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

1. Does Class Count? Class Structure and Worsening Inequality in China and India Presentation for Development Workshop Ichiro Uehara & Emanuel Ules Development Workshop - Inequality in India and China

2. Outline • Introduction • Description of Class Structure • Data • Results • Policy Suggestions • Criticism • Other literature • Discussion Development Workshop - Inequality in India and China

3. 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 Development Workshop - Inequality in India and China

4. Introduction • Two countries with more than 2,5 billion inhabitants • Income/capita India: 1,000 $ • Income/capita China: 3,315 $ • High growth rates + high inequality • Question: what are the sources of inequality? (in terms of class structure) Development Workshop - Inequality in India and China

5. Class? • Income terms • Economic • Political • Consciousness • Marxists • Workers • Others who appropriate workers and live off the surplus(moneylenders, merchants, landlords, shareholders, managers, and state) Development Workshop - Inequality in India and China

6. Classes • Authors used 2 class schemas… • First (simplified), • Elites and workers • Agricultural and non-agricultural • Urban and rural Development Workshop - Inequality in India and China

7. Classes • Second (detailed), • Urban and rural • Skilled and unskilled • Skilled: skilled and professional • Manufacturing and services • Owners and managers • Formal and informal sector • Landed and landless • Landed: rich, middle, small and marginal/tenant • Moneylenders and absentee and landlord • Non-agricultural self-employed Development Workshop - Inequality in India and China

8. Indian Data • The Indian National Sample Survey, Household Consumer Expenditure Data • Periods of • 1993-94 (115,354 samples) • 2004-05 (124,643 sample) • Monthly per capita expenditure level • Adjusted to annual figures • Adjusted to 2005 PPP US dollar Development Workshop - Inequality in India and China

9. 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 Development Workshop - Inequality in India and China

10. Farmers in India • Rich farmers: own more than 10 acres of land • Middle: own between 5 and 10 acres • Small: own between 2 and 5 acres • Marginal: own less than 2 acres Development Workshop - Inequality in India and China

11. Simplified Class Structure India • Urban classes are better off than their rural counterparts • Biggest gainers are the urban elites • Moderate gainers are the rural elite and non-agricultural workers • Biggest losers are the urban working class Development Workshop - Inequality in India and China

12. Simplified Class Structure in India Development Workshop - Inequality in India and China

13. 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 areas • INTRA-URBAN inequality Development Workshop - Inequality in India and China

14. Decomposition: Urban-Rural in India Development Workshop - Inequality in India and China

15. Decomposition:Simplified class in India • INTRA-group inequality explains overall inequality • RISE in URBAN elite and Non-agricultural workers • INTER-group inequality increased significantly Development Workshop - Inequality in India and China

16. Decomposition:Simplified class in India Development Workshop - Inequality in India and China

17. 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 classes • Increase distance between elite classes and the bottom classes • Inequality stagnated (or mildly declined) in the 1980s • Increased in the 1990s • Gini Coefficient between 1993-94 and 2004-05 increased almost 4 points Development Workshop - Inequality in India and China

18. Simplified Class Structure China • Urban classes are the most well off • Decline 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 cities • Bureaucratic 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” Development Workshop - Inequality in India and China

19. Simplified Class Structure China cont. Development Workshop - Inequality in India and China

20. Decomposition Results China (detailed) • Urban areas: • Winners: owners, managers and skilled workers in service sector • Losers: unskilled workers in services as well as unskilled (!) and skilled workers in manufacturing (!!!) • Rural areas: • Winners: workers in formal sector and owners in informal sector • Losers: unskilled workers in formal and workers in informal sector Development Workshop - Inequality in India and China

21. 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 Development Workshop - Inequality in India and China

22. Explanations China • poverty reduction happened in the early 1980s when the agricultural sector grew rapidly • Afterwards 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 work • On the other hand big improvements for skilled workers in services/managers/owners occurred Development Workshop - Inequality in India and China

23. Policy Suggestion by the Authors • First, India and China need higher investment in agricultural sector and financial support • For India, poor farmers need to be supported • Implementation of land reform • Development of market structure • Second, both countries need better allocation of labor • surplus labor in agricultural sector to other • Job creation should be strengthened Development Workshop - Inequality in India and China

24. Policy Suggestion by the Authors • Third, non-agricultural sector needs to be developed • Especially, India • Chinese example of township and village enterprise in 1980s and 1990s • Fourth, India and China need to provide social safety net Development Workshop - Inequality in India and China

