US, China share income inequality but elude comparison

Updated: 2013-03-13 10:50

By Joseph Boris (China Daily)

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Chinese officials are taking income inequality seriously, as shown by recent attention to the issue at the annual sessions of the National People's Congress and the country's political consultative body.

China's focus isn't unique, nor is the phenomenon of income disparity. It's a fact of life almost everywhere, although the degree varies with level of development, urban/rural population distribution and other factors.

"Income inequality is controversial in every single country in the world. The only place where it's being reduced is Latin America, where income inequality was very high in years past," said Yukon Huang, who studies the Chinese economy at the Carnegie Endowment for International Peace in Washington.

"As a country matures and gets richer, income inequality falls; developing countries have higher rates of income inequality than developed [ones]," Huang told China Daily.

US, China share income inequality but elude comparison

In the United States, income inequality is often a partisan political football, kicked around in service to specific debates, such as the current one in Washington over whether to raise the federal minimum wage from $7.25 an hour. Several states are also considering their own minimum-wage increases.

Democrats and Republicans have long differed over the impact of income inequality on the US economy, but they also have tended to agree that the phenomenon (or problem, depending on one's perspective) could be contained as long as all Americans had access to education or training to bring them into higher-paying jobs. This political consensus, which acknowledged the inevitability of at least some "inequality of outcome" while stressing the need to guarantee "equality of opportunity", has been shattered, however.

For over 30 years, wages for the vast majority of American workers have stagnated or even fallen. This is despite gains in productivity that, by historical standards, disproportionately benefit a small percentage of rich Americans who tend to derive the bulk of their income from dividends and other investment sources rather than from a paycheck.

Comparing income inequality in the US and in China must take into account the countries' hugely different political systems, market-development levels and other economic forces that determine what workers are paid. Apples-to-apples analyses that apply to other kinds of economic data are often impossible when evaluating any one country's income disparity against another's.

Numbers for comparative purposes are available, but these don't tell the full story of income inequality within a country, much less that country's relative position in the world.

Consider something called the "Gini coefficient". Named for the Italian statistician Corrado Gini, who devised it in 1912, this measurement of a country's income distribution is based on net incomes of residents and ranges from 0 (total equality) to 1 (total inequality between rich and poor). The Gini coefficient is often expressed as a percentage, so the midpoint on the 0-to-1 scale would be 0.5, or 50 percent.

China's Gini number for 2012 was 0.474, or 47.4 percent, the National Bureau of Statistics reported in January. That's historically high, putting China among the most income-unequal nations in Asia and the world, prompting concern from authorities in Beijing. However, their long-standing priority is ameliorating the acute income disparity between rural and urban Chinese fueled by manufacturing-led economic growth. That gap has narrowed slightly in recent years.

"The US version of capitalism has had no more success in curbing inequality than China's," Huang wrote in a Bloomberg News opinion essay in December. Both countries, he noted, have had Gini coefficients of around 0.45, "albeit with different factors at work".

The dominance of State banks and enterprises in many areas in the Chinese economy produces what the Carnegie analyst calls "distortions" that also contribute to inequality.

"But crony capitalism and dollar politics in the West can be just as pernicious as state capture in China," he wrote. "Both favor well-connected insiders over entrepreneurial outsiders."

The Gini similarity isn't about levels of wealth in the world's two largest economies but how it is spread among each population. Manufacturing that once drove the US economy and has propelled China's growth of recent decades has benefited those who flock to cities for factory jobs but left behind people who remained in the countryside.

Beyond Gini, a two-nation comparison of income inequality should consider the share of GDP represented by household income. In recent years, China's traditionally high levels of personal saving, which meant a minor economic role for household income, have dwindled as low interest rates and rising consumerism encouraged spending and credit over saving. In the US, household income has only recently begun to approach levels that preceded the 2007-09 recession, but this has come mostly from gains in the stock market, further concentrating wealth at the top, out of the hands of wage-earners.

In another essay, on Feb 21 in the Wall Street Journal, Huang wrote: "Inequality is positive when it emanates from productivity increases, entrepreneurial risk-taking and structural changes that produce sustained growth. Harmful inequality comes from distortions that ultimately undermine the development process."

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