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Wealth Inequality in China and the Rural-Urban Gap

wealth in inequality in china
It is a well-known fact that China is one of Asia’s -and the world’s- wealthiest nations. In the past two decades, China has made strides in eliminating poverty by reducing 60 percent of the population living in extreme poverty in 1990 to 10 percent in 2010. However, using the Gini coefficient, an inequality measurement that ranges from 0-1, where 0 means complete economic equality and 1 means the richest person has all the income, wealth inequality in China verges on 0 .5, with 0.4 being regarded as the international warning level of dangerous inequality.

Unrealistic Precedents

The rising average income of 21,586.95 yuan or about $3,142.11 is not as realistic, however. The median income for China is 18,371.34 yuan or about $2,674.06. The downsizing of poverty and growing economy has not impacted all parts of China equally. There is still a large amount of wealth inequality in China. Depending on the region and type of economy, certain areas make more than others. According to 2015 data, Shanghai and Beijing, both very urban areas, make almost 50,000 yuan each, while the poorer, rural areas like Xizang, Gansu, and Guizhou make less than 40,000 yuan combined.

When data like living standards and housing prices are compared by province, there is a stark disparity between the economic conditions of rural and urban areas. Urban areas tend to make much more money than their rural counterparts. Along with this, despite rapid urbanization, 50.3 percent of China’s population, almost half a billion, is rural.

The Role of Education and Finance

One of the underlying causes of wealth inequality in China is the lack of education. Many rural areas lack access to schools and higher education, so although there is a large amount of higher-level jobs available, many Chinese cannot lift themselves up academically in order to access these jobs successfully. Because of this, rural Chinese are more likely to have lower-paying jobs or be self-employed in agricultural jobs. Thus, they will not make as much money.

Another cause of wealth inequality in China is that food costs are more. The Engel coefficient, which works the same as the Gini coefficient but measures food costs, is lower for urban areas than rural areas, even though urban areas have higher gross incomes. Housing is also less expensive in urban areas, leading to a higher surplus of disposable income for already-wealthy urban inhabitants.

According to China’s banking regulator, at least 50 counties in Tibet, Yunnan, and Sichuan are unbanked, which means they even lack access to banks and financial services. Rural Chinese lack a lot of other basic resources like cars and clean water as well.

Hope for the Future

While it may seem like not much is being done to help the rural poor, some policies are being put in place by China to address the issue. In 2013 China started its “35 Point Plan” also known as the Income Distribution Plan. It has goals to increase the minimum wage, spend more on public education and affordable housing, and provide overall economic security. In 2006, the Chinese government also abolished the agricultural tax and prohibited local governments from collecting fees. Social welfare policies and taxation reform, along with policies to improve the equality of education combined have slowly but steadily decreased the Gini coefficient to below 0.5 from 2008, which was its all-time high.

– Nadine Argott-Northam
Photo: Media-Public

 

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The Mechanisms and Determinants of Development

Determinants of Development
The enduring issue of why some countries are rich while others remain poor has long been the subject of great interest among scholars. New research on the determinants of development, though, appears to better identify the driving force behind development by taking an incisive look at the three traditional economic explanations for these cross-country disparities – economic policy, political institutions and geography.

Based on the findings, the researchers conclude that the primary determinant of developmental success may be the strength of institutions.

Economic Policy, Political Institutions and Geography

The research first laid out the traditional arguments for the importance of policy, institutions and geography as determinants of development.

All three are pretty straightforward: economic policy, such as a nation’s savings rate and the strength of its currency, clearly dictate, to some extent, the economic vitality of a country; geographic factors can also matter, for instance, a landlocked country like Chad – without access to the ocean or major rivers – is at a natural disadvantage because trade becomes a logistical nuisance; institutions — like the rule of law to maintain public safety, ensure property rights, and mitigate corruption — still were found to have a greater impact.

However, the researchers’ revelation was not just that policy and geography took a back seat in importance to the role of institutions in development, but that they were, independently, hardly influential at all. Research sampling 72 countries found that while poor policies may hurt growth rates temporarily, they did not have the sort of impact on long-term income levels that many had previously suspected.

