## 1. What is the current state of income inequality in China? How has it evolved over time and how does China compare to other countries? ## Source details **Canonical URL:** [1. What is the current state of income inequality in China? How has it evolved over time and how does China compare to other countries?](https://www.imf.org/-/media/files/publications/wp/2018/wp18127.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2018/wp18127.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2018/wp18127.pdf.json) --- ### II. Current state and evolution of income inequality - China moved from being a moderately unequal country in 1990 to being one of the most unequal countries. - SWIID estimates the Net Gini coefficient for China at 50 points as of 2013. - National Bureau of Statistics (NBS) official estimate of the Gini coefficient was 47.3 points. - The Gini coefficient increased by a total of about 15 Gini points since 1990; a combination of national sources suggests a similar increase of about 12 ½ points. - Ravallion and Chen (2007) extended annual series from 1981 to 2001 and imply a larger increase (15 ½ percentage points) when adjusted for cost of living. - Income inequality increased since the early 1980s, with a leveling-off and modest decline since 2008. - The most recent official estimate of 2016 was 46.5 points, which is 2.6 points below the highest level observed in 2008. - Distributional shifts: - Top 20 percent gained income share during 1980–2008. - Top 10 percent share rose from 26 percent in 1980 to 41.7 percent in 2008. - The modest decline in the Gini since 2008 was driven by a decline in the share of the top 20 and gains for the middle of the income distribution, not by increased shares for the bottom deciles. - Wealth inequality continued to rise even as income inequality showed a recent turnaround. - Real incomes and poverty: - Bottom 10 percent incomes rose by 63 percent between 1980 and 2015. - Poverty (headcount ratio at $1.90 a day at 2011 PPP) decreased by 86 percentage points from 1980 to 2013. ### III. Inequality of opportunity and access - Education: - China drastically increased secondary and tertiary enrolment ratios since the 1980s. - In 2010, tertiary education was more unequally distributed than in other emerging and advanced economies across regional, rural-urban and wealth dimensions. - Financial inclusion (World Bank and the People's Bank of China, 2018): - 41 percent of China’s population saved at a financial institution. - 10 percent borrowed from a financial institution. - 17 percent used an account to receive wages. - Gaps partly explained by rural-urban, educational, and income differences. - Social protection and services: - Almost all of China’s population has legal health care coverage, largely due to the New Rural Cooperative Medicare. - 74 percent of the population above statutory pensionable age is receiving an old age pension. - China lags advanced countries on unemployment benefits coverage and has higher out-of-pocket health expenditure as a percentage of total health expenditure compared with major advanced countries. - Gross pension replacement rate for urban workers is generous, but non-contributors receive very low benefits, implying a weak safety net for the elderly. ### IV. Main drivers explaining trends in inequality (empirical decomposition) - Methodology: - The Theil index and decompositions by province, rural-urban location, educational attainment, and sector of employment using CHIP household surveys for 1995, 2007, and 2013. - Education and skill premium: - Between-group inequality due to differences in educational attainment of the household head: - 20 percent of total inequality in 1995. - Around 32 percent in 2007. - 26 percent in 2013. - Theil between-group index values: 0.07 in 1995, 0.13 in 2007, 0.09 in 2013. - Rapid demand for high-skilled labor increased returns to education historically; evidence suggests an easing or decrease in the skill premium between 2008 and 2014. - Spatial drivers: - Provincial differences explained 35 percent of total inequality in 1995 and declined to 11 percent in 2013. - Rural-urban gap accounted for 44 percent of total inequality in 1995, rose further in 2007, then declined to 34 percent in 2013. - Decline in the rural-urban gap since 2007 may reflect rapid urbanization and government policies. - Sector of employment: - Share of income inequality accounted for by sectoral differences: - 32 percent in 1995. - 8 percent in 2013. - Within-sector inequality rose notably for: - Those without work: from 7 percent to 30 percent. - Services: from 8 percent to 13 percent. - Within-group inequality accounts for the majority of total Theil’s T in all decompositions and years (e.g., within: 0.2852 80.57 in 1995 by education; within: 0.2560 73.79 in 2013 by education). ### Box: Policies China has implemented to address inequality - Political commitment: - Twelfth Five Year Plan emphasized “speeding up the formation of a reasonable pattern of income distribution . . ., and reversing the widening income gap as soon as possible” (State Council of the PRC 2011). - Thirteenth Five Year Plan (2016–2020) reiterated the goal to eradicate rural poverty by 2020. - First session of the 13th National People’s Congress (March 2018): premier Li announced a target of lifting 10 million people out of poverty in 2018 out of an estimated close to 27 million remaining at the end of 2017. - Personal Income Tax Reform: - The government raised the minimum threshold for personal income tax multiple times: from 800 yuan per month before 2005 to 3,500 yuan per month in 2011. - The threshold remained in place as of 2017 and was equivalent to 78 percent of GDP per capita. - Only a small share of income earners actually pay the tax; studies find the redistributive effect of the personal income tax to be very limited. - Labor market policies: - After a hiatus in 2009, significant annual hikes in minimum wages resumed. ### Minimum wage and labor-sector effects - By 2015 the average ratio of minimum wage to average wage had increased to 31.2 percent in the non-private sector and 51.2 percent in the private sector. - Recent hikes and better enforcement have shifted views on the role of minimum wage regulation in reducing wage inequality. ### Social assistance and poverty alleviation programs - The Dibao system: - By 2016 the minimum