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Four Economic Policies Forwarding Inequality, July 8, 2015 Adjust font size:

Dr. Sen Gong, of the Development Research Centre of the State Council, wrote a five-section report, "Inequality in China: A Case Study", with Associate Professor Bingqi Li, from Australian National University, and Save the Children UK, helping to address the root causes of inequality in opportunity and outcomes, as China seeks to pave the way for sustainable economic growth and social development.

Root Causes of Inequalities (Section 4)

Inequalities occur across three dimensions of unbalanced growth: across regions, provinces and counties; across rural and urban areas; and across households. The root causes of this unbalanced growth lie in structural transformation associated with economic growth, policies, traditional or cultural factors and labor moving from the low productivity and labor-intensive agricultural sector to the higher productivity and relatively more capital-intensive manufacturing sector. The rises in the wages of low-skilled workers have also been contained to ensure international competitiveness.

Four major economic policy factors have exacerbated inequality in China:

- Labor has been placed in a disadvantaged position - a result of low-interest financial capital, low-compensation land from rural areas, and low-price natural resources from Central and Western regions. In these circumstances, industry is likely to replace labor with capital when labor costs increase, hence limiting job creation and wage increases.

- Relative to the private sector, state-owned enterprises consume a large proportion of capital, raw materials and intermediate inputs to produce relatively smaller shares of gross output and value added. Moreover, state-owned enterprises only submit 10% of their profits on average to public finances.

- The structure of government revenues is neither suitable for income redistribution nor does it incentivize labor. China also has neither property tax nor taxation on capital gains. 70% of tax revenues come from indirect taxes, which are very difficult for the government to use to respond to income inequality, and individual income tax rates vary according to different sources of income and different tax systems, which makes it difficult to tell whether the overall effect is progressive or regressive.

(The tax sharing system, introduced in 1994, had the central government collecting revenues from local governments and re-allocating them according to different local needs. The aim was to use central government funds to even out regional disparities, but consequently, those who had earned more before were rewarded further. Moreover, the majority of central government grants are provided on condition that the local governments match funding, meaning richer areas receive even more grants from central government while poorer areas become even poorer.)

- The inter-governmental fiscal system is another example of a policy that fails to provide an effective framework for addressing inequalities. Sub-provincial governments continue to be decentralized; the fiscal capacity of provincial government is also weakened. For example, the lower levels of local government are expected to play a greater role in funding schools, forwarding greater inequality between local regions. Large numbers of rural schools were closed down in the early 2000s for the purpose of enhancing educational efficiency, making education much less accessible in remote rural areas.