Promotion of Stable Institutions

The relationship between geography and development was a bit more complicated. Although nations with poor geography and stable institutions still do well, the authors acknowledge the role geography often plays in promoting stable institutions historically.

Specifically, nations colonized by Europe in unfavorable regions (in regard to disease and other conditions) were typically turned into rentier states and dealt poorer institutions. Conversely, regions which could be settled were afforded European-mainland style institutions: democracy, property rights and the rule of law.

Determinants of Development

So, Europe’s unique colonial history shows that geography did affect the type of institutions implemented in various countries, and it is these institutions that explain differences in development.

In a sense, the revelation that among the determinants of development, growth is primarily a function of institutions should be somewhat heartening, as institutions can be reformed. Therefore, instead of nations across Sub-Saharan Africa and parts of Central America being condemned to second-class status economically, focus can shift to the ways their poor institutions can be altered to better catalyze development.

Although researchers failed to explain the means of doing so directly, recognizing that building robust institutions is the best path toward progress is an important insight.

– Brendan Wade

Photo: Flickr

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Top Celebrities at Milken Institute Global Conference

milken institute global conference
Philanthropist Michael Milken established the Milken Institute in 1990 with a focus on the interaction between education and job growth. The institute’s mission has expanded to include advancing economic and policy solutions to create jobs, widen access to capital and enhance health.

The institute has also expanded its reach. At this year’s Milken Institute Global Conference in Beverly Hills, guests included Matt Damon, will.i.am and Charlize Theron. The 17th annual conference attracted more than 3,500 entrepreneurs, executives, philanthropists, scientists and celebrities.

Co-founder of Water.org, Matt Damon, spoke about the water crisis, in which 780 million people in the world lack access to clean water. Damon and co-founder Gary White created the nonprofit organization to find new solutions, new financing models and real partnerships, with the vision of providing safe water and proper sanitation means for all. Water.org operates in Africa, South Asia and Central America.

Black Eyed Peas singer will.i.am spoke at the conference about his experience teaching disadvantaged children from his former neighborhood in Boyle Heights, Calif. He also spoke about entrepreneurship, presenting his wristwatch phone, which was an idea he designed and created with the help of an engineering team.

Charlize Theron, founder of Charlize Theron Africa Outreach Project, spoke at the conference about fighting AIDS in South Africa. Almost 6 million people in South Africa live with AIDS. Theron, a native of South Africa herself, established the project in 2007 to support African youth in the fight against HIV/AIDS. The youth of Africa are particularly vulnerable to HIV for many reasons including gender inequity, high crime rates, lack of cohesive family units, high incidence of rape, lack of information, chronic unemployment and lack of access to health services. The project focuses on community-based organizations and gives support in the form of grants, networking and building collaborative relationships based on trust and respect.

The Milken Institute Global Conference is organized into more than 160 panels that are grouped into 11 categories, including education, philanthropy, aging, health and environment. Next year’s conference will be held April 26-29.

– Haley Sklut

Sources: Forbes, Look to the Stars, Milken Institute, Water.org
Photo: Fulloma

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Mixed Policy for Banks in India

india_banks_policy
Raghuram Rajan took office as the governor of India’s central bank in September. His liberal vision of India’s financial sector was meant to boost economic growth and help the poor. In 1969, India’s former prime minister, Indira Gandhi, nationalized most of the banks in India. Since India’s presidential election in 1969, there have been many reforms to the country’s banking system, but the system is a mix of new liberal policies and right-wing conservative policies, creating an ambiguous mixture that is India’s current banking system.

The Reserve Bank of India’s (RBI) hybrid system may promote social inequality and create an unstable economic atmosphere. Many problems plague India’s banking sector, including bad debts, low bank reserves and mediocre capital levels and the fact that only 35 percent of adults have bank accounts.

At least half of all rupee trading is abroad, and two large foreign banks in India have operations that are 1.9 times bigger than their local counterparts. RBI’s hybrid system may promote social inequality and create an unstable economic atmosphere. The difficulty and lack of opportunities to save money perpetuates poverty and makes it hard for the government to collect taxes.