income guarantee system covered 45.8 million rural residents (7.8 percent out of the total rural population). - Another 4.97 million rural residents received relief assistance for extreme poverty. - 14.9 million urban residents, approximately 1.9 percent of the urban population, participated in the program. - Empirical studies find the Dibao program did not have a significant impact on reducing income inequality but has been effective in alleviating poverty. - Pro-farmer policies since 2000 (direct subsidies, abolishment of agricultural tax, improved public services and social protection) have increased farmers’ incomes and reduced urban–rural income gaps. - Education and poverty alleviation: - Rural poverty rate declined considerably on account of antipoverty policies and high economic growth. - The 13th Five-Year Plan for the Development of Education (2016-2020) calls for universal three-year preschool and senior high school education, special support to central and western regions and rural or poverty-stricken areas, equal access to compulsory education at local schools for children of migrant workers, and improving the education system for left-behind children. ### Social security and healthcare coverage - New Rural Cooperative Medicare led to rapid expansion in medical care coverage and near-universal coverage for rural residents. - Pension coverage by end-2016: - 378 million people participated in the urban basic pension program for workers. - 508 million participated in the basic pension insurance program for urban and rural residents. - Because of differences in scope and level of coverage among groups, it is not clear to what extent advances in social security have narrowed inequality nationwide. ### Regional development, fiscal transfers, and urbanization policy - Western Development Strategy (2000) emphasized infrastructure improvement, preferential policies for foreign investment, and significant increases in fiscal transfers to western regions. - The share of general purpose grants in the transfer system has grown since the early 2000s and evidence suggests they have reduced fiscal disparities. - Income gap between coastal and western regions has decreased since the mid-2000s. - 2014 urbanization plan aims to move approximately 100 million additional rural residents into urban areas by 2020 to reduce the urban–rural income gap. - Human Rights Action Plan 2016 called for implementing household registration reform and establishing a unified urban–rural household registration system. ### Financial inclusion - Policies promoted expansion of payments systems in remote and rural areas, new rural financial service providers and sub-branches, and agent-based service points for cash withdrawal. - In 2014 the China Banking Regulatory Commission set an objective to reach coverage of basic financial services in all villages in three to five years. - ATMs and point-of-sales more than doubled from 2011 to 2016 and agent-based service points for cash withdrawal covered almost all rural towns. - Gaps remain; the Plan for Advancing the Development of Financial Inclusion was issued in 2015. ### Methodology for projecting inequality and key structural drivers - Approach: fixed-effects panel regression explaining changes in the net Gini index across a panel of 28 countries spanning roughly 1980-2010; for China the sample spans 1985-2010. - Regression specification: Net Gini = α + β×S' + γ×P' + μ + ε, where S = structural variables, P = policy variables, μ = country fixed effects. - Structural variables include urbanization, aging (third order polynomial), sectoral change (share of employment in services and industry), and educational levels (share of population with higher education). - Policy variables aggregated into three groups: - Revenue: individual income tax revenue in percent of GDP and property tax revenue in percent of GDP. - Expenditure: public spending on health and social protection in percent of GDP. - Redistribution: difference between Market Gini and Net Gini. - Robustness checks included trade openness, GDP per capita and its square, shadow fed funds rate, and time fixed effects. ### Results and interpretation (historical fit and decomposition) - Regression performance: - Fitted values track China’s actual net Gini between 1990 and 2002; earlier period actual inequality lower than implied, and after 2002 actual inequality has been above fitted values. - The regression explains close to 16 points increase in the net Gini from 1985 to 2010, compared to the actual change of around 22 points (from 29 to 51). - Structural drivers: - Structural factors (urbanization, aging, sectoral rebalancing) explain most of the rise in inequality until 2010. - Urbanization example: share of population in urban areas rose from 23 percent in 1985 to 51 percent in 2010, implying an increase of 20.5 Gini points over the same period. - Policy role: - Policies did not provide enough offset to structural forces; fiscal policy is identified as a powerful tool where a more pro-active scenario has the potential to quell the rise in inequality. - Demographics: - Demographics tied to falling fertility and rapid aging contributed 4.4 points to the rise in the net Gini index. - Sectoral rebalancing and education: - Move from agriculture to industry and services and improvements in tertiary education contributed to a combined decline of 7.3 Gini points in inequality (1985–2010). - Historical policy containment: - The role of policies in 1985–2010 was modest, around 2 Gini points in containing the rise in inequality. ### Projections and scenarios to 2050 - Baseline projection (policies constant at latest observation) for 2010–2050: - Fitted net Gini index rises 4.8 points (2.6 Gini points compared to the observed value in 2010). - Drivers in the projection period chiefly: - aging: +4.8 - urbanization: +5.1 - Offsetting effects: - Rebalancing away from agriculture and industry reduces inequality by 3.2 Gini points. - Tertiary educational attainment lowers inequality marginally. - Policies assumed constant; past policy contribution was -1.5 point to the net Gini index in 1985–2010. - Counterfactual “active policies” scenario (gradual adoption of fiscal policies to reach levels of the most proactive countries of the G7 by 2050): - Under the “active policies” scenario, inequality slightly declines after 2010 rather