There are a number of reasons behind a society's widening income gap. Some of them are the result of social change. But high incomes obtained from monopoly through administrative power are certainly against the rule of market economy and should be levelled off.

The income gap in China has increased dramatically in the last decade.

According to the World Bank statistics, the Gini coefficient, a measurement showing the inequality degree of personal income rose to 0.403 in 1998 from 0.376 in 1992.

In 1998, the 10 per cent of citizens with the lowest income got 5.9 per cent of the total income, while the 10 per cent of citizens with the highest income were paid 30.4 per cent of the total. The gross income of the richest 10 per cent was 12.7 times than that of the first group.

According to a calculation in 2001, the Gini coefficient in China reached 0.458, over the international alert level of 0.4, indicating a very uneven distribution of income.

It is safe to draw a conclusion from these numbers that a large amount of wealth is under the control of a small group, while the majority of the population is in relative poverty.

Two categories of people are receiving extra attention because they are at the two extremes of the income distribution line.

The first category is the so-called "new rich," including private enterprise owners, entertainment stars as well as some officials with illegal incomes.

The second category includes poverty-stricken farmers, laid-off workers and others with low skill levels in the labour market.

Some people often harbour suspicions about the source of the "new rich's" fortunes or even develop negative sentiments about all wealthy people.

As a matter of fact, it is inevitable for part of the population to get rich before others do. The income gap will remain de facto. This is the price to be paid for developing productivity at this current stage, with the economic and legislative systems needing to be improved to match the dramatic changes in reality.

The gap in income broadens for many reasons. The major ones are the following.

First, some people take advantage of legal loopholes in laws and the economic system during the transformation and channel State property into their pockets.

Second, the remarkable gap between the urban and rural areas, which was shaped under the planned economy, is still expanding instead of being bridged.

Third, the intensifying market competition is differentiating some competent businesses and individuals, in terms of income, from others.

Fourth, regions and industries that have received favourable treatment from the government or administrative authorities benefit greatly from those government policies.

Fifth, the means of production and productivity vary among regions due to their different natural conditions.

There are also other factors, such as outdated practices in fiscal policies and an under-functioning social security system.

However, the most important point in analyzing the income gap is that we must make a difference between the "acceptable" and the "unacceptable" reasons.

Competition and limited natural resources are both acceptable causes of income gap, while others, especially corruption and monopoly, are unacceptable.

Examining the income in all industries, people often feel uncomfortable when they see the payroll of monopoly industries.

The average annual income for all industries was 2,140 yuan (US$257.8) in 1990. The top salary, 2,718 yuan (US$327.5), came from mining, which was 1.8 times the lowest income, 1,541 yuan (US$185.7), from agriculture.

In 2002, the highest average annual income was from finance and insurance, which stood at 19,135 yuan (US$2305.4). The lowest is still from agriculture, 6,398 yuan (US$770.8).

The difference between the highest and lowest expanded from 1,177 yuan (US$141.8) in 1990 to 12,737 yuan (US$1534.6) in 2002.

Of course, such a gap has something to do with workers' capabilities, the value created in the industry and professional risks. However, the direct cause is monopoly.

It is against the law of the market economy to garner profits and excessive incomes by maintaining a monopoly in production, market or price.

Some industries have the characteristic of a natural monopoly, such as telecommunications. In order to prevent monopoly companies from raising prices willfully to hurt consumer interests or promote technological innovation, the government must intervene.

There are no grounds for the State to fail to intervene and to eliminate those malpractices.

As a matter of fact, excessive profits and incomes in industries under monopoly come from improper policies or mechanisms that protect monopolies.

First, there is virtually no competition with the industries under monopoly.

Second, the price of services is decided by the monopolizers or the government authorities, while the legislature and citizens are deprived of the right to have a say in price setting.

Third, since they are all willing to see an increase in fiscal revenues, local governments often tend to allow the monopoly forces to go unchecked if they can bring in more revenue.

To tackle this problem, laws and regulations must be drafted, drawing on the lessons learned in developed countries. A limit should be set upon the scope of monopolized industries and the prices of monopolized products and services.

The author is a professor of economics with the Party School of the Communist Party of China Central Committee.

(China Daily October 23, 2003)