China Acts To Reduce Wealth Gap

The West won the Cold War which raged for half a century between Communist standard bearer the USSR and the Western philosophy of Capitalism and democracy. Whilst many of the former Warsaw Pact leadership retained power and influence (for example Vladimir Putin is a former KGB chief), all paid lip service to democratic ideals and market forces as the pathway to the future. However, the victory did not extinguish Communism as political doctrine; it is the driving force behind the world’s most populous country and its second largest economy: China.

It can be argued that Capitalism works remarkably well for a tiny elite with the vast majority struggling (to a greater or lesser extent) to get by – a situation which may lead to resentment. Chinese figures recognise that 128 million people, living in rural China, are poor meaning that their income is below $368. The population of China is estimated to be 1.3 billion. A situation where the divide between rich and poor is perceived to be too wide can lead to social unrest. The Gini coefficient is a measure of income disparity and a value of 0.4 is regarded as a threshold for unrest. The Gini coefficient for China is 0.474, but then the Communist model is based on the idea that all comrades are equal, of course.

China has announced that it wants to increase the minimum wage to 40% of average urban salaries by 2015. Social security funds would benefit from an increased share of the profits of State-owned businesses. China also wants to see improvement in the health care sector; higher incomes for farmers; more affordable housing; stronger tax regulations and a cap on senior manager’s salaries in the State-owned sector.

If China is able to rebalance the wealth gap, it should mean that domestic demand will increase which would reduce China’s dependency on exports for economic growth. It could also please China’s trading partners who have been clamouring for more access to the vast Chinese domestic market for their own goods and services.