than increasing. - The full range of policies—tax changes, expenditure increases and redistribution—contributes significantly to reducing inequality. - Largest effects in the scenario come from social protection spending and redistribution. - The scenario would still imply a decrease of 3 Gini points compared to the observed Gini coefficient in 2010. - Inclusion of policy inclusiveness variables (not available cross-country) could suggest a larger role for policies. ### Fiscal policy: potential and empirical role - Fiscal policy is found to be a potentially powerful tool in reducing inequality. - Regression framework includes: - Expenditure-side: health and social protection expenditure to GDP. - Revenue-side: individual income tax and property tax revenues to GDP. - Redistribution proxied by the difference between the market and the net Gini indices. - Tax variables were the only policy variables not significant in the regression. - Historical evidence on redistributive impact: - China’s post-tax Gini coefficient is only 3% lower than its pre-tax Gini coefficient, compared to average reduction of over 30% in OECD countries. ### Revenue-side reform recommendations (tax reforms) - Shift tax composition toward more direct taxes and less on indirect taxes: - VAT and other taxes on goods and services account for about half of tax revenues in China compared to one third in OECD countries. - Revenues from PIT contribute only around 5 percent of total revenues, versus an OECD average of 25 percent. - Improve design of direct taxes and social security contributions: - The PIT currently embeds a progressive schedule with marginal rates increasing from 3 to 45 percent. - In practice very few taxpayers pay any PIT; the top marginal rate applies only to incomes in excess of 35 times the national average wage, or 15 times the average urban wage. - Reform options include lowering the high basic personal allowance, transforming it into a tax credit, and redesigning tax brackets. - Remove imputed minimum earnings for social security contributions: - It is estimated that around 30 percent of the urban labor force earns below the imputed value used for minimum contributions in several large cities. - Consider adoption of a recurrent market-value based property tax. ### Expenditure-side reform recommendations - Increase public spending on education, health and social assistance: - China still lags other emerging economies and OECD countries in these public spending areas. - Present discounted value imbalance of the pension system over 2015–2050 is estimated to be around 125 percent of 2015 GDP. - Address unequal provision of public services and residency restrictions: - Hukou system restricts access to social entitlements for migrants; new migrants to urban areas are expected to number 300 million over the next two decades. - Reduce provincial and regional disparities in public service provision: - State Council reform plans aim to increase transfers to poorer regions and move to a rules-based system for transfers. - Re-centralize social insurance to improve equality, risk sharing and labor mobility. ### Conclusion and policy implications - Over recent decades China experienced a sharp reduction in poverty and a substantial increase in inequality; inequality started to modestly decline since 2008. - Empirical analysis attributes the rise in inequality to differences in education and the skill premium, urbanization, and population aging; recent decline is broad-based and linked to a decrease in the skill premium and reductions in geographical and inter-sectoral income gaps. - Without policy changes, aging and urbanization are likely to drive inequality higher through 2050. - Fiscal policy reforms have the potential to substantially enhance inclusiveness: - The full range of policies—tax changes, expenditure increases and redistribution—could contribute significantly to reducing inequality, with largest effects from social protection spending and redistribution. - Specific recommended reforms include increasing the progressivity of social security contributions, of personal and property taxes, boosting social expenditure, ensuring equal access to public services across provinces and regardless of residency status, and liberalizing residency restrictions that block migrants from social entitlements. *Source: wp18127 - 1. What is the current state of income inequality in China? How has it evolved over time (IMF working paper content).* ### 1. What is the current state of income inequality in China? How has it evolved over ### wp18127 - 1. What is the current state of income inequality in China? How has it evolved over time and how does China compare to other countries? ### II. Current state and evolution of income inequality - China moved from being a moderately unequal country in 1990 to being one of the most unequal countries. - SWIID estimates the Net Gini coefficient for China at 50 points as of 2013. - The National Bureau of Statistics (NBS) official estimate of the Gini coefficient was 47.3 points (year not explicitly restated in the source excerpt). - The Gini coefficient increased by a total of about 15 Gini points since 1990; a combination of national sources suggests a similar increase of about 12 ½ points. - Official NBS data provide Gini coefficients since 2003; complementary data (Ravallion and Chen, 2007) extend annual series from 1981 to 2001 and imply a larger increase (15 ½ percentage points) when adjusted for cost of living (see appendix A2 referenced). - Income inequality increased since the early 1980s, with a leveling-off and modest decline since 2008. - The most recent official estimate of 2016 was 46.5 points, which is 2.6 points below the highest level observed in 2008. - Distributional shifts: - Top 20 percent gained income share during 1980–2008. - Top 10 percent share rose from 26 percent in 1980 to 41.7 percent in 2008. - The modest decline in the Gini since 2008 was driven by a decline in the share of the top 20 and gains for the middle of the income distribution, not by increased shares for the bottom deciles. - Wealth inequality trends diverged: wealth inequality continued to rise even as income inequality showed a recent turnaround (appendix figure A.1). - Despite rising inequality, real incomes rose broadly: - Bottom 10 percent incomes rose by 63 percent between 1980 and 2015. - Poverty (headcount ratio at $1.90 a day at 2011 PPP) decreased by 86 percentage points from 1980 to 2013—the most rapid reduction in history. ### III. Inequality of opportunity and access - Education: - China drastically increased secondary and tertiary enrolment ratios since the 1980s. - In 2010, tertiary education was more unequally distributed than in other emerging and advanced economies across regional, rural-urban and wealth dimensions (figure 7 referenced). - Financial inclusion (World Bank and the People's Bank of China, 2018): - 41 percent of China’s population saved at a financial institution. - 10 percent borrowed from a financial institution. - 17 percent used an account to receive wages. - Gaps partly explained by rural-urban, educational, and income differences (appendix figure A.2). - Social protection and services: - Almost all of China’s population has legal health care coverage, largely due to the New Rural Cooperative Medicare. - 74 percent of the population above statutory pensionable age is receiving an old age pension. - China lags advanced countries on unemployment benefits coverage and has higher out-of-pocket health expenditure as a percentage of total health expenditure compared with major advanced countries. - Gross pension replacement rate for urban workers is generous, but non-contributors receive very low benefits, implying a weak safety net for the elderly. ### IV. Main drivers explaining trends in inequality - Method: The Theil index and decompositions by province, rural-urban location, educational attainment, and sector of employment using CHIP household surveys for 1995, 2007, and 2013. - Education and skill premium: - Between-group inequality due to differences in educational attainment of the household head: - 20 percent of total inequality in 1995. - Around 32 percent in 2007. - 26 percent in 2013. - Corresponding Theil between-group index values: 0.07 in 1995, 0.13 in 2007, 0.09 in 2013. - Rapid demand for high-skilled labor increased returns to education historically; evidence suggests an easing or decrease in the skill premium between 2008 and 2014, possibly because of a graduate glut and recent minimum wage hikes. - Spatial drivers: - Provincial differences explained 35 percent of total inequality in 1995 and declined to 11 percent in 2013. - Rural-urban gap accounted for 44 percent of total inequality in 1995, rose further in 2007, then declined to 34 percent in 2013. - Decline in the rural-urban gap since 2007 is supported by the urban-rural income ratio and may reflect rapid urbanization (decline in rural surplus labor) and government policies. - Sector of employment: - Share of income inequality accounted for by sectoral differences: - 32 percent in 1995. - 8 percent in 2013. - Within-sector inequality rose notably for: - Those without work: from 7 percent to 30 percent. - Services: from 8 percent to 13 percent. - These within-sector rises suggest uneven provision of social protection. ### Box: Policies China has implemented to address inequality - Political commitment: - Twelfth Five Year Plan emphasized “speeding up the formation of a reasonable pattern of income distribution . . ., and reversing the widening income gap as soon as possible” (State Council of the PRC 2011). - Thirteenth Five Year Plan (2016–2020) reiterated the goal to eradicate rural poverty by 2020. - First session of the 13th National People’s Congress (March 2018): premier Li announced a target of lifting 10 million people out of poverty in 2018 out of an estimated close to 27 million remaining at the end of 2017. - Personal Income Tax Reform: - The government raised the minimum threshold for personal income tax multiple times: from 800 yuan per month before 2005 to 3,500 yuan per month in 2011. - The threshold remained in place as of 2017 and was equivalent to 78 percent of GDP per capita. - Only a small share of income earners actually pay the tax; studies find the redistributive effect of the personal income tax to be very limited (Zhuang and Shi, 2016; Li et al., 2012, 2014; Lam and Wingender, 2015). - Labor market policies: - After a hiatus in 2009, significant annual hikes in minimum wages resumed (text cut off in source excerpt). *Source: wp18127 - 1. What is the current state of income inequality in China? How has it evolved over time (IMF working paper content).* ### 2010. As a result, by 2015 the average ratio of minimum wage to average wage had increased to 31.2 ### wp18127 - 2010. As a result, by 2015 the average ratio of minimum wage to average wage had increased to 31.2 ### Minimum wage and labor-sector effects - By 2015 the average ratio of minimum wage to average wage had increased to 31.2 percent in the non-private sector and 51.2 percent in the private sector. - Recent hikes and better enforcement have shifted views on the role of minimum wage regulation in reducing wage inequality (Lin and Yun, 2016). ### Social assistance and poverty alleviation programs - The Dibao system: - By 2016 the minimum income guarantee system covered 45.8 million rural residents (7.8 percent out of the total rural population). - Another 4.97 million rural residents received relief assistance for extreme poverty. - In contrast, 14.9 million urban residents, approximately 1.9 percent of the urban population, participated in the program. - Empirical studies find the Dibao program did not have a significant impact on reducing income inequality but has been effective in alleviating poverty (Li and Yang 2009). - Pro-farmer policies since 2000 (direct subsidies, abolishment of agricultural tax, improved public services and social protection) have played an important role in increasing farmers’ incomes and reducing urban–rural income gaps (Hoken et al., 2016; Li et al., 2013). - Poverty alleviation and education: - China’s rural poverty rate declined considerably on account of antipoverty policies and high economic growth (Li et al., 2014). - The 13th Five-Year Plan for the Development of Education (2016-2020) calls for universal three-year preschool and senior high school education, special support to central and western regions and rural or poverty-stricken areas, equal access to compulsory education at local schools for children of migrant workers, and improving the education system for left-behind children. ### Social security and healthcare coverage - New Rural Cooperative Medicare