where these approvals is based on explicit rules and regulation.
For a healthy capitalism, clear legal institutions is desired much more than the current party-state capacity of manipulation of the market. Unfortunately, according to Chen (2002), China’s private business must rely heavily upon arbitrary political power of the CCP in order to survive and prosper.
As Zheng (1994) pointed out, although Chinese leaders realized the importance of democracy, they consider economic growth as the priority, and it is thought that authoritarian system is better than democratic to assure economic growth.
Also, there is an important cultural dimension in China, about masses’ strong identification with the state. This necessarily strengthen the state’s commanding position and weaken social forces, while the relation state-society still not institutionalized Zheng (1994).
The fact that theories cannot fit the Chinese capitalism, does not mean that China is not capitalism economy, because it has specific characteristics and genuine process of gradual capitalism. Some scholars classified it as pragmatism, which involve the keep of legitimacy and the fulfillment of goals of development.
Theoretically, a typical authoritarian regime do not need and ideological justification to apply its policies, however in China, the CCP need to use a socialism discourse to keep legitimacy of its regime, being its most important policies the economic reform and the open policy, which obviously are pro-capitalism policies.
Since the Russian experience of democratization and capitalism had been perceived as a disastrous, it is now an important reference for the CCP and big concern. Consequently, for Chinese leaders, some mistakes in the democratization and liberalization process could mean political chaos, economic breakdown, mafia, and other social evils.
Many scholars point out the real perception of some Chinese leaders that democratization and free elections mean endless street demonstration, mass rallies, and basically make the government please the poor majorities. And probably the most determine into CCP policy, it would make China an easy victim of external aggression by other powers.
All these concerns explain clear why the CCP’s preferences of its policies. Thus, Oksenberg (2001) consider acceptable that Chinese leaders opt for making pragmatic and incremental institutional adjustment to solve problems as they arise, in both economic and political areas. He agrees with the using of the metaphor of China’s leaders about to “cross the river stone by stone”.
For Yang (2006) the supposed incessant effort to enhance political central power and sometimes eroding regulatory institutions can be understood as a necessity of stability in an uncertain and rapidly changing external environment. Since CCP is also guided by the idea that potential social tension and big low educated population justify a slow and gradual movement to political reform.
Actually, after the private sector in China became a powerful economic growth engine, the CCP have a accommodating itself to neutralize potential opposition to this growth. In different Congress the regime use to highlight the importance of the private sector for the Chinese development. Even at the local levels, private economy enjoy amiable treatment by the government.
Although in China still a large number of SOEs, and an agenda to rescue them as a priority of the macroeconomic policy, justly the lack of success for recuing money-losing SOEs made private sector more indispensable, especially in terms of employment and government revenue, one interesting example is the ability and explicit proposal made by private business to reemploy laid-off state.
Specifically, at the local areas, the main objective of governmental approvals, which we mentioned previously, would be a rationality of rent seeking rather than following any ideology. For some scholars local officials are not bothered by ideology, they are more practical, since no obstruct privatization, when there is a great enthusiasm for profitability. Actually some local officials have their own private companies.
For some scholar the economic growth experimented by China in so long has given strong incentives for institutionalization in order to assure investment. Even though there is a predominance of the CCP as central power, the political relationship between the center and the local levels is more in favor of a kind of market-preserving federalism Yang (2006).
But this kind of capitalism path followed by CCP, also is shared for other sectors. Thus, the lack interest for democracy would be the real desires of the “Chinese civil society”. As is showed by Chen (2002), who interviewed successful entrepreneurs, nearly half of them prefer the “rule of law” than democracy, just looking for a institutionalized free market order.
Actually, the middleclass share the same idea of the necessary repressive and control over the big poor population and potential demands for egalitarian policies in order to protect their wealth and social statues. Chen (2002) find out of his survey that the most important variable for the middle class is “Social Stability”.
