Chinese Economists Call for Fundamental Reforms to Fight Urban Income Gap

Following the Chinese government’s pledge to address its growing urban income gap, India’s The Economic Times suggest that current proposals do not go far enough.
February 12, 2013, 10am PST | Melina Cordero
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With ongoing global concern about the deepening divide between China’s rich and poor, the government’s recently announced pledge to curb inequality is eliciting mixed reactions among economists.

Concerns over the country’s polarized income distribution center around its rapidly expanding cities, where the welfare gap between the poorest and wealthiest tiers is most apparent. While China’s cities support the country’s booming luxury goods industry – which grew 56% in 2012 --  they also play host to millions of low-wage migrant workers with restricted access to urban housing, education, and health care. 

Among policy observers, changing China’s “two-tier society of rich and poor” will require “fundamental” reforms. Economist Hu Xingdou argues that the country needs to address outdated tax structures by introducing inheritance tax and restructuring the current system of property rights. Currently, as the article explains, local governments generate a large portion of their revenues via land sales. This, in turn, leads local authorities to push many farmers and rural dwellers off their properties with compensation well below market rate.  Creating a property tax and giving rural dwellers greater rights to their property would dis-incentivize the sale of land and limit the number of landless farmers, the article explains.

For Mao Yushi, a proponent of economic liberalization, the country needs to increase access to bank loans. At present, he argues, access to loans is vastly unequal, favoring large firms with close ties to the state but excluding small businesses. Providing access to finance will, he suggests, allow for the growth and development of small businesses and employment opportunities among the rural and urban poor.

While the government’s plan addresses some of these proposals, the article describes it as an “aspirational document” that uses non-committal language and lacks “concrete steps”.  With regards to tax reform, the government’s proposals mention that property tax will be “extended” and that inheritance tax will be “introduced ‘at the appropriate time’”.  In additional, tax cuts will be “promoted” for low-income tiers.

Citing that the country’s recently released Gini coefficient is among the world’s highest, the article quotes Xiaolu, who writes that current proposals fall short of resolving the urban poverty gap. “Solving the income distribution issue,” he explains, will require “full-scale reform.”

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Published on Friday, February 8, 2013 in The Economic Times
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