led to rapid expansion in medical care coverage and near-universal coverage for rural residents. - Pension coverage by end-2016: - 378 million people participated in the urban basic pension program for workers. - 508 million participated in the basic pension insurance program for urban and rural residents. - Because of differences in scope and level of coverage among groups, it is not clear to what extent advances in social security have narrowed inequality nationwide (Zhuang et al., 2012; Li and Luo, 2010; Cai and Yue, 2016; Hoken et al., 2016). ### Regional development, fiscal transfers, and urbanization policy - Western Development Strategy (2000) emphasized infrastructure improvement, preferential policies for foreign investment, and significant increases in fiscal transfers to western regions. - The share of general purpose grants in the transfer system has grown since the early 2000s and evidence suggests they have reduced fiscal disparities and other development indicators across regions (Wang and Herd, 2013; Hofman and Guerra, 2007). - Income gap between coastal and western regions has decreased since the mid-2000s (Li et al., 2014). - 2014 urbanization plan aims to move approximately 100 million additional rural residents into urban areas by 2020 to reduce the urban–rural income gap. - Human Rights Action Plan 2016 called for implementing the State Council’s household registration reform and establishing a unified urban–rural household registration system. ### Financial inclusion - Over the last 15 years, policies promoted expansion of payments systems in remote and rural areas, new rural financial service providers and sub-branches, and agent-based service points for cash withdrawal. - In 2014 the China Banking Regulatory Commission set an objective to reach coverage of basic financial services in all villages in three to five years. - Results: ATMs and point-of-sales more than doubled from 2011 to 2016 and agent-based service points for cash withdrawal covered almost all rural towns. - Gaps remain; government addresses them through the Plan for Advancing the Development of Financial Inclusion issued in 2015 (World Bank and the People's Bank of China, 2018). ### Methodology for projecting inequality and key structural drivers - Approach: fixed-effects panel regression explaining changes in the net Gini index across a panel of 28 countries spanning roughly 1980-2010; for China the sample spans 1985-2010. - Regression specification: Net Gini = α + β×S' + γ×P' + μ + ε, where S = structural variables, P = policy variables, μ = country fixed effects. - Structural variables include: - Urbanization: share of population living in urban areas (noted inverted U-shape relationship and link to Kuznets effect). - Aging: Higgins (1998) variables approximating population age distribution via a third order polynomial. - Sectoral change: share of employment in services and industry. - Educational levels: share of population with higher education (composition and wage-compression effects discussed). - Policy variables aggregated into three groups: - Revenue: individual income tax revenue in percent of GDP and property tax revenue in percent of GDP. - Expenditure: public spending on health and social protection in percent of GDP. - Redistribution: difference between Market Gini and Net Gini (used to measure policy efficiency and capture other fiscal policies). - Robustness checks: included trade openness (sum of exports and imports over GDP), GDP per capita and its square, shadow fed funds rate, and direct inclusion of time fixed effects; these did not change baseline results meaningfully. ### Results and interpretation - Regression performance: - Fitted values track China’s actual net Gini between 1990 and 2002; earlier period actual inequality lower than implied, and after 2002 actual inequality has been above fitted values. - The regression explains close to 16 points increase in the net Gini from 1985 to 2010, compared to the actual change of around 22 points (from 29 to 51). - Structural drivers: - Structural factors (urbanization, aging, sectoral rebalancing) explain most of the rise in inequality until 2010. - Urbanization example: share of population in urban areas rose from 23 percent in 1985 to 51 percent in 2010, implying an increase of 20.5 Gini points over the same period, reflecting a rising rural–urban divide until about 2008. - Policy role: - Policies did not provide enough offset to structural forces; fiscal policy is identified as a powerful tool where a more pro-active scenario has the potential to quell the rise in inequality. *Source: wp18127 - 2010. As a result, by 2015 the average ratio of minimum wage to average wage had increased to 31.2 (PDF).* ### Section IV). In addition, this possibly reflects rising inequality within urban areas ### wp18127 - Section IV). In addition, this possibly reflects rising inequality within urban areas ### Major empirical findings on inequality drivers - Demographics tied to the sharp fall in fertility and rapid aging contributed 4.4 points to the rise in the net Gini index. - This likely reflects increased income inequality among individuals as they grow older and the lack of an adequate safety net for the elderly. - Low fertility can imply reduced intergenerational support from the younger generation to older generations. - Urbanization, when modeled, is related to inequality with the expected inverted U-shape (Kuznets effect). - If per capita GDP and its square alone are used as regressors, the basic Kuznets inverted U-shape is recovered. - Sectoral rebalancing and education mitigated inequality: - The move from employment in agriculture to industry and services, and improvements in tertiary education attainment, contributed to a combined decline of 7.3 Gini points in inequality (1985–2010). - Within-sector inequality may have increased, but between-sector effects offset this via wage adjustments as labor reallocated. - The role of policies in 1985–2010 was modest, around 2 Gini points in containing the rise in inequality. - Regression evidence: several policy variables (health and social protection expenditure to GDP, individual income tax and property tax revenues to GDP, plus a redistribution measure) are significantly related to inequality; tax variables in that regression are not significant. ### Projections and scenarios to 2050 - Baseline