Income Inequality In China

Here is the headline-grabber:

(China Daily)  Income gap in China widens in first quarter.  June 19, 2005.

China's income gap widened in the first quarter of the year, with 10 percent of the nation's richest people enjoying 45 percent of the country's wealth, state press reports said.  China's poorest 10 percent had only 1.4 percent of the nation's wealth, the Xinhua news agency reported, citing a recent survey by the National Bureau of Statistics. 

...

The survey, which polled 54,000 urban and rural households, found China's richest 10 percent had disposable income 11.8 times greater than the lowest 10 percent at the end of the first quarter of 2005.  This compares with the rich having disposable income 10.9 times greater than the poorest 10 percent during the same period last year, the report said. 

How serious is this problem?  Will the number of peasant riots (last count was 58,000 per year) skyrocket so as to topple the regime?  Not to worry, because the key lies in the following paragraph:

However, income continued to grow among both the rich and the poor during the first quarter of 2005. The richest 10 percent saw disposable income rise 15.7 percent over the same period last year to 8,880 yuan (1,072 dollars), it said.  Disposable income for the lowest 10 percent rose 7.6 percent from the first quarter of 2004 to 755 yuan. 

As long as disposable income rises for everyone, there is not a serious problem.  For the lowest 10 percent, here is the bet -- you are getting a 7.6% increase per quarter; if you topple this government, what will your disposble income be?  You don't have a clue, nor can anyone else tell you with any certainty.  It will be a huge bet.  There will be people who are willing to tell you that an American-style democracy will bring you an American standard of living, but you have to be very simple and naïve to believe that.  Just about every Latin American country was sold on that notion, and nothing like that has ever happened to them.  Against that is the possibility that a military junta will take over and go right back to the total control in the Cultural Revolution Days where everyone makes 36 yuan per month.  So I believe the people of China will acquiesce until as such times when the situation changes.

The big problem will come if the above paragraph should read in the future something like:

The richest 10 percent saw disposable income rise 20% percent over the same period last year to 175,000 yuan, the report said.  Meanwhile, disposable income for the lowest 10 percent decreased 25% percent from the first quarter to 250 yuan. 

As long as everyone is doing better, the trickle-down theory will keep just about everyone happy.  And then the bomb will come when the economy cannot grow that fast, or else the rich gets too greedy.

The other statistic mentioned in the China Daily report is the Gini index:

Still, China's Gini coefficient -- an internationally accepted measurement of income equality -- was calculated to be over the "alarm level" of 0.4, the report said.  On the Gini scale, zero corresponds to complete equality and one refers to perfect inequality, or one person having all the income.  No precise Gini coefficient was provided, but state press reports in recent weeks said the value was more than 0.48 and approaching 0.5.  Most developed European nations tend to have coefficients of between 0.24 and 0.36, while the United States has been above 0.4 for several decades, according to the United Nations 2004 Human Development Report, which calculated China's value last year at 0.447.

Again, by itself, an increasing Gini index is not a problem as long as everybody does better.  A higher Gini index means the rich are doing even better, but the poor may not have much to complain about with a 7.5% quarterly increase in disposable income.  Here is a hypothetical set of examples to illustrate absolute versus relative poverty.

The richest 10% has disposable income of 4,500,000 yuan while the poorest 10% has disposable income of 30,000 yuan (all figures in real terms).  The Gini index is 0.600, but everyone is happy in this extremely well-off society twenty years from now.

The richest 10% has disposable income of 100 yuan per month while the poorest 10% has 36 yuan.  The Gini index is 0.050, but everybody is miserable in this Cultural Revolution-era society.

The bomb will come in five or ten years time when the growth rates slow down. 

Related post:  Gini Index in Hong Kong  (December 27, 2004)