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History shows that social and economic disequilibrium occurred in the course of the industrialization of many countries. This is particularly the case when per capita GDP crosses the US$1,000 threshold. This is manifested in widening income gaps between different social strata.

China, having experienced almost three decades of rapid growth, is now confronted with the same question that haunted other industrializing countries in the past.

China had a Gini coefficient of 0.4 at the end of last year. The Gini coefficient is widely used across the world to gauge income inequality, with zero indicating perfect equality and 1 being a state of perfect inequality. A Gini coefficient of 0.5 is the warning level of inequality.

By striving for a harmonious society, the Chinese government is taking serious steps to address this problem.

President Hu Jintao recently presided over a meeting of leading officials on the issue of wealth distribution. This clearly indicates that the narrowing of the income gap tops the central government's agenda.

What has led to this ever-widening income gap?

Generally speaking, there are three types of income gaps per capita income difference between different localities, per capita income gaps between urban and rural residents, and per capita income disequilibrium between residents in the same locality.

Obviously, the former two types of income disparity have much to do with physical factors such as climate, soil, geography, natural resources and communications facilities. In this context, the income gap has widened with the development of the Chinese economy. We may define the cause of the income gap in this category as a "development-based factor."

There are a number of other factors contributing to disparities in earnings.

One of these is "income composition." At present, the sources of income of the Chinese people, both in urban and rural areas, are becoming increasingly diversified. It is fairly common that a person does more than one job concurrently or has a number of different sources of income. An income gap naturally evolves from this.

Then come "essential elements." This means that essential elements such as capital and working skills play an increasingly more integral role in wealth distribution. In other words, thanks to the fact that capital and sophisticated working skills contribute more to economic growth than simple labor does, those who possess such assets acquire much more wealth than ordinary laborers. The gap between the incomes of these groups, for instance, reflects the disparity between dividends from capital input and earnings from simple labor.

Policy-based factors also contribute to the ever widening income gap. These factors chiefly relate to changes in economic, industrial and employment policies, which exacerbate income disequilibrium between different social strata.

A "high employment rate and low wages" policy was adopted shortly after the founding of the People's Republic of China in 1949 and was implemented for many years. But this policy, the hallmarks of which were egalitarianism and low productivity, was scrapped after the nation embarked on reform and opening in the late 1970s.

The reorganization or takeover of some enterprises, combined with the fact that the government focused on large State-owned enterprises and left others to the mercy of market forces, meant that redundancies naturally followed. The situation was compounded by a lack of credit support offered to small- and medium-sized enterprises. This largely explains why people made redundant have little initiative to start their own businesses and, in turn, employ themselves and others.

Statistics show that only 100,000 legal-person enterprises were launched annually between 1999 and 2004. This figure pales into insignificance beside the enormous figure of 8 million people seeking employment every year. Against this backdrop, laid-off workers, college graduates and migrant workers seeking employment in cities constitute an inexhaustible source of inexpensive labor. Given such a large number of people on low incomes, how could China's Gini coefficient not approach the warning level?

Finally, there are institutional factors. These are the result of the constant adaptation of the nation's political and economic establishments to changing situations, as well as having to navigate their way through uncharted economic waters.

Volatile institutions and repeated policy changes caused loopholes and dislocations between old and new infrastructures. This was multiplied by the disconcerted operations of various government departments, by vested interests monopolizing important sectors, by corrupt officials seeking disproportionately fat profits and by officials using their power for financial gain. Such circumstances literally mean that some people get rich overnight while others remain poor.

Among the five major causes of the widening earnings gap, problems triggered by income composition are easy to resolve. Furthermore, this factor can have a positive impact on the nation's development, but only if effective labor laws and rules are in place, intellectual property rights are better protected and a workable policy is formulated on labor mobility.

Problems arising from development-based factors can be relieved and eased through the current nationwide bid to build a new socialist countryside. Hard work is required to eliminate the structure of rural-urban duality.

In addition, economic legislation such as the resources law is needed to ensure that the less-developed central and western regions of the country can better utilize their rich resources. The bid to get rid of this contributing factor would itself undoubtedly facilitate the country's future sustainable development.

Weeding out policy-based factors calls for the integration of economic growth and employment. Preferential tax and financial policies should be implemented to support the founding and development of small- and medium-sized businesses. In this way, employment is expected to be boosted and, in turn, the income gap narrowed. The transition from investment-driven growth to demand-powered development, which has been a headache for the central government, will then hopefully be achieved.

But the real hard nuts to crack are the essential element-based and institutional factors.

To resolve the problems caused by the former, it is essential that, led by taxation policies, owners of capital be made to shoulder greater social responsibilities.

At the same time, the principle that the distribution of wealth should be determined by the role played by essential elements of production should be adhered to. The old rut of extreme egalitarianism ought to be shunned.

Maladies originating from institutional factors can be cured by forceful means. No acts of seeking benefits by using power should be allowed to continue. The abuse of power for financial gain veiled behind monopolies must be stopped. The situation in which distribution of wealth is tainted and distorted by corruption must be redressed.

The authorities must regard this contributing factor, which is the one most hated by the public, as a malicious tumour and remove it without hesitation.

The author is a researcher from the China Foundation for International and Strategic Studies.

(China Daily June 2, 2006)