Concerning Chen (2002) also entrepreneurs is resisting democratization because they see some threats such as political reversal and popular anger due to the “unjustifiable” economic inequalities. Where, the “rule of law” would be a legal protection. Thus, in case of emergency such as the 1989 Tiananmen Square the “rule of law” may provide a legal framework for maintaining social order and to keep the state machine functioning normally.
As a consequence, basically there is a middle class agenda for institutionalization of capitalism in order to make their business and capitalism way safe, which has obviously lack of democratic objectives, even being considered pressure on the CCP for fundamental economic-political changes. Therefore, there are also trends of constraining party power over the market.
It is clear that both the State and the entrepreneurs are agreed in maintaining most aspects of the Chinese capitalism. Where, both the importance private sector and the ability of the State, but there pending issues such as the civil society, worker and peasants. The pragmatism of the Chinese leaders suggest that other social demands could be satisfied, if are within the frame of social stability, peaceful development and the improving of standard of life.
The Chinese process could classified slow, gradual or different, but not necessarily contrary to freedom and democracy. The process really not only rely on leaders, the rest sector also are inter-acting. In the case of the poorest, the lack of claim could be explained by a strong collective mentality of the population, which trust on authorities for choosing the most appropriate way for the society.
Finally, It is widely known the important role of state for industrial policy and sustainable economic growth, as had been highlighted for the cases of Japan, Taiwan , Korea, Singapore and so on. In the case of China, given all the circumstance and particularities, the Pragmatism applied, although no perfect, could be positive and the appropriate development model, long as development goals are met, which are more important than classification.
Bibliography
Chen An (2002), “Capitalism Development, Entrepreneurial Class, and Democratization in China”, Political Science Quarterly, Volume 117, Number 3.
Yang, Dali L. (2006), “Economic transformation and its political discontents in China: Authoritarianism, unequal growth, and the dilemmas of political development”, Annu. Rev. Polit. Sci. 2006. 9:143–64 doi: 10.1146/annurev.polisci.9.062404.170624, Copyright_c 2006 by Annual Reviews. All rights reserved First published online as a Review in Advance on Jan. 16, 2006.
Zheng, Yong Nian (1994), “Development and democracy: Are they compatible in China”, Political Science Quaterly; Summer 1994; 109, 2; ABI/INFORM Global.
Oksenberg, Michel (2001), “China’s political system: Challenges of the twenty-first century”, The China Journal, No 45, January 2001.
Shirk, Susan L. (2007), “China: fragile superpower”, Oxford University.
One the main theories predict that capitalism produces a middle class and a bourgeoisie independent of the state power, pressuring to democracy, as it had occurred in western, liberal democracy grew out automatically of capitalism system. But also in the case of China this theory failed. The Chinese system receive the manes of socialist market economy, since one important feature is that it include market forces and a central political elite, but with preferences for the political domain.
Of course there some differences between Chinese capitalism and western capitalism, for example it is pointed out that for the former, the private sector suffer from state discrimination policy, such as of bank loans or taxation. There are not certainly answer about Who are the beneficiaries of these policies? How unfair is this situation of unequal market competition environment?
Even for some Asian economies with similar cultures to China, such as Taiwan and Korea, it is known that after a short time of capitalism, political control by an one-party were eroded, emerging political opposition, multiparty system and autonomous civil society. Yet, in the case of China it is said that CCP never tolerate any strong group of entrepreneurs as bourgeoisie emergence out of the market.
This kind of “Chinese capitalism” could be seen deeper at the local level. Where, the CCP had not sought other sociopolitical forces than its bureaucracy, and where the implementation of the market reform had created a kind of patron-client relationship between local governments and private business. Being state dominance worse than at the central level.
The situation is ambiguous, because although CCP had rejected a return to central planning of the past, also they no tend to go toward a true economic liberalism, even less to democracy Chen (2002). Besides, there still a flagrantly unfair offering state resources and opportunities to the Children and relative of official and cadres.
