Is China headed for a Gini ‘red alert’?

Francesco Sisci – Asia Times

Oct 20, 2005
BEIJING – Economic inequality and social protests in China have become a frequent topic in the Western press. The startling figure of 74,000 protests across China in 2004, up from 58,000 the previous year, has popped up in many newspapers, as has China’s most recent Gini coefficient of 0.45, suggesting that economic inequality in China has in fact surpassed that of the US and UK with their allegedly cold-blooded “Anglo-Saxon” model of capitalism. (The Gini coefficient, a measure of inequality developed by the Italian statistician Corrado Gini, is a measure of income inequality ranging between 0 and 1, where 0 corresponds to a society where everyone has exactly the same income, and 1 corresponds to a society where one person has all the income and everyone else has none.)
Eyeing such statistics, one might be tempted to think that Chinese society is falling apart, and indeed, various books and articles have appeared suggesting exactly that. However, as with many things in China, first impressions can be misleading. The 0.45 figure was published by the official People’s Daily, which described it as a “yellow alert”, and asserted that if things go on like this China will reach the “red alert” level in five years. [1] Using similar logic, one might extrapolate the protest figures to suggest that if social protests grow as rapidly as the Gini coefficient has, there could be over 80,000 this year, more than 100,000 in a year or two, and so on, endangering the social fabric of China within the next five years, when the Gini coefficient will have reached and passed the “red alert” level.
The aforementioned figures seem to find confirmation in other numbers more readily available: 66% of all total bank deposits belong to 10% of the population, with 20% of the population holding 80% of total deposits. Peasants, the majority of China’s population, make under US$300 a year, while people in Shanghai, the richest city in China, earn over $4,000 a year. [2] China’s coastal region, home to some 300 million people, produces about 70% of China’s GDP. If we compare these numbers, it becomes clear that we are talking about the same group: 20% of the population amounts to about 260 million people, roughly the population of the coastal region, and the ten percent holding 66% of total deposits are the 130 million affluent people living in eastern coastal cities. The rest of the country has been left behind.
The Asian Wall Street Journal, in a recent editorial, warned against curtailing economic reforms based on these numbers. [3] “It is almost axiomatic that during periods of high growth, some will improve their lots at a higher rate than others,” said the Journal, which underscored that China’s reform process has already achieved the greatest sustained poverty reduction in the recorded history of the world. By World Bank estimates, China had 29 million absolute poor in 2001, compared to 80 million in 1993 and 250 million in 1979, when the economic reforms started. This feat dwarfed the growth of the Gini coefficient in the same period. In 1980, after one year of reforms, it was 0.33; in 1992, when the late Communist Party leader Deng Xiaoping again promoted reforms after his famed “southern trip” in the wake of the Tiananmen crackdown, it was 0.37, and in 2003, when further reform measures were introduced according to China’s WTO commitments, it was 0.4.
Therefore, it would be misguided to say that protests and the income gap are simply going to push China over the edge, that the days of the Chinese boom are numbered and will be followed by a 1920s-China sequel – renewed civil war and warlordism, with the next dynasty struggling to establish itself from the wreckage of the old regime.
It is important to note that the Chinese leadership is indeed concerned by these facts – we know them because official Chinese media, toeing the party line, published them; otherwise we would never have known. So the question we should be asking is: why does the regime want people to know about the inequality problem? It is not that the figures would have been available anyway, or that social instability has grown so much that it can no longer be hidden: in the universe of China, much occurs that goes unnoticed by the rest of the world.
Even the best foreign intelligence might manage to gather a burst of sporadic events, but it could never authoritatively draw a vast picture of tens of thousands of protests all over the country, let alone then authoritatively feed it to the international press and make them believe it. If the Chinese didn’t tell us we would never know of so many protests. But the publication of the data is hardly an indication that Chinese leaders have grown more transparent overnight. The actual message is different. The Chinese regime is telling us there are more protests and a higher wealth gap because it is confident it has the situation under control, and it believes that these events cannot rock the boat, either now or in the coming five years.
There are several reasons to interpret the protest figures cautiously. For one, the 74,000 figure is only for demonstrations involving over 100 people; the innumerable small gatherings of a handful of people outside the local government office are not included. If the government, at any level, had to confront and repress violently these protests, there would not be enough police in China to rein in the riots, which would spawn other, bigger riots.
In reality, protesters are usually bought off easily: money is spread around, requests are granted, and people are appeased. These tactics create a virtuous circle (or a vicious one according to the viewpoint): protests yield money and thus yield more protests. Of course a peaceful result is not guaranteed; in some cases, police are called in, they break some heads, and organizers are spotted and arrested. In early October, the state-run media noted that so far this year some 1,826 police had been harmed, and 23 killed, trying to handle riots. By official accounting, then, the total number of police casualties was about 1 for every 35 protests. If this reasoning is valid, we can infer that a violent outcome, with a fierce confrontation, is not the rule. In other words China has learned that protests can be handled peacefully – this might be one major reason why the government feels confident in handing out the figures.
