BIZCHINA> Review & Analysis
Essential steps to tackle widening income gap
By Qin Xiaoying (China Daily)
Updated: 2006-06-02 09:00

History shows that social and economic disequilibrium occurred in the course of the industrialization of many countries. This is particularly the case when per capita GDP crosses the US$1,000 threshold. This is manifested in  widening income gaps between different social strata.

China, having experienced almost three decades of rapid growth, is now confronted with the same question that haunted other industrializing countries in the past.

China had a Gini coefficient of 0.4 at the end of last year. The Gini coefficient is widely used across the world to gauge  income inequality, with zero indicating perfect equality and 1 being a state of perfect inequality. A Gini coefficient of 0.5 is the warning level of inequality.

By striving for a harmonious society, the Chinese Government is taking serious steps to address this problem.

President Hu Jintao recently presided over a meeting of leading officials on the issue of wealth distribution. This clearly indicates that the narrowing of the income gap tops the central government's agenda.

What has led to this ever-widening income gap?

Generally speaking, there are three types of income gaps  per capita income difference between different localities, per capita income gaps between urban and rural residents, and per capita income disequilibrium between residents in the same locality.

Obviously, the former two types of income disparity have much to do with physical factors such as climate, soil, geography, natural resources and communications facilities. In this context, the income gap has widened with the development of the Chinese economy. We may define the cause of the income gap in this category as a "development-based factor."

There are a number of other factors contributing to disparities in earnings.
One of these is "income composition." At present, the sources of income of the Chinese people, both in urban and rural areas, are becoming increasingly diversified.

It is fairly common that a person does more than one job concurrently or has a number of different sources of income. An income gap naturally evolves from this.

Then come "essential elements." This means  that essential elements such as capital and working skills play an increasingly more integral role in wealth distribution. In other words, thanks to the fact that capital and sophisticated working skills contribute more to economic growth than simple labour does, those who possess such assets acquire much more wealth than ordinary labourers. The gap between the incomes of these groups, for instance, reflects the disparity between dividends from capital input and earnings from simple labour.

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