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Weekly Economic Briefing

Emerging Markets

Socialist mobility

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A lot of attention is paid to rising inequality in China; among the world's largest economies, only Brazil tops China in terms of income inequality. But what about income mobility? Whereas income inequality compares one household to another household at the same point in time, income mobility compares the position of one household to itself at different points in time. While inequality is important, mobility can be just as important. A highly unequal society (like China's) could likely tolerate higher levels of inequality if there is a high level of mobility; for example, the possibility of starting out poor but achieving a high income in older age can make high levels of inequality more tolerable. It is not surprising that China has achieved relatively high levels of absolute income mobility over the past four decades. Rapid, broadly distributed growth meant fewer households stayed in the same income quintile for long periods of time. However, the two components that have contributed to China's higher levels of income mobility over past years – rapid economic growth, and broad distribution across income groups – may be changing as growth slows and the economy matures. Evidence that growth is less equally distributed than in the past may contribute to lower absolute and relative income mobility than in the past. Using provincial GDP data as a proxy for growth distribution shows that since the crisis growth is less evenly distributed across the country, likely as a result of the manufacturing slowdown and growth in higher-value added industries (see Chart 10).

Slower and dispersed Unequal and less mobile?

Data and research on this topic are relatively scarce, but most evidence suggests that income mobility has risen continuously since the reform and opening-up period began in 1978. Examples abound of both income and social mobility: China's richest man and woman had neither the benefits of family connections nor attendance at elite schools to help them build their wealth – Jack Ma used to be an English teacher and was famously rejected for over 30 jobs before starting Alibaba; Zhou Qunfei was once a school dropout and migrant worker in Shenzhen before becoming the world's richest self-made woman. Although a lack of available data inhibits research on the topic, there are a few attempts to measure mobility in China. A paper in the Review of Income and Wealth found that absolute income mobility has increased steadily from the period between 1978 and 2011 (when the last data is available), but relative mobility has fallen dramatically since the 2000s. While children will likely earn more than their parents did as adults, it is becoming less likely that they will break out of their social class. In this respect, perhaps China is looking less like a developing economy and more like the US. Rapid industrialisation and fewer entrenched interests meant people like Zhou Qunfei could achieve wealth through ambition and risk taking when the economy was rapidly transitioning under reforms. However, as intergenerational transmission of education and jobs strengthens, mobility will likely decline. Furthermore, as the Communist Party strengthens its role in the economy, Party members may enjoy even more social advantages in obtaining entrance into top universities, or locating better job opportunities for their children. As this trend continues, in addition to high inequality, increasingly limited mobility adds yet another challenge policymakers must contend with in the years ahead (see Chart 11).

Alex Wolf, Senior EM Economist