The other reason for telling China and the world these stories is to create the consensus needed to promote the idea of a “harmonious society”, a new political slogan of the new leadership. “Harmonious society” is not a simple political slogan dusted off from Confucian times; it in fact underlies the economic effort to spread wealth to the interior and boost domestic consumption, two crucial challenges for China in the next few years. Mr Wang Jian, from the State Development and Reform Commission (SDRC), China’s main economic planning body, points out that the eastern regions of China are in a conundrum: they need more land to build houses and factories, yet this is prime fertile land, used to produce grain. [4] Less land for agriculture in China will create, in the long run, pressure on the world grain market.
The same was true also in Japan at the time of rapid industrialization, explains Wang Jian, yet the size of the Chinese population is much bigger than that of Japan. “There is not enough grain in the world market to feed the Chinese population,” concludes Wang. This may actually not be true – important grain exporters like the US, Canada, Australia and Argentina have plenty of slack capacity at the moment, in fact, the US and EU are literally paying farmers to underproduce – but Wang’s comment does reveal a deep sense that China should handle grain differently from the way it has handled, say, oil, where it has a growing dependency on imports.
Incidentally, the issue of land requisition for industrial purposes and disagreements about compensation are the most important reasons for the recent protests. The issue is very complicated because if industry pays too much, it would reduce the incentive for industrial development, and local governments have no money to make up the difference to the peasants whose land has been taken. “Local governments have few sources of revenue to finance physical infrastructure and social expenditure,” writes World Bank economist David Dollar, explaining some of the reasons why Chinese peasants have low compensation for their land requisition. [5]
Opening the west as a solution
The problem of limited fertile land has been made more acute by fast-growing pollution, which wastes both water and land. Wang Jian, who in the mid-1980s was the first advocate of economic development along the coasts, now urges a more careful use of land. It is also important to try to open up the western and central areas, where there is plenty of land and almost 1 billion people. Unfortunately, the idea of developing the west has been around for almost a decade but so far has produced little. But the effort goes on. China is said to be considering the creation of new cities along the Yangtze river, and possibly even along the canals that will soon criss-cross the country bringing water from southern to northern China for the gigantic South-North water diversion project. This process could go further west; for example, the government might attempt to move population and industries to Qinghai, a province as large as Western Europe with a population of just 5 million. However, there are many problems associated with this kind of large-scale shift, and political sensitivities are not last on the list. The government is worried about how the international community would regard what could be viewed as a massive invasion of Qinghai – once part of historic Tibet – by Han Chinese.
Unquestionably, bringing wealth, development, production, and cities to the western regions is one of China’s biggest long-term challenges. Success could create a kind of ‘west coast’ of China, a shore for trade and development with Central Asian states that could help bring stability and welfare to that region, where Islamic fundamentalism could otherwise become dominant. To achieve this goal, China must learn to cope better with the international community, suspicious of the Han invasion of areas inhabited by ethnic minorities; the ethnic minorities themselves, resentful of the Han settlers; and Muslims and local central Asian people, fearful of Chinese domination of Central Asia.
These are large, long-term issues that any government of China, democratic or not, will have to confront. But if the Chinese government were democratic – one head one vote – it could well be more difficult than it is today to hold the hundreds of millions of peasants crowded in Henan, Hebei, Hunan and Hubei from storming the deserted west, just as American pioneers swarmed through the thinly populated prairies of the American West in the 19th century.
In a time of fast growth with many poor people fighting for their chance to wealth and climbing up the ladder of success, it would seem axiomatic to lend a hand to signor Gini and his coefficient of economic equality and social stability by quickly opening up the west to fast “colonization” from the east. This move could immediately relieve social pressure by providing a chance and a “go west” dream for millions of peasants.
Notes
[1] People’s Daily, English edition, September 21, 2005, Party school journal warns against China’s widening income gap .
[2] So defined not necessarily by their trade but by their living quarters, thus they should be considered people living in the countryside.
[3] AWSJ, September 23, 2005, “Letting the Gini Out of the Bottle”.
[4] Wang Jian “Guanyu jianshe jieyuexing shehuide san dian sikao” , internal document of the China Study Society for Macroeconomics, 6th issue, 2005.
[5] David Dollar “China’s Economic Problems (and Ours)”, The Milken Institute Review, third quarter 2005.
Tomorrow – Part 2: Will the Gini problem lead to political change?
Francesco Sisci, based in Beijing, is Asia Editor for the daily La Stampa.
(Copyright 2005 Asia Times Online Ltd. All rights reserved.

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