Does Class Count? Class Structure and Worsening Inequality in China and India

Presentation for Development WorkshopIchiro Uehara & Emanuel Ules

Development Workshop - Inequality in India and China1

Does Class Count? Class Structure and Worsening

Inequality in China and India

Outline


IntroductionDescription of Class StructureDataResultsPolicy SuggestionsCriticismOther literatureDiscussion

Introduction


According to the New York Times…In Aurangabad, India, more than 150 businessmen

bought a Mercedes each; spent nearly $15 million in a single day to stimulate investment in Aurangabad

Aurangabad is not known so they needed to show that they have money

Antipoverty activist says…The money spent for the luxury cars could have gone to

help those left behind by Aurangabad’s boom

Introduction


Two countries with more than 2,5 billion inhabitants

Income/capita India: 1,000 $Income/capita China: 3,315 $High growth rates + high inequalityQuestion: what are the sources of inequality? (in

terms of class structure)

Class?


Income termsEconomicPoliticalConsciousnessMarxists

WorkersOthers who appropriate workers and live off the

surplus(moneylenders, merchants, landlords, shareholders, managers, and state)

Classes


Authors used 2 class schemas…First (simplified),

Elites and workersAgricultural and non-agriculturalUrban and rural

Classes


Second (detailed),Urban and ruralSkilled and unskilled

Skilled: skilled and professionalManufacturing and servicesOwners and managersFormal and informal sectorLanded and landless

Landed: rich, middle, small and marginal/tenantMoneylenders and absentee and landlordNon-agricultural self-employed

Indian Data


The Indian National Sample Survey, Household Consumer Expenditure DataPeriods of

1993-94 (115,354 samples)2004-05 (124,643 sample)

Monthly per capita expenditure levelAdjusted to annual figuresAdjusted to 2005 PPP US dollar

Chinese Data


1995, 11 provinces with 6931 households in urban areas, 19 provinces with 7988 households in rural areas were selected

in 2002, 12 provinces with 6835 households in urban areas, 22 provinces with 9194 households in rural areas were selected.

Classes were defined using the CHIP survey based questions on the occupations of the members of the household.

Data Limitations and Bias upper end consumption groups are not adequately sampled

managers and owners underrepresented migrants from rural areas to urban areas are not listed as urban

residents

Farmers in India


Rich farmers: own more than 10 acres of landMiddle: own between 5 and 10 acresSmall: own between 2 and 5 acresMarginal: own less than 2 acres

Simplified Class Structure India


Urban classes are better off than their rural counterparts

Biggest gainers are the urban elitesModerate gainers are the rural elite and non-

agricultural workersBiggest losers are the urban working class

Simplified Class Structure in India


Decomposition: Urban-Rural in India


Overall inequality can be explained by INTRA-group component (more than 80%)

There is proportional increase in INTER-group inequality as well as URBAN areasINTRA-URBAN inequality

Decomposition: Urban-Rural in India


Decomposition:Simplified class in India


INTRA-group inequality explains overall inequalityRISE in URBAN elite and Non-agricultural workers

INTER-group inequality increased significantly

Decomposition:Simplified class in India


Inequality in India


Indian inequality between 1993-1994 and 2004-2005 is explained by the RISE of inequality BETWEEN classes.But overall inequality can be explained by WITHIN classesIncrease distance between elite classes and the bottom

classesInequality stagnated (or mildly declined) in the

1980s Increased in the 1990s

Gini Coefficient between 1993-94 and 2004-05 increased almost 4 points

Simplified Class Structure China


Urban classes are the most well offDecline in in ratio of mean of class consumption to

mean overall consumption due to migration“administrative urbanization”

villages in suburban areas become part of the citiesBureaucratic process, but rural areas are suddenly part of

urban areas economic structure is of course not changed

Turns richest former rural farmers into relatively poor urban members

“artificial migration”

Simplified Class Structure China cont.


Decomposition Results China (detailed)


Urban areas:Winners: owners, managers and skilled workers in service

sectorLosers: unskilled workers in services as well as unskilled

(!) and skilled workers in manufacturing (!!!)

Rural areas:Winners: workers in formal sector and owners in informal

sectorLosers: unskilled workers in formal and workers in informal

sector

Decomposing Chinese Inequality


Major part of inequality explained by rural-urban inequality

All changes in overall Gini coefficient can be explained by rise in intra-group effects in urban areas

BUT the increase in the intra-class inequality is actually an increase in the inter-class inequality but appears differently due to the massive urbanization phenomenon

overlapping index of the informal workers in the rural areas has gone down stratification at the bottom

Explanations China


poverty reduction happened in the early 1980s when the agricultural sector grew rapidlyAfterwards strong increases in inequality

main cause: rural classes (in particular, the farming community) have been left behind compared to the urban classes

Special Economic Zone strategy: other opportunities for farmers/migrants to increase income (especially in manufacturing)But often not well paid/low skilled workOn the other hand big improvements for skilled workers in

services/managers/owners occurred

Policy Suggestion by the Authors


First, India and China need higher investment in agricultural sector and financial supportFor India, poor farmers need to be supportedImplementation of land reformDevelopment of market structure

Second, both countries need better allocation of laborsurplus labor in agricultural sector to otherJob creation should be strengthened

Policy Suggestion by the Authors


Third, non-agricultural sector needs to be developedEspecially, IndiaChinese example of township and village enterprise in

1980s and 1990sFourth, India and China need to provide social

safety net

Conclusions


Consumption inequality is rising in India as well as in China

India rise in INTER-class inequalityOverall inequality can be explain by INTRA-class

China rise in INTRA-class inequalityLosers: workers in manufacturing!Is inequality really occuring in rural-urban areas or

inland-coastal regions

Criticism


Categorizing farmers by size of land they ownArbitrarily made (<2, 2-5, 5-10, 10<)Does not reflect productivity i.e. income

As well as productivity differ from location to locationCategorizing farmers by agricultural machines

they can use??

