An Empirical Study On Contemporary Foreign Income Disparity And Its Enlightenment To China

Since the implementation of the reform and opening up policy, the income of Chinese people has been increasing. At the same time, the income disparity between residents expands continuously. How should we treat the current expansion of income disparity in China? Will it go down spontaneously without government intervention? Should government take active measures to adjust the income disparity? What kind of policy is more effective? In order to answer these questions, this paper studies the change of foreign income disparity and reasons for the change and policies that foreign countries have adopted for narrowing the income disparity, which can provide references for correctly treating the current expansion of income disparity in China and solving the problem.The most famous theories about the trend of the income disparity in the early stages are Lewis dual economic theory the inverted-U shape of the Kuznets curve. Lewis and Kuznets both think that the income disparity rises and then declines during the process of industrialization. However, in 1980s, some scholars bring forward a new point of view that the income disparity in developed countries shows the U-shaped curve. On the basis of historical data for 13 OECD countries from UNU-WIDER World Income Inequality Database, This paper finds that the income disparity shows the "great U-turn" after the Second World War and the turning point of "great U-turn" occurs after the end of the 1970s in general. This finding is also verified in my empirical analysis, which supports the U-shaped relationship of income inequality with economic development and does not conflict with the inverted-U shape of the Kuznets curve. Because the "great U-turn" or U-shaped curve describes the relationship of income inequality with economic development during the post-industrial stage and knowledge economy stage, while the inverted-U shape of the Kuznets curve describes the relationship of income inequality with economic development during the process of industrialization. In other words, income inequality declining in the U-shaped curve is just the continuation of the inverted-U shape of the Kuznets curve. The change of the income disparity in developed countries means that the income disparity declining in the late industrialization is not a long-term trend and the income disparity will change when the stage of economic development changes.After the Second World War, the income disparity declining in the first stage and turning into rising in the second stage in developed countries are both due to the combined effects of natural factors and policy factors. On the one hand, the income disparity declining from the 1950s to the late 1970s is closely related with the natural factors about transformation of dual economic structure. On the other hand, the redistribution policies tending to protect the poor promote to narrow the income disparity from the 1950s to the late 1970s. After the 1980s, many other natural factors and policy factors jointly promote the rising income disparity, such as globalization, technological progress, weakened government intervention and trade union power, etc.. In addition to exploring the factors that impact on the income disparity of developed countries from a theoretical point of view, this paper also gives an empirical analysis with panel data of 12 OECD countries and finds many variables are significant and consistent with theoretical analysis.This paper also studies the change of the income disparity in newly industrialized countries and developing countries and transition countries with gini coefficients from UNU-WIDER World Income Inequality Database. The result shows that the change of the income disparity in those countries is not obviously consistent with the inverted-U shape of the Kuznets curve and is closely related with industrialization strategy and the orientation of government policies. When the government is committed to economic development rather than income distribution, the income disparity usually tends to rise. If the government is not only concerned about economic goals but also concerned about social justice, the income distribution situation is usually improved. The change of the income disparity in transition countries shows a common feature that is the income disparity in the early transition is rapidly rising. There are mainly several reasons for the rising income disparity of transition countries in the early transition. Firstly, those countries have carried out the reform of price liberalization which increases inflation. Secondly, the privatization of state enterprises makes wealth concentrate in the hands of the small number of elites. Thirdly, imperfect legal system makes corruption spread rapidly. Furthermore, the level of social security declines and unemployment increases which promotes the gap between the rich and the poor to rise. However, many countries have taken some measures to narrow the income disparity since the late 1990s and the income disparity in some countries becomes to decline.We can see that the income disparity has once risen without exception in the process of economic development whether in developed countries or newly industrialized countries or developing countries or transition countries. And the current income inequality in many countries is very great, for example, the gini coefficients in Brazil, Colombia, South Africa and Kenya are all more than 0.55. So, the rising income disparity is not the unique phenomenon in China. Although the current income disparity in China is smaller than in many countries such as Brazil and South Africa, Chinese government should not leave current income disparity alone. In fact, Kuznets does not think the income disparity would go down unconditionally and the developing countries should leave the income disparity alone as the early capitalist countries. Therefore, Chinese government should take some measures and establish the policy system to narrow the current income disparity.In developed countries and the East Asian newly industrialized countries, the problem of rising income disparity has been successfully solved. While in other countries especially in developing countries such as India and many Latin America countries, the policies aiming to adjust the income disparity have little effect. So, Chinese government may take some effective measures on the basis of foreign successful experience and lessons to narrow the current income disparity. Firstly, the government should strengthen the role in the primary distribution of the national income to protect the legitimate rights and interests of low-income groups. Secondly, Chinese government should coordinate urban and rural development to narrow the income disparity between urban and rural residents. For example, the government can add the investment and strengthen the protection in agriculture to establish the long-term effective mechanism to increase farmers’income. Thirdly, the government should strengthen competition in the monopoly industries and break industrial monopolies to eliminate unreasonable high income and narrow the income disparity between monopoly sectors and non-monopoly sectors. Fourthly, the government should improve the social security system to effectively protect vulnerable groups. Furthermore, the government should also increase the investment in education, especially in poor areas to create equal access to education for all people and can consider promoting the development of small and medium-sized enterprises in order to increase employment. All these measures will conducive to narrowing the income disparity in China.