For some scholar, the Chinese entrepreneurs still very suspicions about the commitment of the CCP with capitalism, since remaining anti-capitalism practice, ranging from the registration of a company to the sale of products, which always required governmental approval, pretty different of a capitalist society where these approvals is based on explicit rules and regulation.
For a healthy capitalism, clear legal institutions is desired much more than the current party-state capacity of manipulation of the market. Unfortunately, according to Chen (2002), China’s private business must rely heavily upon arbitrary political power of the CCP in order to survive and prosper.
As Zheng (1994) pointed out, although Chinese leaders realized the importance of democracy, they consider economic growth as the priority, and it is thought that authoritarian system is better than democratic to assure economic growth.
Also, there is an important cultural dimension in China, about masses’ strong identification with the state. This necessarily strengthen the state’s commanding position and weaken social forces, while the relation state-society still not institutionalized Zheng (1994).
The fact that theories cannot fit the Chinese capitalism, does not mean that China is not capitalism economy, because it has specific characteristics and genuine process of gradual capitalism. Some scholars classified it as pragmatism, which involve the keep of legitimacy and the fulfillment of goals of development.
Theoretically, a typical authoritarian regime do not need and ideological justification to apply its policies, however in China, the CCP need to use a socialism discourse to keep legitimacy of its regime, being its most important policies the economic reform and the open policy, which obviously are pro-capitalism policies.
Since the Russian experience of democratization and capitalism had been perceived as a disastrous, it is now an important reference for the CCP and big concern. Consequently, for Chinese leaders, some mistakes in the democratization and liberalization process could mean political chaos, economic breakdown, mafia, and other social evils.
Many scholars point out the real perception of some Chinese leaders that democratization and free elections mean endless street demonstration, mass rallies, and basically make the government please the poor majorities. And probably the most determine into CCP policy, it would make China an easy victim of external aggression by other powers.
All these concerns explain clear why the CCP’s preferences of its policies. Thus, Oksenberg (2001) consider acceptable that Chinese leaders opt for making pragmatic and incremental institutional adjustment to solve problems as they arise, in both economic and political areas. He agrees with the using of the metaphor of China’s leaders about to “cross the river stone by stone”.
For Yang (2006) the supposed incessant effort to enhance political central power and sometimes eroding regulatory institutions can be understood as a necessity of stability in an uncertain and rapidly changing external environment. Since CCP is also guided by the idea that potential social tension and big low educated population justify a slow and gradual movement to political reform.
Actually, after the private sector in China became a powerful economic growth engine, the CCP have a accommodating itself to neutralize potential opposition to this growth. In different Congress the regime use to highlight the importance of the private sector for the Chinese development. Even at the local levels, private economy enjoy amiable treatment by the government.
Although in China still a large number of SOEs, and an agenda to rescue them as a priority of the macroeconomic policy, justly the lack of success for recuing money-losing SOEs made private sector more indispensable, especially in terms of employment and government revenue, one interesting example is the ability and explicit proposal made by private business to reemploy laid-off state.
Specifically, at the local areas, the main objective of governmental approvals, which we mentioned previously, would be a rationality of rent seeking rather than following any ideology. For some scholars local officials are not bothered by ideology, they are more practical, since no obstruct privatization, when there is a great enthusiasm for profitability. Actually some local officials have their own private companies.
For some scholar the economic growth experimented by China in so long has given strong incentives for institutionalization in order to assure investment. Even though there is a predominance of the CCP as central power, the political relationship between the center and the local levels is more in favor of a kind of market-preserving federalism Yang (2006).
But this kind of capitalism path followed by CCP, also is shared for other sectors. Thus, the lack interest for democracy would be the real desires of the “Chinese civil society”. As is showed by Chen (2002), who interviewed successful entrepreneurs, nearly half of them prefer the “rule of law” than democracy, just looking for a institutionalized free market order.