25. Conclusions • Consumption inequality is rising in India as well as in China • India  rise in INTER-class inequality • Overall inequality can be explain by INTRA-class • China  rise in INTRA-class inequality • Losers: workers in manufacturing! • Is inequality really occuring in rural-urban areas or inland-coastal regions Development Workshop - Inequality in India and China

26. Criticism • Categorizing farmers by size of land they own • Arbitrarily made (<2, 2-5, 5-10, 10<) • Does not reflect productivity i.e. income • As well as productivity differ from location to location • Categorizing farmers by agricultural machines they can use?? Development Workshop - Inequality in India and China

27. Other Literature • Economic Growth and Income Inequality (1955) • By Simon Kuznets • Inequality was decreasing, but should be higher level • Tax on capital gain • Inheritance tax • Inflation (tax on savings) Development Workshop - Inequality in India and China

28. Other Literature • Economic Growth and Income Inequality (1955) • Natural cause of inequality • Demographical change • Fertility rate • Migration • Saving • Rich saves; therefore, acceleration of wealth growth Development Workshop - Inequality in India and China

29. Other Literature India • Why has economic growth been more pro-poor in some states in India than others? (2001) • By Martin Ravallion and Gaurav Datt • Found 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 poverty • However, 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 Development Workshop - Inequality in India and China

30. Other Literature India • Why is Mobility in India so low? • By Kaivan Munshi and Mark Rosenzweig • Found that local risk-sharing networks (insurance) based on caste system restrict mobility • Households 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 90s • Empirically, households with the membership will increase their permanent income Development Workshop - Inequality in India and China

31. Other Literature about China • Knight, John („Reform, Growth and Inequality in China”, 2007) finds similary inequality levels • Huge differences between urban-rural areas due to policies • Migrants from rural areas treated as second class citizens • Huge 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 inequality • rural-urban gap is much higher than the inland-coastal gap • BUT rural – urban gap stays more or less the same, while inland – coastal inequality is rising dramatically Development Workshop - Inequality in India and China

32. Other Literature about China • Cont. Kanbur and Zhang • Reasons: 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 Migration • Aim: “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 Development Workshop - Inequality in India and China

33. Policy Suggestions by others • Inequality, Growth and Poverty in the Era of Liberalization and Globalization • By 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 Development Workshop - Inequality in India and China

34. Policy Suggestions by others • Policies to address traditional causes of inequality • Land Reform: land ownership inequality explains high levels of income inequality in rural area • Interpretation • Land Reform: Take away lands from Rich and give them to Poor • Expanding Education: increasing average years of schooling will reduce inequality • Interpretation • Expanding education: Force kids to go school no matter what Development Workshop - Inequality in India and China

35. Policy Suggestions by others • Policies to address traditional causes of inequality • Active Regional Policy: investment in education and transportation, power and water infrastructure are more effective in reducing regional inequality • Interpretation • Active Regional Policy: Build power and water infrastructure in poor countries and regions Development Workshop - Inequality in India and China

36. GDP/capita and Gini Index Development Workshop - Inequality in India and China

37. GDP/capita and Access to Clean Water Development Workshop - Inequality in India and China

38. GDP/capita and Electric Consumption/capita Development Workshop - Inequality in India and China

39. Policy Suggestions by others • Policies to address new causes of inequality • Macroeconomic Stability: macroeconomic policies are key elements of anti-poverty strategies such as minimizing output volatilities and avoiding sharp recession • Interpretation • Macroeconomic stability: act like communists • Careful domestic and international financial liberalization and regulation: liberalization of domestic banking and of international financial flows have caused rises in income inequality • Interpretation • Careful domestic and international financial liberalization and regulation: regulate financial market so Rich cannot borrow money so easily so they cannot get richer faster Development Workshop - Inequality in India and China

40. Policy Suggestions by others • Policies to address new causes of inequality • 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 Interpretation • Equitable labor market policies: higher minimum wage, heavily centralized wage setting, more investment in human capital for poor, and more employment protection for poor • Innovative tax and transfer policies:increasing tax revenues and progressive pro-poor expenditure can have direct and significant impact on income inequality • Interpretation • Innovative tax and transfer policies:tax heavily on Rich and distribute it for poor Development Workshop - Inequality in India and China

41. Solution to Income Inequality • Why increase in income inequality? • Rich gets richer • Poor also gets richer (Poor does not get poorer) • But, not as fast as Rich Development Workshop - Inequality in India and China

42. Solution to Income Inequality • Solution 1: Boost income of Poor • Solution 2: Cap income growth of Rich • Which one should we choose?? Development Workshop - Inequality in India and China

43. Discussion • How to reduce inequality? • Is manufacturing really an engine for growth? • Relationship between growth and inequality? Development Workshop - Inequality in India and China