In 1978, the land east of the river that runs through downtown Shanghai was a patchwork of marshy rice paddies and drab warehouses. Less than 40 years later, the area had transformed into a sci-fi inspired landscape of skyscrapers and neon lights that Hollywood now uses as a set for cities of the future.
All around China, cities have undergone similarly stunning transformations the country changed from a poor, underdeveloped nation to one of the world’s leading economies. By building factories, roads, apartments and global brands, the country has created a massive amount of wealth — and a massive amount of inequality.
In just a few decades, China went from a place in which nearly everyone was equally poor to one of sharp divisions between social classes.
But the extent of China’s inequality has not been well understood — until perhaps now. In a new paper, a group of noted economists offer some of the most definitive estimates of inequality in China between 1978, the year the country began to crack open a long-closed door to the global economy, and 2015.
The researchers — Thomas Piketty and Li Yang of the Paris School of Economics and Gabriel Zucman of the University of California, Berkeley — find that China transformed from a relatively egalitarian place in the late 1970s, with levels of inequality similar to those found in Nordic countries today. It has changed into a society more closely approximating the United States, though China has not quite reached U.S. levels of inequality yet. Their work highlights the mixed blessings of China’s economic growth.
According to their research, the highest-earning 10 percent of China’s population had 41 percent of national income in 2015, up from 27 percent in 1978. Meanwhile, the income share of the bottom half dropped to 15 percent in 2015 from 27 percent in 1978.
That’s higher than what the bottom half earn in the United States — about 12 percent of income — but lower than the 22 percent seen in France, the economists say. “For the time being, China’s development model appears to be more egalitarian than that of the United States, and less than Europe’s,” they write.
Gathering data on inequality has always been difficult in China, because of the tendency for the wealthiest people to underreport their earnings and dodge taxes. To create a more complete picture of Chinese wealth than had been accessible before, the economists cobbled together data from various sources, including national accounts, which measure the amount of wealth going into and leaving a country, surveys, government tax records and magazine wealth rankings.
It’s a familiar approach for Piketty, the French economist who is one of the world’s defining voices on inequality. His 2013 book “Capital in the 21st Century” used historical series to explore inequality in France, the United Kingdom, the United States and elsewhere. It showed that wealth and inequality compound powerfully as they are passed on to future generations, unless government or outside events intervene.
Piketty is the most famous name on the project, but his work in compiling rigorous historical data on inequality has depended on dozens of researchers working together in countries around the world. Together they have highlighted how rising inequality in past decades is causing income and wealth to skyrocket not just for the top 1 percent, but the top .1 and .01 percent of society.
China has undergone a particularly stunning transformation. China now makes up around one-fifth of the world economy — which makes sense, since it has about one-fifth of the world’s people. But what’s striking is just how poor the country was before. In 1978, when it had 23 percent of the world’s population, the country made up less than 3 percent of global GDP.
At that time, China was a communist country paralyzed by the chaotic policies of Mao Zedong. In the countryside, most people worked as subsistence farmers. In the cities, many worked for state-owned companies that produced little but issued a small, reliable paycheck — lifetime jobs that Chinese called “iron rice bowls,” because they would always provide a meal.
This was the kind of job held by the parents of one of the researchers, Yang. When he was growing up, his parents worked for a state-owned train company in Baotou, Inner Mongolia, on a dusty high plain northwest of Beijing. His parents' pay was not very high, but their jobs were extremely stable.
The following decades brought dramatic change to China. Many state-owned companies closed their doors as private enterprises cropped up, and with them much more lucrative earning opportunities.
Much of the increase in wealth and inequality came through the housing system, Yang says. In the 1980s, many Chinese lived in government-owned housing, but in the 1990s, the government started selling these homes to their residents for relatively low prices. Real estate prices skyrocketed in subsequent decades, meaning those who invested in housing earlier ended up much wealthier than those who did not.
Today, more than 95 percent of the housing stock is privately owned in China, up from about half in 1978, the researchers say.
In contrast, Chinese companies are still substantially state-owned — much more than other Western countries today. The percentage of corporate shares owned by the government steadily dropped until 2006, but it started to trend upward again with the financial crisis. In 2015, it was about 60 percent.
“In brief: China has moved a long way toward private property between 1978 and 2015, but the property regime of the country is still very different than in other parts of the world,” the researchers write. “China has ceased to be communist, but is not entirely capitalist; it should rather be viewed as a “mixed economy” with a strong public ownership component.”
In the United States, those on the bottom of the income spectrum have seen their incomes stagnate, even as those at the top continue to grow. That's not the case for China, where nearly everyone today is earning more than they did. Between 1978 and 2015, the researchers say, average national income per adult grew by 59 percent in the U.S. and 39 percent in France. It grew by more than 811 percent in China.
“The income of the poor people is also increasing quite significantly, just not as fast as the rich people,” Yang says.
Even so, those increases in wealth have not been evenly distributed. That's been a particular shock in China, where things were relatively equal not so long ago.