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It's well past time to put the Gini back where it belongs

PUBLISHED : Thursday, 12 April, 2012, 12:00am
UPDATED : Thursday, 12 April, 2012, 12:00am

'Let some people get rich first,' urged Deng Xiaoping, and sure enough, some of them did. Between 1990 and 2008, China's headlong rush to economic growth lifted 500 million people out of extreme poverty. And in case you were wondering, according to the World Bank, 'extreme poverty' means living on a household income of less than US$1.25 a day.

The achievement is undeniably impressive, but China has paid a heavy price for it in terms of ballooning income inequality.

While a third of the population still lives on less than US$2 a day, a privileged elite has become very rich indeed. According to the Shanghai-based Hurun Report, which tracks China's wealthy, the richest 70 members of the National People's Congress made US$12 billion last year, bringing their net worth to an eye-popping US$90 billion.

To put that number into perspective, although US politicians are generally considered well-heeled, America's top 660 power-brokers - the president, his cabinet, the Congress and the Supreme Court - are together worth a relatively meagre US$7.5 billion.

As a result, China today has the fastest-widening wealth gap in Asia.

Wealth gaps are usually measured using the Gini co-efficient. This gauges a country's inequality of income on a scale of zero to 100. A score of zero would represent perfect equality, with everyone earning the same. In contrast, a score of 100 would see all the income generated by the entire country going to a single individual, with everyone else getting nothing. Any level above 40 is usually considered iniquitous.

The trouble with Gini co-efficients is that they are notoriously tricky to calculate, not least because people generally, and the rich especially, tend to fib about their incomes.

To get around the problem, the Asian Development Bank has calculated Gini scores for the region using data for household spending rather than income.

According to this method, China's Gini score climbed from 32 in 1990 to 43 in 2008. But because the poor spend more of their income than the rich, this method understates the true level of income inequality. According to ADB chief economist Changyong Rhee, China's actual Gini co-efficient is likely to be as much as five points higher than his team's calculations suggest. Other economists believe it to be higher still, with one recent study estimating that China's Gini score has now reached 53.

Such a fast-rising wealth gap is not just an academic pre-occupation; it inflicts real economic and social damage. The ADB estimates that if China's economic growth between 1990 and 2008 had been achieved with no increase in inequality, an additional 110 million people would have been lifted out of extreme poverty.

To put that another way, 110 million people - equivalent to the entire population of Guangdong - with all the inhabitants of Hainan thrown in for good measure - are still living on less than US$1.25 a day because a few of their more well-connected compatriots got very rich first.

Naturally enough, these paupers have limited spending power, which is bad news for an economy looking to rebalance itself more towards consumption-led growth. Countries with widening income gaps, the ADB warns, also tend to have deteriorating growth prospects.

Happily, there are some obvious policy steps Beijing could take to halt and even reverse growing inequality. With much of the wealth gap attributable to income disparities between cities and the countryside, the government could significantly raise rural incomes by granting farmers ownership rights over their land.

Beijing could also sharply reduce inequalities of opportunity in the cities by scrapping the hukou household registration system, which forces the families of migrants to work in the informal labour market and denies them access to education and healthcare.

And the authorities could remove the market distortions that have long favoured capital over labour. By setting borrowing costs at artificially low levels, Beijing has propelled a sharp decline in the share of manufacturing income that goes to workers.

If the authorities were to price capital more appropriately by bringing borrowing costs into line with the nominal growth rate - which means raising benchmark lending rates to around 12 per cent from the current 6.56 per cent - they would redress the imbalance between capital and labour that the ADB identifies as one of the main causes of increasing inequality.

These measures are often dismissed as being politically impossible to introduce. But implementing them would go a long way towards creating the harmonious society that is the official goal of Beijing's policies.

Enough people have got rich first. It's high time the rest started to catch up.



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