projection (policies constant at latest observation) for 2010–2050: - China’s fitted net Gini index rises 4.8 points (2.6 Gini points compared to the observed value in 2010). - Drivers in the projection period are chiefly: - aging: +4.8 - urbanization: +5.1 (much less important than in 1985–2010) - Offsetting effects: - Rebalancing away from agriculture and industry reduces inequality by 3.2 Gini points. - Tertiary educational attainment lowers inequality marginally (linear and quadratic effects almost offsetting). - Policies assumed constant; past policy contribution was -1.5 point to the net Gini index in 1985–2010. - Counterfactual “active policies” scenario (gradual adoption of fiscal policies to reach levels of the most proactive countries of the G7 by 2050): - Under the “active policies” scenario, inequality slightly declines after 2010 rather than increasing. - The full range of policies—tax changes, expenditure increases and redistribution—contributes significantly to reducing inequality. - Largest effects in the scenario come from social protection spending and redistribution. - The scenario would still imply a decrease of 3 Gini points compared to the observed Gini coefficient in 2010. - Note: cross-country analysis omits policy inclusiveness variables (insufficient data); inclusion could suggest a larger role for policies (e.g., increased health care coverage more effective than equivalent spending without coverage expansion). ### Fiscal policy: potential and empirical role - Fiscal policy is found to be a potentially powerful tool in reducing inequality. - Regression framework includes: - Expenditure-side: health and social protection expenditure to GDP. - Revenue-side: individual income tax and property tax revenues to GDP. - Redistribution proxied by the difference between the market and the net Gini indices. - Tax variables were the only policy variables not significant in the regression. - Historical evidence on redistributive impact: - China’s post-tax Gini coefficient is only 3% lower than its pre-tax Gini coefficient, compared to average reduction of over 30% in OECD countries (Zhuang and Li (2016) / referenced result). ### Revenue-side reform recommendations (tax reforms) - Shift tax composition toward more direct taxes and less on indirect taxes: - VAT and other taxes on goods and services account for about half of tax revenues in China compared to one third in OECD countries. - Revenues from PIT contribute only around 5 percent of total revenues, versus an OECD average of 25 percent. - Increasing reliance on PIT could improve redistribution since PIT more easily accommodates progressive structure. - Improve design of direct taxes and social security contributions: - The PIT currently embeds a progressive schedule with marginal rates increasing from 3 to 45 percent. - In practice very few taxpayers pay any PIT; the top marginal rate applies only to incomes in excess of 35 times the national average wage, or 15 times the average urban wage. - In contrast, top marginal tax rates in OECD countries are imposed on individual income starting at around four times the national average wage on average. - Reform options include lowering the high basic personal allowance, transforming it into a tax credit, and redesigning tax brackets to ensure middle and high income households contribute more. - Remove imputed minimum earnings for social security contributions: - Currently a nominal flat rate is applied to wages, but a minimum employee contribution is required based on some imputed value of earnings. - It is estimated that around 30 percent of the urban labor force earns below this imputed value in several large cities (Cai, Du, and Wang 2011). - The combined effect of PIT and imputed-minimum social security contributions generates a strongly regressive tax schedule and discourages formal sector participation. - Consider adoption of a recurrent market-value based property tax: - Property and wealth taxes remain limited; they are broadly viewed as progressive and efficient (least distortive to growth). ### Expenditure-side reform recommendations - Increase public spending on education, health and social assistance: - China still lags other emerging economies and OECD countries in these public spending areas. - Low social spending not only raises current inequality but leaves China vulnerable to rapid aging. - Present discounted value imbalance of the pension system over 2015–2050 is estimated to be around 125 percent of 2015 GDP (Soto and Gupta 2017). - Address unequal provision of public services and residency restrictions: - Hukou system restricts access to social entitlements for migrants; new migrants to urban areas are expected to number 300 million over the next two decades and often lack access to health care, education, and housing due to registration requirements. - Liberalizing the residency system would allow more migrants to contribute to and benefit from the social safety net, reducing disparities and strengthening redistributive fiscal effects. - Reduce provincial and regional disparities in public service provision: - Richer provinces have outpaced poorer areas in public service access (e.g., hospital beds per 1000 people increased disparity between 2004 and 2014). - State Council reform plans to address intergovernmental relations aim to increase transfers to poorer regions. - Policy actions include increasing the pool of funds for equalization grants, shifting to a rules-based system for transfers, simplifying conditional transfers and focusing on outcomes rather than inputs. - Re-centralize social insurance to improve equality, risk sharing and labor mobility. ### Conclusion and policy implications - Over recent decades China experienced a sharp reduction in poverty and a substantial increase in inequality; inequality started to modestly decline since 2008. - Empirical analysis attributes the rise in inequality to differences in education and the skill premium, urbanization, and population aging; recent decline is broad-based and linked to a decrease in the skill premium and reductions in geographical and inter-sectoral income gaps. - Without policy changes, aging and urbanization are likely to drive inequality higher through 2050. - Fiscal policy reforms have the potential to substantially enhance inclusiveness: - The full range of policies—tax changes, expenditure increases and redistribution—could contribute significantly to reducing inequality, with largest effects from social protection spending and redistribution. - Specific recommended reforms include increasing the progressivity of social security contributions, of personal and property taxes, boosting social expenditure, ensuring equal access to public services across provinces and regardless of residency status, and liberalizing residency restrictions that block migrants from social entitlements. *Source: IMF Working Paper wp18127 - Section IV).