After 40 years of capitalism, China’s income is divided almost as unequally as America’s

China’s divide.
China’s divide.
Image: Reuters/Carlos Barria
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Increasing inequality is now at the center of world policy debates, and there is perhaps no person more responsible for that than French economist Thomas Piketty.

His book Capital in the Twenty-First Century examined trends in inequality over the last two centuries in the United States and Western Europe. Piketty found that while inequality had fallen in the mid 20th century, since about 1975 it has been rising at an alarming rate as income from wealth (such as property and other assets) outpaced income earned from working. The 2013 book would become a surprise bestseller and perhaps the most influential economics book of the 21st century.

Now Piketty, along with his colleagues Li Yang and Gabriel Zucman, has turned his sights on China. For a forthcoming paper, the economists use tax data, surveys, and China’s national accounting statistics to estimate the growth of Chinese inequality from 1978 to 2015—the period since China liberalized its economy. The researchers find that while nearly all Chinese people are better off economically than they were three decades ago, the gains have been strongest at the top. They estimate that the share of income going to the top 1% has risen from 6% in 1978 to about 14% in 2015—a share that is less than in the US (20%) but higher than in France (10%).

The researchers say the new data is an improvement on previous attempts to measure Chinese inequality because they were able to use tax statistics available since 2006 on high earners. They claim that older research that only used survey data underestimated inequality because those with the highest incomes were unlikely to get surveyed.

Piketty and his colleagues depict a China that is somewhere between France and the US in terms of how economic growth is distributed. While the gains in income were well distributed in France from 1978 to 2015, they find that almost all the income growth in the US went to the top half of earners. In China, while higher earners have done unusually well—the incomes of the top 10% of earners rose by a rate of 7.4%—the bottom 50% saw strong gains as well.

It’s reasonable to question whether China’s astronomical growth over the last several decades would have been possible without an increase in inequality. The increasing divide is largely a result of urban areas thriving as rural areas stagnated, according to a 2018 paper from the International Monetary Fund. Given that the economic growth was driven by a move from agriculture to manufacturing, a typical path for growth for industrializing nations, it would have been difficult for rural workers to gain as much as those in cities.

People in China are worried about growing disparity, with families spending a large share of their income on education, since those with high school and college degrees have gained more than those without as demand for high-skill workers increased. If the government hopes to keep inequality from getting to US levels, the IMF recommends that China put greater investments in education and promoting the power of unions to advocate for workers. China’s likely to be on board with the former—but independent unions are even more unwelcome in one-party China than they have been in the US.

Greater inequality was a risk of economic reform that the father of China’s economic reforms foresaw—and accepted as a cost of having people generally become better off.

“We should allow some… to earn more and enjoy more benefits sooner than others, in accordance with their hard work and greater contributions to society,” said Deng Xiaoping in a speech at the time China embarked on its opening up. “If the standard of living of some people is raised first, this will inevitably be an impressive example to their ‘neighbors,’ and people in other regions and units will want to learn from them. This will help the whole national economy to advance wave upon wave.”