1912 was an important year for our understanding of economics, a chap you’ve probably never heard of (I hadn’t); Corrado Gini published a paper called “Variablity and Mutability” (actually it wasn’t – Gini was Italian so the paper’s name was Italian too – but this makes it easier for me and hopefully you too).
I won’t bore you with the details of the paper, because it’s very heavy on the math, but the upshot of it all in economic terms is that it defined the “Gini coefficient” which is a measure of income inequality in society.
Income inequality is a big deal, the country which is regularly reported as the happiest in the world (in terms of general contentment with standard of life and society) is Denmark. Denmark has the lowest Gini coefficient in the world, which means that in Denmark people are reasonably equal in terms of their income. This doesn’t stop people from becoming rich, some of Europe’s richest people operate out of Denmark but it does stop people from becoming too poor as the lowest incomes tend to be higher than in other countries.
For the record Denmark has a Gini coefficient of around 0.25, to put this in context – a country with a Gini coefficient of zero has perfect equality (that means everybody gets exactly the same money no matter what they do) and one with a Gini coefficient of 1 is perfectly unequal (one person gets all the money and everybody else gets nothing).
It’s important to have a Gini coefficient of greater than zero, because in that type of society there would be no incentive to work hard, study hard, or contribute anything out of the ordinary at all – because you’d be paid the same as everyone else no matter how little you did. And obviously 1 is a bad number because then everyone else starves to death, and the person with all the money gets lonely really quickly.
In general terms the lower the Gini coefficient of a country the better as it means that there’s not that great a gap between rich and poor. In practice one of the most unequal societies in the West is to be found in the United States which has a Gini coefficient of 0.41 and we know this is true, even if we don’t like it much, because in the same country that Bill Gates lives in a mansion and pop stars buy yachts – thousands of people live in tents in parks, hoping for an upturn in the economy (which sadly probably won’t help them very much even if it arrives).
When China was a communist country it had a fairly low Gini coefficient, mainly because it had no money and everyone can have an equal share of nothing and while there’s nothing left at the end, there’s still plenty of nothing to be had. However in the last decade it has overtaken the United States and its Gini coefficient now stands at 0.42 (at least in 2008 it did) which means that China is rapidly becoming one of the least equitable places on earth for income.
There are two pairs of groups that demonstrate this, firstly there’s the fact that China creates more billionaires than any other country on earth now and all the while 300 million people live below the UN defined absolute poverty line – which is to say they have less than $1.25 a day in income (less than $456 a year). And we’ll look at both these groups later.
The other pair is the urban population of China who are considerably better off than the populations of most other rapidly developing nations such as India and Brazil, and the rural population who are considerably worse off than those in other developing nations. The exact figures on this vary so much from source to source that it’s impossible to put a number on this but the disparity is probably around 500% in favor of city dwellers (that means they have five times as much money as those in the country).
And so my next stop on the tour of China’s economy will be the rich and the poor of China. But that’s another story for another day.