Actually, the middleclass share the same idea of the necessary repressive and control over the big poor population and potential demands for egalitarian policies in order to protect their wealth and social statues. Chen (2002) find out of his survey that the most important variable for the middle class is “Social Stability”.
Concerning Chen (2002) also entrepreneurs is resisting democratization because they see some threats such as political reversal and popular anger due to the “unjustifiable” economic inequalities. Where, the “rule of law” would be a legal protection. Thus, in case of emergency such as the 1989 Tiananmen Square the “rule of law” may provide a legal framework for maintaining social order and to keep the state machine functioning normally.
As a consequence, basically there is a middle class agenda for institutionalization of capitalism in order to make their business and capitalism way safe, which has obviously lack of democratic objectives, even being considered pressure on the CCP for fundamental economic-political changes. Therefore, there are also trends of constraining party power over the market.
It is clear that both the State and the entrepreneurs are agreed in maintaining most aspects of the Chinese capitalism. Where, both the importance private sector and the ability of the State, but there pending issues such as the civil society, worker and peasants. The pragmatism of the Chinese leaders suggest that other social demands could be satisfied, if are within the frame of social stability, peaceful development and the improving of standard of life.
The Chinese process could classified slow, gradual or different, but not necessarily contrary to freedom and democracy. The process really not only rely on leaders, the rest sector also are inter-acting. In the case of the poorest, the lack of claim could be explained by a strong collective mentality of the population, which trust on authorities for choosing the most appropriate way for the society.
Finally, It is widely known the important role of state for industrial policy and sustainable economic growth, as had been highlighted for the cases of Japan, Taiwan , Korea, Singapore and so on. In the case of China, given all the circumstance and particularities, the Pragmatism applied, although no perfect, could be positive and the appropriate development model, long as development goals are met, which are more important than classification.
Bibliography
Chen An (2002), “Capitalism Development, Entrepreneurial Class, and Democratization in China”, Political Science Quarterly, Volume 117, Number 3.
Yang, Dali L. (2006), “Economic transformation and its political discontents in China: Authoritarianism, unequal growth, and the dilemmas of political development”, Annu. Rev. Polit. Sci. 2006. 9:143–64 doi: 10.1146/annurev.polisci.9.062404.170624, Copyright_c 2006 by Annual Reviews. All rights reserved First published online as a Review in Advance on Jan. 16, 2006.
Zheng, Yong Nian (1994), “Development and democracy: Are they compatible in China”, Political Science Quaterly; Summer 1994; 109, 2; ABI/INFORM Global.
Oksenberg, Michel (2001), “China’s political system: Challenges of the twenty-first century”, The China Journal, No 45, January 2001.
Shirk, Susan L. (2007), “China: fragile superpower”, Oxford University.
Thursday, June 23, 2011
The inequality in China and its particular capitalism process
1. Introduction
Since the implementation of the economic liberalization at the late of the seventies, China have been getting a economic growth around 10% annually. While, at the same time, the private initiatives was allowed, many own-state companies privatized, and the foreign direct investment promoted. One key feature of the Chinese liberalization process is its gradualism, different from the Russian Big Ban process, for example. Thus, China have started with special economic zones, instead of covering all the country. It is important to highlight that this gradualism together with all the policies would be an important factor which caused the inequalities.
Due to the characteristic capitalism process with high level of inequalities in China, there are many questions we want to answer: The begin of capitalism process and economic reform in China necessarily must involved high level of inequalities? Is it possible to revert the inequalities in China, at the same time of keeping similar high level of economic growth rate? What Is the different between the initial inequality conditions, current situation and the perspective of inequalities in China?
In the present research, we aim to analyze how the specific Chinese Capitalism process and the economic reform, including both the characteristic and endowments of the society, and particularly how the specific policies implemented have exacerbated the level of inequality in China. Likewise, evaluate the necessary and correct policies to revert the evolution to a capitalism process more egalitarian.
