U of U ECON 5420 - China: Oligarchy in the Forming and the Counter Movemen

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China: Oligarchy in the Forming and the Counter Movement Dr. Dale Jiajun Wen Part 1: the Facts China is evolving rapidly with its break-neck growth. Some people are getting rich at unbelievable speed; some interests are getting entrenched. The rapid polarization between the rich and poor is alarming. China’s “Gini index”, the measure of inequality commonly used, was below 30 in the 1980s, comparable to more egalitarian countries like Norway and Sweden; yet it has climbed to around 45 today, more similar to the US or Latin America countries. While the rich today comes from all kinds of social and economic background, there are worrisome signs that social mobility may be decreasing. For example, when one looks at the student composition of elite universities, the percentage of youngsters from rural backgrounds has dropped rapidly even after the urbanization rate is taken into consideration. According to the newest Forbes China Rich List released in September 2011, the number of billionaires among China’s richest 400 people increased to a record 146 from 128 a year earlier. The total wealth of the richest 400 people on the mainland is US$459 billion, an increase of 8% from $423.2 billion before, but only 4% in local currency terms. That is less than the 10% increase in China’s GDP in 2010. The Forbes report commented that “Slowing growth in China’s wealth is a warning sign for global luxury good suppliers”. Well, a warning sign for luxury suppliers is actually a good sign for the average Chinese people, maybe not very significant, but still a positive sign. It is not trivial to definitely say “who is who” about China’s oligarchy in the forming. For individual billionaires, they are not quite entrenched and stable as in some other countries, say, the US. For example, Huang Guangyu, the number 1 richest person in China in 2008 according the influential Hurun Report, was charged with bribery and insider trading soon after. He was sentenced to 14 years in prison and fined 800 million Yuan (1dollar~6.5 Yuan). His case was not alone. In August 2009, Hurun Report issued a special report with following statistics: among the 1,330 Chinese millionaires or billionaires which had made the Hurun Rich List between 1999 and 2008, 16 had been sentenced into prison, 3 were waiting for sentence at the time, 10 were under investigation, 7 were missing or had escaped abroad with debt disputes or pending criminal investigation. Total 36 out of 1,330, or 2.7%, being rich is indeed a risky business. While collusion of money and power is a usual and common feature of oligarchy, neither offers sure immunity from the law in China, at least for now. With the aforementioned Huang Guangyu case, 5 officials were sent into prison, with the highest ranking one a provincial level official roughly equivalent to state heads level in the US). These 5 were the ones publicly announced, while it is commonly assumed that probably dozens of officials were implicated in Huang’s case and ended up in prison. In 2010, 11 highlevel officials (at least provincial or ministerial level) were sentenced into prison due to corruption and other charges, 4 with life imprisonment, 7 with death penalty with a suspension of execution (which would normally be converted to life imprisonment later). With the rising income gap, theoretically progressive taxation should be one of the measures the government can deploy to address this issue. So far this vehicle has not worked so well. Chinese government started to collect personal income tax in 1980. There are 9 tax brackets, with tax rates ranging between 5% and 45%. People with low income are exempted from personal income tax, with the threshold previously set at 2,000 Yuan per month, but raised to 3,500 Yuan since September 1, 2011. With lots of economic transactions still done with cash, there is massive under-reporting. Aneffective monitoring and taxation system is yet to be established. It is estimated that 84 million people paid personal income tax with the previous 2,000 Yuan threshold and only 24 million people will have to pay now with the new 3,500 Yuan threshold. A number for comparison is that automobile ownership has risen sharply in recently years, exceeding 70 million now. In a country where private automobile is not essential for most places, it is hard to believe that the majority of car owners actually earn less than 3,500 Yuan (~540 dollars) per month—this gap clearly illuminates the under-reporting issue. Personal income tax accounts for less than 7% of total government tax revenues in all of the previous 5 years, another sign that so far it is not an effective tool for wealth redistribution. Yet in recent years the government has taken some concrete steps to address the rising inequality, most notably on improvement of the rural situation. The income and welfare gap between rural and urban areas in China have been enlarging since mid 1980s. As measures to address the ever-pressing rural crisis, all agricultural taxes has been eliminated since 2006, as well as tuition fees for all rural students for the first 9 years of education. Funds have been allocated to provide free textbooks and scholarships to poor students who need more help. Investment for rural infrastructure has been increasing at 20-30% a year. With all these measures, there are positive signs that the urban-rural gap has plateaued and is starting to decrease. Another very visible progress is in health care. The 2003 SARS outbreak exposed many problems of the health care system. It was estimated that about 80% of the rural population did not have any form of health insurance at the time. This sounded the alarm and sent the government into action. In July 2005, the Development Research Center of the State Council released an official document admitting that the market-oriented health care reform had not been a success. After that, a New Rural Cooperative Medical Insurance System was established as well as a Basic Medical Insurance System for Urban Residents. Now it is estimated that 1.27 billion people or 95% of the population have health insurance. While the new system needs more time and practice for fine-tuning and improvement, the positive sea change comparing to the situation mere 5 or 6 years ago is undeniable. Needless to say, all these social programs need significant amount of resources to run. So it begs the obvious question: where does the


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U of U ECON 5420 - China: Oligarchy in the Forming and the Counter Movemen

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