* ### introduction,” Région et Développement n° 27. ### wp18127 - introduction,” Région et Développement n° 27 ### Overview of data sources and measurement approaches - SWIID Gini estimates: - Reports Gini coefficients for 174 countries from 1960 to the present. - Uses the Luxembourg Income Study as standard; further values generated using model-based imputation and supplementary sources (United Nations University’s World Income Inequality Database, the OECD Income Distribution Database, national statistical offices). - Main caveat: questionnaires, definitions and quality differ across sources and countries; see Solt (2016). - Ravallion and Chen (2007) Gini estimates: - Calculated using Rural Household Surveys and Urban Household Surveys of China’s National Bureau of Statistics. - Imputes income from own production and accounts for valuation-method change in 1990; also provides a second Gini estimate adjusting for urban-rural cost-of-living differences (adjustment lowers level of Gini but trend is similar). - Caveats: smaller early-survey sample sizes, sample frames not accounting for rural-urban migrants, limited access to data, and no imputation of rents for owner-occupied housing. - NBS estimates: - NBS started releasing Gini estimates in 2013, including retrospective estimates; based on Rural and Urban Household Surveys with a new “urban-rural integrated” sampling framework. - Employed personal income tax records to correct biases. - Weaknesses: lack of imputing in-kind compensation and imputed rents from owner-occupied housing; income concept broadened over time, improving accuracy but weakening inter-temporal comparability. Major changes since 2013 included imputation of rents in urban income and employer contributions to employee benefits. - Piketty et al. (2016) approach: - Combine national accounts, survey, wealth and fiscal data; start from China Statistical Bureau tabulations, interpolate, correct using income tax data for high-income taxpayers, and use national accounts and wealth data to correct for tax-exempt capital income. - Main shortcoming: lack of highly detailed micro data. - China Household Income Project (CHIP): - Uses household surveys 1988, 1995, 2002, 2007, 2013. Data used in decomposition analysis: 1995, 2007, and 2013 waves. - 1995: 6929 urban households from 11 provinces and 7998 rural households from 19 provinces. - 2007: 9999 urban households and 13000 rural households from 17 provinces. - 2013: 6762 urban households and 10530 rural households from 15 provinces. - CHIP samples are subsamples of NBS surveys and are designed to represent four regions; weighting scheme based on urban/rural, provinces, and region is adopted for decomposition analysis. - CHIP net household disposable income includes imputed subsidies on subsidized rental housing and imputed value of rental income on owner-occupied housing. ### Inequality decomposition results (CHIP data, Theil’s T index) - By education attainment of household head (Theil’s T index; Share (%)): - 1995: - Illiterate: 0.0147 4.14 - Primary: 0.0536 15.15 - Junior middle: 0.1137 32.14 - Senior middle: 0.0745 21.05 - Junior college: 0.0177 5.00 - Undergraduate or above: 0.0109 3.09 - Within: 0.2852 80.57 - Between: 0.0693 19.57 - Total: 0.3539 100.00 - 2007: - Illiterate: 0.0078 1.99 - Primary: 0.0290 7.37 - Junior middle: 0.0924 23.49 - Senior middle: 0.0813 20.65 - Junior college: 0.0331 8.42 - Undergraduate or above: 0.0252 6.41 - Within: 0.2688 68.32 - Between: 0.1251 31.80 - Total: 0.3934 100.00 - 2013: - Illiterate: 0.0071 2.04 - Primary: 0.0394 11.35 - Junior middle: 0.1024 29.51 - Senior middle: 0.0641 18.47 - Junior college: 0.0214 6.17 - Undergraduate or above: 0.0217 6.25 - Within: 0.2560 73.79 - Between: 0.0916 26.42 - Total: 0.3469 100.00 - By rural/urban (Theil’s T index; Share (%)): - 1995: - Rural: 0.1064 30.07 - Urban: 0.0878 24.82 - Within: 0.1942 54.88 - Between: 0.1608 45.44 - Total: 0.3539 100.00 - 2007: - Rural: 0.0646 16.42 - Urban: 0.1448 36.81 - Within: 0.2094 53.23 - Between: 0.1855 47.16 - Total: 0.3934 100.00 - 2013: - Rural: 0.0752 21.68 - Urban: 0.1546 44.55 - Within: 0.2298 66.23 - Between: 0.1184 34.12 - Total: 0.3469 100.00 - By province (selected groups; Theil’s T index; Share (%)): - 1995 (selected): - Group_11: 0.0084 2.38 - Group_14: 0.0072 2.03 - Group_21: 0.0131 3.69 - Group_32: 0.0203 5.73 - Group_44: 0.0466 13.16 - Group_51: 0.0451 12.75 - Within: 0.2316 65.44 - Between: 0.1227 34.66 - Total: 0.3539 100.00 - 2007 (selected): - Group_11: 0.0058 1.47 - Group_13: 0.0051 1.30 - Group_32: 0.0449 11.41 - Group_41: 0.0265 6.74 - Group_44: 0.0434 11.04 - Group_51: 0.0359 9.13 - Within: 0.3126 79.46 - Between: 0.0805 20.47 - Total: 0.3934 100.00 - 2013 (selected): - Group_11: 0.0088 2.53 - Group_14: 0.0102 2.93 - Group_21: 0.0214 6.18 - Group_32: 0.0450 12.97 - Group_44: 0.0461 13.30 - Group_51: 0.0099 2.85 - Within: 0.3079 88.74 - Between: 0.0392 11.31 - Total: 0.3469 100.00 - By sector (Theil’s T index; Share (%)): - 1995: - Not Work: 0.0241 6.81 - Agriculture: 0.0791 22.34 - Secondary: 0.0617 17.42 - Service: 0.0764 21.59 - Within: 0.2412 68.16 - Between: 0.1137 32.14 - Total: 0.3539 100.00 - 2007: - Not Work: 0.11 29.14 - Agriculture: 0.0179 4.55 - Secondary: 0.0698 17.74 - Service: 0.1280 32.54 - Within: 0.3304 83.97 - Between: 0.0639 16.25 - Total: 0.3934 100.00 - 2013: - Not Work: 0.11 30.27 - Agriculture: 0.0087 2.51 - Secondary: 0.0751 21.65 - Service: 0.1321 38.08 - Within: 0.3210 92.51 - Between: 0.0261 7.53 - Total: 0.3469 100.00 Key interpretation from decomposition tables: - Within-group inequality accounts for the majority share of total Theil’s T in all years, rising from 0.2852 (80.57%) in 1995 (by education groups) to 0.2560 (73.79%) in 2013 for education decomposition and showing similar dominance in sector and province