Other Literature


Economic Growth and Income Inequality (1955)By Simon KuznetsInequality was decreasing, but should be higher level

Tax on capital gain Inheritance tax Inflation (tax on savings)

Other Literature


Economic Growth and Income Inequality (1955)Natural cause of inequality

Demographical changeFertility rateMigration

SavingRich saves; therefore, acceleration of wealth growth

Other Literature India


Why has economic growth been more pro-poor in some states in India than others? (2001)By Martin Ravallion and Gaurav DattFound that higher farm yields, higher state development

spending, higher non-farm output and lower inflation were all poverty reducing

Especially, non-farm output is a key to escape povertyHowever, initial condition is a key

States with low farm productivity, low rural living standards relative to urban area, greater landlessness in rural area and poor basic education and health had poor participation in growth of non-farm output

Other Literature India


Why is Mobility in India so low?By Kaivan Munshi and Mark RosenzweigFound that local risk-sharing networks (insurance)

based on caste system restrict mobilityHouseholds with the network are less likely to “out-

marry” and “out-migrate”e.g. In rural area, out-marriage is less than 6%In Mumbai, it was 2% in 70s and 12% in late 90sEmpirically, households with the membership will

increase their permanent income

Other Literature about China


Knight, John („Reform, Growth and Inequality in China”, 2007) finds similary inequality levelsHuge differences between urban-rural areas due to policiesMigrants from rural areas treated as second class citizensHuge benefits for urban citizens (higher wages, social security,

housing,...)Kanbur and Zhang („The Evolution of Rural-Urban and

Inland-Coastal Inequality in China, 1983-1995”, 1998) concentrate on inland – coastal inequality.Main driver of inequalityrural-urban gap is much higher than the inland-coastal gapBUT rural – urban gap stays more or less the same, while

inland – coastal inequality is rising dramatically

Other Literature about China


Cont. Kanbur and ZhangReasons: migration may be easier to urban area from its

rural hinterland than from an inland area to a coastal area heavy restrictions on migration.

Policy of Local MigrationAim: “limit the interregional movement of workers to the

current level and the majority of redundant rural-workers should leave agriculture for new jobs locally” Most of migration happening intra-regional

the dynamic growth in the coastal areas has separated them from inlands

Policy Suggestions by others


Inequality, Growth and Poverty in the Era of Liberalization and GlobalizationBy Giovanni Andrea Cornia and Julius Court

technology change and globalization are not important factors driving rises in inequality rather public policies

Traditional causes of inequality: Land concentration Urban bias Inequality in education

New causes of inequality: Excessive liberal economic policies Economic reform policies



Policies to address traditional causes of inequality1. Land Reform: land ownership inequality explains high

levels of income inequality in rural area Interpretation1. Land Reform: Take away lands from Rich and give them

to Poor

2. Expanding Education: increasing average years of schooling will reduce inequality

Interpretation2. Expanding education: Force kids to go school no matter

what



Policies to address traditional causes of inequality

3.Active Regional Policy: investment in education and transportation, power and water infrastructure are more effective in reducing regional inequality

Interpretation3.Active Regional Policy: Build power and water

infrastructure in poor countries and regions

GDP/capita and Gini Index


020000

40000

60000

80000

gdppercapita

20 30 40 50 60gini

GDP/capita and Access to Clean Water


020000

40000

60000

80000

gdppercapita

60 70 80 90 100improvedwatersource

GDP/capita and Electric Consumption/capita


020000

40000

60000

80000

gdppercapita

0 10000 20000 30000electriconsumptionpercapita



Policies to address new causes of inequality1. Macroeconomic Stability: macroeconomic policies are key elements of

anti-poverty strategies such as minimizing output volatilities and avoiding sharp recession

Interpretation1. Macroeconomic stability: act like communists

2. Careful domestic and international financial liberalization and regulation: liberalization of domestic banking and of international financial flows have caused rises in income inequality

Interpretation2. Careful domestic and international financial liberalization and regulation:

regulate financial market so Rich cannot borrow money so easily so they cannot get richer faster



Policies to address new causes of inequality3. Equitable labor market policies: changes in labor market institution, such as

minimum wages, centralized wage setting, investing in human capital and employment protection, have contributed significantly to rises in wage inequality

Interpretation3. Equitable labor market policies: higher minimum wage, heavily centralized

wage setting, more investment in human capital for poor, and more employment protection for poor

4. Innovative tax and transfer policies: increasing tax revenues and progressive pro-poor expenditure can have direct and significant impact on income inequality

Interpretation4. Innovative tax and transfer policies: tax heavily on Rich and distribute it for poor

Solution to Income Inequality


Why increase in income inequality?Rich gets richerPoor also gets richer (Poor does not get poorer)

But, not as fast as Rich

Solution to Income Inequality


Solution 1: Boost income of PoorSolution 2: Cap income growth of RichWhich one should we choose??

Discussion


How to reduce inequality?

Is manufacturing really an engine for growth?

Relationship between growth and inequality?

Does Class Count? Class Structure and Worsening Inequality in China and India

Documents

Transcript of Does Class Count? Class Structure and Worsening Inequality in China and India