The first part of the article is the introduction. In the second part we try to explained the components a evolutions of the income inequality, using an approach of analyzing rural and urban groups. In the third parts we will relate the income inequality with this appropriate policy, which determinate or exacerbate the inequality. Finally, in the four part we will give some conclusions and recommendations.
2. Analysis of Inequality
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 figure 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).
Figure 1
Source: Blecher (2005)
In this part 2 we will analyse the inequelity of China in greater detail, making a disagregation in three aspects. First the inequality in the urban sector, second in the rural area and finally we are analysing the gap between the rural and urban sector.
A. Inequality in the urban area
According to figure 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.
B. Inequality in the rural area
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.
Figure 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.
C. Urban-rural gap
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 figure we are using the percentage of population with access to water. There we can see the big differences between these two sectors.
Figure 3
Source: World Bank, http://data.worldbank.org/country/china
3. Capitalism process with inequality
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.
In the next three points, there are several economic policies that explain how the level of income inequality in China to increase: It should increase within both the urban and rural sectors, and possibly across urban and rural sectors as well. Below we make a balance of all these measures based on scholar´s analysis, mainly on Dollar (2007)´s analysis.
A. Open policy and focus in special economic zones
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 capitalism 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.
Figure 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.
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 Hukou system
At the beginning of the economic reform China counted with a positive measure in favor of capitalism 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.
Figure 5
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 figure 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.
4. Conclusions and recommendation
The first conclusion is that the inequality in China is due mainly to inter-groups effects. Although we can find inequalities inside rural sector and urban sector, it is surprising that there is a big different between the incomes of these two groups. As consequence the national inequality is bigger than any of this group individually.
The second conclusion is about the necessity of exchange rate appreciation combined with more social spending, as the most recommend macro policy able to help address China’s disparities. It is due to that currently the Chinese economy is rising nearly 10% annually. Then it is necessary to cool off the economy first, through appreciation, and only after that it is possible to improve considerable social spending. It is recommend this expenditures, especially in favor of rural sector and focusing in a set of social egalitarian policies able to improve skills and human capital such as education and health system. It is expected also that the appreciation would make, internally, Chinese people as a whole wealthier as well as encourage internal consumption.
The third conclusion is to improve the implementation of capitalism in the rural areas, where the population could be able to use their land as asses to get enough money of lending in order to get a base of capital or human capital to be prepare for any mobility. Moreover, there should be eliminated, gradually, all kind of restrictions of mobility between rural and urban sector. In this manner, all kind of rural-urban gad also would disappear automatically.
The four and final conclusion in about the necessity of ability of the central government to get desire results in the supplying of public services such education and health system. Nowadays, these public services, not only are acknowledge as the best ways to improve human capital, but also as the best instrument to face inequalities. Thus, the most urgently lack of access to these services, specially for poorest regions would be reduced.
Bibliography
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Blecher, Marc and Orbelin College (2005), “Inequality and Capitalism in China”, Paper prepared for the American Political Science Association Task Force Conference on Inequality and Difference in the Third World, June 2005.
Cornea, ed., (2003), “Inequality, Growth and Poverty in an Era of Liberalization and
Dollar, David (2007), “Poverty, inequality and social disparities during China’s economic reform”, World Bank Country Director, China, April 2007.
Dollar, David R., Wei, Shang-Jin (2006), “Das Wasted Kapital”, IMF Working Paper.
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Khan, Azizur Rahman, and Carl Riskin (2001), “Inequality and Poverty in China in the Age of Globalization”, Oxford: Oxford University Press
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Since the implementation of the economic liberalization at the late of the seventies, China have been getting a economic growth around 10% annually. While, at the same time, the private initiatives was allowed, many own-state companies privatized, and the foreign direct investment promoted. One key feature of the Chinese liberalization process is its gradualism, different from the Russian Big Ban process, for example. Thus, China have started with special economic zones, instead of covering all the country. It is important to highlight that this gradualism together with all the policies would be an important factor which caused the inequalities.