The RBI’s growing independence has led to the Bank no longer setting the interest rates that banks must charge. However, the system controls the assignment of credit, requiring banks to invest 23 percent of their deposits in government bonds and save an additional four percent with the RBI.

The rules that govern the debt market mean 58 percent of banking system deposits are based on government preference. Rajan’s position at the RBI creates hope for extending finance to more Indians. New banking laws will make it easier for foreign banks to expand, provided that they set up local subsidiaries that the Indian government can regulate easily. One of Rajan’s goals is to methodically end the way that banks are forced to purchase government debt. In addition, Rajan has vowed to make new rules that will stop business magnates from exploiting the country’s fragile banking system and force banks to recognize debts that would otherwise sour.

– Daren Gottlieb

Sources: The Economist, Rediff News

History of the IMF

History of the IMF
The IMF, or International Monetary Fund, was founded in July of 1944 at the International Monetary and Financial Conference, in New Hampshire. The organization was entered into force in 1945, and the laws were adopted in March of 1946. In the months following the organization’s creation, executive directors and the first managing director, Camille Gutt of Belgium, were elected.

The harsh economic circumstances of the 1930’s and 40’s led the founders of the IMF to plan an institution charged with overseeing the international monetary system in order to prevent self-defeating financial policies. The formation of the IMF would ensure that exchange rate stability was maintained and encourage its member countries to eliminate exchange restrictions that could potentially hinder or complicate trade. In March of 1947, France became the first country to borrow from the IMF.

 

The IMF: A Cornerstone of the Global Economy

Between 1945 and 1971, member nations of the IMF agreed to keep their exchange rates at a level that could be adjusted only to correct disequilibrium in the balance of payments and only with the IMF’s consent. This system, known as the Bretton Woods system, remained in place until 1971 when the US suspended the convertibility of USD into gold.

After the collapse of the Bretton Woods system, IMF members have been free to choose any form of exchange agreement they wish, other than pegging their currency on gold. Countries are free to allow their currency to float freely, peg it to a different currency, adopt another country’s currency, or other methods.  The IMF’s transition to floating exchange rates made it easier for economies to adjust to external shocks.

The IMF has since been redefined by the major global economic crises around the world. Since the mid-1970s, the IMF has helped many of the world’s poorest countries by providing concessional loan programs. These programs came during the oil crisis of the 1970s. The oil crisis forced many countries to borrow from commercial banks, which led to interest rate increases, and subsequently, an international debt crisis. The soaring interest rates caused poorer, developing, and non-oil-producing countries to pay roughly $22 billion dollars between 1978-81.

The financial crisis continued to worsen into 1982, when the IMF coordinated global response, realizing that nobody would benefit if the country after the country failed to repay its debts. This strategy calmed the initial panic; however, it also highlighted the long road needed to eliminate the problem.

After the fall of the Berlin wall in 1989, the organization witnessed its greatest influx of member states since the 1960s. The IMF was essential in assisting countries from the Soviet Bloc transition from central planning to market-driven policies. After several years of intense reform and IMF guidance, most economies had transitioned to market economy status.

In 1997, the Asian financial crisis taught the IMF several important things. First, they would need to pay a great deal more attention to weaknesses in countries’ banking sectors and to the effects those weaknesses had on their macroeconomic stability.  The IMF also realized that the institutional prerequisites for successful liberalization of international capital flows were more daunting than they had realized. And finally, the IMF realized that they needed to re-evaluate how fiscal policy should be adjusted in a time of economic crisis.

The global economic crisis of 2008 was preceded by large imbalances in global capital flows. This financial crisis uncovered fragility in advanced markets. In response to the recognition that the IMF would be strained during this financial crisis, the fund lending capacity was tripled to $750 billion. They implemented a variety of lending policies and flexible credit lines to countries with strong economic fundamentals, while also assisting poorer, less developed nations.

The IMF has been and continues to be a quintessentially important monetary cornerstone of the international global economy. The IMF is responsible for many of the world’s most comprehensive and influential economic decisions of the 20th and 21st centuries. Without the IMF the global economy would be a drastically different place.

– Caitlin Zusy
Source IMF