Chinese Lesson for Western Economists: Progress, Not Equality is the Issue
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Chinese Lesson for Western Economists: Progress, Not Equality is the
Issue
Income inequality has been rising in China, prompting some to suggest
that the nation's market oriented policies must be curbed. The official
government newspaper The People's Daily disagrees as is indicated in a
July 20 article, The limitation of the Gini Coefficient in China. The
"Gini Coefficient" is widely used in international economics to measure
income inequality in nations. Economist Wei Jie, Director of the
National Center for Economic Research at Tsinghua University notes that
the gini coefficient tends to indicate higher levels of inequality in
nations that have not completed the urbanization process. In China,
large income differences are to be expected because so much of the
population (60 percent) lives in lower income rural areas. In first
world economies, generally 30 percent or less of people live in rural
areas. Further, Wei Jie points out that income inequality as measured
by the Gini coefficient may worsen at the same time that incomes at the
lowest levels are increasing --- at the same time as the poor are
getting richer! Professor Wei Jie offers a valuable lesson for western
and international economics.
These are important points and the latter is especially relevant to
discussions in the western world where the conventional "politics of
envy" based discussion of income equality leads to the untenable
conclusion that it would be better for all to be poorer than for some
to be richer. This is evident in the frequently cited claim that the
"rich keep getting richer" and the "poor keep getting poorer." That is
at least one-half true. The rich have become richer. However, the poor
are also getting richer. From 1971 to 2001, US Census Bureau data
indicates that the average income of least affluent quintile (20
percent) of US households rose 26 percent (inflation adjusted).
Progress has been so substantial that a report by the Swedish Research
Institute of Trade found US African-American median incomes to the
overall Swedish median (average Swedish income is at approximately the
same the Western European average).
It is thus true that the more affluent have gained more than the less
affluent. However, the principal point is that all, including the poor,
have gained. There is often a tendency to think of poverty in relative
terms, such as the income of the lowest-income quintile compared to the
highest. However, this is a mistake. If, for example, poverty is
defined as having an income in the bottom 10 percent, the poverty can
never be eradicated. Relative poverty indicators are as inappropriate
as they are rooted in envy. What is important is not how much
low-income households have in relation to rich households; it is
whether they have enough to live a comfortable life.
Thus for example, the United States defines poverty in terms of a
standard of living, not in terms of envy. It would, of course, be
desirable for all households to prosper to the same extent as the most
affluent. However, despite considerable attempts under socialist, mixed
and free market economies, income equality has not been achieved.
No economic system has yet been identified that can substantially
reduce income inequality without reducing even more the income of the
lowest income households. That is why policies that improve the
absolute incomes of low-income households are preferable to envy based
relative measures. Joseph Schumpeter expressed the purpose of a free
market economic system with respect to income distribution:
The capitalist achievement does not typically consist in providing more
silk stockings for queens, but in bringing them within the reach of
factory girls in return for steadily decreasing amounts of effort
High-income nations have different policies that seek to improve
incomes among the least affluent. Western European nations tend to have
larger social welfare systems and higher rates of long-term
unemployment, which they accept in return for less economic growth and
affluence. In the United States, the policy priority is employment and
economic growth. Most people live well both in Western Europe and the
United States. Further, low-income households in the United States and
Western Europe live better than average households in most
middle-income and virtually all low-income nations. The most reliable
road to greater affluence for all, including low-income households, is
strong economic growth.
Moreover, Harvard's Benjamin Friedman suggests in a recent book that
economic growth is more than desirable, but also necessary for longer
term social cohesion.
International and western economic analysis would do well to end its
unhealthy affection for the politics of envy.