Due to the characteristic capitalism process with high level of inequalities in China, there are many questions we want to answer: The begin of capitalism process and economic reform in China necessarily must involved high level of inequalities? Is it possible to revert the inequalities in China, at the same time of keeping similar high level of economic growth rate? What Is the different between the initial inequality conditions, current situation and the perspective of inequalities in China?
In the present research, we aim to analyze how the specific Chinese Capitalism process and the economic reform, including both the characteristic and endowments of the society, and particularly how the specific policies implemented have exacerbated the level of inequality in China. Likewise, evaluate the necessary and correct policies to revert the evolution to a capitalism process more egalitarian.
The first part of the article is the introduction. In the second part we try to explained the components a evolutions of the income inequality, using an approach of analyzing rural and urban groups. In the third parts we will relate the income inequality with this appropriate policy, which determinate or exacerbate the inequality. Finally, in the four part we will give some conclusions and recommendations.
2. Analysis of Inequality
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 figure 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).
Figure 1
Source: Blecher (2005)
In this part 2 we will analyse the inequelity of China in greater detail, making a disagregation in three aspects. First the inequality in the urban sector, second in the rural area and finally we are analysing the gap between the rural and urban sector.
A. Inequality in the urban area
According to figure 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.
B. Inequality in the rural area
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.
Figure 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.
C. Urban-rural gap
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 figure we are using the percentage of population with access to water. There we can see the big differences between these two sectors.
Figure 3
Source: World Bank, http://data.worldbank.org/country/china
3. Capitalism process with inequality
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.
In the next three points, there are several economic policies that explain how the level of income inequality in China to increase: It should increase within both the urban and rural sectors, and possibly across urban and rural sectors as well. Below we make a balance of all these measures based on scholar´s analysis, mainly on Dollar (2007)´s analysis.
A. Open policy and focus in special economic zones
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 capitalism 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.
Figure 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.
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 Hukou system
At the beginning of the economic reform China counted with a positive measure in favor of capitalism 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.
Figure 5
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 figure 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.
4. Conclusions and recommendation
The first conclusion is that the inequality in China is due mainly to inter-groups effects. Although we can find inequalities inside rural sector and urban sector, it is surprising that there is a big different between the incomes of these two groups. As consequence the national inequality is bigger than any of this group individually.
The second conclusion is about the necessity of exchange rate appreciation combined with more social spending, as the most recommend macro policy able to help address China’s disparities. It is due to that currently the Chinese economy is rising nearly 10% annually. Then it is necessary to cool off the economy first, through appreciation, and only after that it is possible to improve considerable social spending. It is recommend this expenditures, especially in favor of rural sector and focusing in a set of social egalitarian policies able to improve skills and human capital such as education and health system. It is expected also that the appreciation would make, internally, Chinese people as a whole wealthier as well as encourage internal consumption.
The third conclusion is to improve the implementation of capitalism in the rural areas, where the population could be able to use their land as asses to get enough money of lending in order to get a base of capital or human capital to be prepare for any mobility. Moreover, there should be eliminated, gradually, all kind of restrictions of mobility between rural and urban sector. In this manner, all kind of rural-urban gad also would disappear automatically.
The four and final conclusion in about the necessity of ability of the central government to get desire results in the supplying of public services such education and health system. Nowadays, these public services, not only are acknowledge as the best ways to improve human capital, but also as the best instrument to face inequalities. Thus, the most urgently lack of access to these services, specially for poorest regions would be reduced.
Bibliography
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Blecher, Marc and Orbelin College (2005), “Inequality and Capitalism in China”, Paper prepared for the American Political Science Association Task Force Conference on Inequality and Difference in the Third World, June 2005.
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