decompositions. - Between-group shares vary across decompositions and over time; e.g., between-education share rose to 0.1251 (31.80%) in 2007 then fell to 0.0916 (26.42%) in 2013. - Urban group’s Theil contribution increased between 1995 and 2013 (Urban: 0.0878 24.82 in 1995; 0.1546 44.55 in 2013), while rural contribution declined then partially rebounded. ### Cross-country regression results (dependent variable: Net Gini Coefficient) - Sample countries include: Argentina, Australia, Brazil, Bulgaria, Canada, China, Denmark, Hungary, India, Italy, Japan, Mexico, Netherlands, New Zealand, Norway, Panama, Philippines, Poland, Portugal, Korea, Singapore, Spain, Sweden, Switzerland, Thailand, the United Kingdom, the United States of America, and Venezuela. - Selected estimated coefficients and significance (t statistics in parentheses; + p<0.10, * p<0.05, ** p<0.01): - Share of Employment in Services: -0.320 ( -1.91) in baseline; range across specifications includes -0.285, -0.297, -0.312, and -0.006 with corresponding t-statistics ( -1.68), ( -1.76), ( -1.84), ( -0.03). - Share of Employment in Services Squared: 0.0020 ( 1.30) in baseline; similar 0.002 across specs and a -0.002 ( -1.13) in one. - Share of Employment in Industry: -0.886** ( -4.11) in baseline; similar magnitudes across specs and -1.003** ( -4.59) in one. - Share of Employment in Industry Squared: 0.010** ( 2.64) in baseline; similar and significant across specs. - Age Distribution D1: 66.942** ( 7.22) baseline; similar across specs (e.g., 68.553** ( 7.33)). - Age Distribution D2: -8.758** ( -7.12) baseline; similar across specs. - Age Distribution D3: 0.338** ( 7.02) baseline; similar across specs. - Share of Population living in Urban Areas: 1.576** ( 12.60) baseline; similar across specs (e.g., 1.579** ( 12.60)); squared term -0.011** ( -11.94). - Share of Population with Some Tertiary Education: -0.160* ( -2.29) baseline; squared term 0.004** ( 3.69). - Public Social Protection Expenditure as Share of GDP: -0.146** ( -3.92) baseline; remains negative and significant in most specs (e.g., -0.096* ( -2.47) in one). - Public Health Expenditure as Share of GDP: -2.314** ( -5.67) baseline; squared term 0.183** ( 5.60). - Absolute Redistribution (SWIID difference between Market and Net Gini): -0.138** ( -3.60) baseline; similar across specs and -0.189** ( -4.91) in one. - Property Tax Revenue as Share of GDP and Individual Income Tax Revenue as Share of GDP: coefficients negative but not consistently significant (e.g., Property Tax: -0.241 ( -1.22) baseline; Individual Income Tax: -0.065 ( -0.90) baseline). - Relative GDP per Capita and squared, Trade Openness, Fed funds rate appear in robustness checks but are not significant in reported baseline. - Regression diagnostics: - Number of Observations: 573 (across specifications). - Adjusted R-squared: 0.968 or 0.970 depending on specification. - Country Fixed Effects: Yes in all specifications. - Year Fixed Effects: included in one specification (column (5)). ### Projection methodology for employment, demographics, urbanization, education, and policy variables (used in projection exercises) - Share of Employment in Services and Industry: - Source: Groningen Growth and Development Centre, World Bank. - IMF staff projections until 2030 and gradually extrapolated thereafter to reach 2 percent of employment in agriculture and about 25 percent in industry with the remainder in services. - Age Distribution: - Source: UN World Population Prospects: The 2017 Revision. - Share of Population living in Urban Areas: - Source: UN World Urbanization Prospects: The 2014 Revision. - Share of Population with some Tertiary Education: - Source: Barro-Lee Educational Attainment Dataset V.2.1 (Barro and Lee, 2013); projection uses average of G7 countries. - Public Social Protection Expenditure: - Source: SPEED; projection set to constant/Mean of top three G7 countries in 2011. - Public Health Expenditure: - Source: CEIC, IMF EBA data; projection set to constant/Mean of top three G7 countries in 2011. - Absolute Redistribution: - Source: SWIID Version 5.1 (Solt, 2009; Solt, 2016); projection set to constant/Mean of top three G7 countries in 2011. - Property Tax Revenue as Share of GDP and Individual Income Tax Revenue as Share of GDP: - Source: IMF Tax Database; projection set to constant/Mean of top three G7 countries in 2011. - GDP per Capita: - Source: Penn World Table 9.0. - Trade Openness: - Source: IMF, WEO. ### Policy-relevant findings and implications (from reported results) - Public spending and redistribution: - Higher Public Social Protection Expenditure as Share of GDP and higher Public Health Expenditure as Share of GDP are associated with lower Net Gini coefficients (e.g., Public Social Protection: -0.146**; Public Health: -2.314**), though Public Health shows a positive squared term (0.183**), indicating non-linearity. - Absolute Redistribution (difference between Market and Net Gini) is strongly associated with lower Net Gini (-0.138**). - Structural and demographic drivers: - Urbanization (Share of Population living in Urban Areas) exhibits a positive linear coefficient (1.576**) and a negative squared coefficient (-0.011**), indicating a nonlinear relationship between urbanization and inequality. - Age distribution variables (D1, D2, D3) are significant and large in magnitude, suggesting demographic structure is an important determinant of net inequality. - Employment structure matters: Share of Employment in Industry shows a significant negative coefficient with a significant positive squared term, indicating a U-shaped relationship with inequality. - Sectoral and within-group inequality: - Decomposition results show within-group inequality dominates total inequality across education, rural/urban, province, and sector decompositions, suggesting policies targeting within-group disparities (e.g., skills, wages, social protection coverage) are critical. - The service sector’s Theil contribution rose across 1995–2013, and “Not Work” group exhibits a rising Theil share in 2007 and 2013 (0.11 29.14 in 2007; 0.11 30.27 in 2013), underscoring the importance of addressing non-employment-related inequality components. _Italic: Source — wp18127 - introduction,” Région et Développement n° 27 (source PDF content provided)._ --- _Source: https://www.imf.org/-/media/files/publications/wp/2018/wp18127.pdf_