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china, chinese, Denmark, Economy, Gini Coefficient, Income Inequality, The Economy, The United States
From this photo I figure it's a good job, Corrado Gini, was around early in the century - otherwise he'd have been working for Hammer Horror and we'd have missed this wonderful statistical device
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).
Denmark, altogether now; "If you're happy and you're equal, paint your face, if you're happy and you're equal, paint your face..."
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.
Lovely pictures like this of rural China mask a lot of the truth about actually living and working there for Chinese people
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.
Shards of China 
I knew the US was bad, but I had no idea that China was worse in terms of inequality. Does this mean that I need to change my homepage off of CNN American edition?
I wouldn’t recommend swapping to China Daily – it may be the worst written news feed in the world. And that’s the “US Edition”…
Maybe another topic series… Which news source to believe and cite. Great writing, laughed and then sat back pondering it all.
Thank you for this interesting and well-written post. Despite a formal backgound in economics, I really wasn’t familiar with Gini. Now you’ve started me on a search to learn more.
Glad to be of help. Thank you for stopping by to comment. 🙂
I’m surprised Gini isn’t very well known. I had the whole Gini stuff in my statistics class during my bachelor degree. We even went through all the maths – terribly boring….
I’ve done the math too – but I felt that it wasn’t important for the blog, it’s too complex for non-higher level mathematicians and it’s the concept that was important here rather than the calculation. 🙂
I think that I sometimes take the things I know for granted and assume that others would know it too – and of course given the enormous spectrum of knowledge (and nonsense) available to us that’s rarely true. 🙂
China’s development is not surprising. Normally, developing countries have a higher Gini compared to developed countries. It might be part of the development process that some people get richer first before others are following.
Looking at what’s happening in Guangdong province (massive salary increases for factory workers), we might see China’s Gini falling in the future. China also has high taxes, same as European countries. If these taxes are used to distribute income to the lower part of the population (and not to be spent on corrupt officials), China’s gini will also decrease.
I agree that developing nations tend to be unequal (though Bhutan is an exception to the rule), but…
The Guandong salary increases are a great way of masking a low rise through percentages. 20% increase in wages! But that’s a raise from 1,000 RMB a month to 1,200 RMB a month – or less than $30 in total. And the net effect of those rises are to reduce Chinese competitiveness in low-end manufacturing, and we’re already seeing companies move their manufacturing to other cheaper nations as a result.
As for taxes – yes they’re high but as in Italy nobody in China really pays their tax, so they don’t appear in the system for them to be redistributed to anyone, it will take decades for China to implement a strong taxation model that actually works.
And both of these things I shall come onto later in this series. Thanks for dropping by to comment, it’s great to get some positive input on what people think may be happening in China and who knows you might very well be right in the long-term. 🙂
It’s true that a wage increase from 1,000 to 1,200 doesn’t sound like a lot. But it will go on further. Just look at countries such as South Korea, Taiwan, Singapore and Hong Kong. All of these started poor and are developed nations now. However, due to a pervert tax regime that benefits those with income from capital gains, the gini coefficient is sky high.
You’re right with Italy. But countries such as Germany, Denmark, Sweden and the lot are fairly efficient at collecting taxes. And with income taxes of up to 60% (Sweden) and VAT in the area of 20% they collect quite a lot!
The thing with all those countries is that they’re famous for their efficiency (Germany, Denmark, etc.) and their law abiding populations. Italy isn’t and it doesn’t work well – and China is very similar to Italy. The four asian economies that are now “developed” are much smaller than China – and that presents some very unusual (if not unique) problems for China down the road -as I’ll show in this series a little later on.
Having said all that – the Chinese government are very good at economic problem solving (at least they have been so far) so I’m not writing off the chances of some major improvements later down the road.
Fascinating stuff ! Where do you get all this information? You must do a fair amount of research and reading. I have never heard of Gini before. Learn something new every day!
I’m a ridiculously nerdy bloke – I read a lot (usually between one and two books a day, and lots online too). When it comes to the economy I did a lot of the research before I came to China in the hopes of setting up my own business, I’ve come to the conclusion that apart from in certain high-end luxury markets there’s not much there for most Westerners and my main focus is outside of China now (and that’s working well now). 🙂
Cool! I love to read to but get distracted with my other obligations namely the kids! I can’t wait to hear more about what you are working on!
🙂
Good article, and anyone that can make the Gini coefficient fun deserves praise.
My own specific comment about Gini coefficient is that like GDP it has failings, in this case, it is socio-economic data and rankings, unless since corrected by statisticians.
Otherwise, I have a question about something you wrote. As you write, “When China was a communist country….”
I am wondering if this was a typo, or did you mean to say this?
Now, I have my own feelings about this; but, I also think that you intended to say this, but why?
Talk later. 🙂
Great question. 🙂 I guess I meant to say that but didn’t mean to write it down – so it’s part typo and part intentional.
But in also seriousness though the communist party still manages China, the country is no longer communist in nature.
Well, here is my take on the issue.
When I first saw what you wrote and thought about it, I realized that describing China really takes some thought.
For me, in earlier publications, I simply, at least “I think”, solved the problem by uniquely describing China as a “socialist-political polity pursuing capitalist economic policy (or policies)”.
You still have to deal with the reality of the Chinese Communist Party (CCP).
In truth, however, it is only a partial solution, because it still left me with the controversy (i.e., China’s post-WTO accession) about China’s market economy status.
In other words, is China a market economy or non-market economy?
Moreover, what is funny is that at the end of the day, the issue of China being a market economy or non-market economy actually boils down to a “political” decision rather than economic one.
As always, what I share with my friend is just simply fodder for thought; and I still cannot believe you were able to make the Gini-coefficient fun.
That could be another blog post – is China Communist?
Depends how you define “communism”. One Chinese official once told an American official “we’re the Communist party of China, what “communism” is or is not is subject to our definition”. That solves the question rather quickly but doesn’t help us.
If you look at the economy, some parts of the economy are clearly “communist”, meaning in the hands of the state (just look at the telecommunication or steel sector). Also, all land still officially belongs to the government. That’s pretty communist. Some parts of the economy though, are far more capitalist compared to Europe, e.g. the health sector.
I guess in parts France could be described as a “Communist” country as the government owns large parts of the big companies and heavily influences them.
Actually the main revenue system for the government in China is land sales and a lot of land is now in private hands. Communism was supposed to reward everyone equally and it’s a hopeless idea because it de-incentivises people to make the most of thier situation. I think China’s communism (if that’s what we can still call it) has evolved over the last few decades immeasurably.
Thanks for commenting on this. 🙂
Strictly speaking it’s not “land sales” but just a 70 year lease. Which is bullshit of course. If they really collect all the land after 70 years there’s going to be a revolution. The system of “land sales” which are legally not really land sales shows how they try to remain communist on paper while actually moving more and more to a market economy.
That’s true too. I’d love to see how it works in practice in 70 years time, but I suspect I shall be long gone by then. 🙂
Agreed, and thanks for this. 🙂 I think it’s simple enough to say that if China is a communist country – it’s not the kind of communism envisaged by Marx all those years ago.
I think everything interesting can be made fun – one of the joys of wordpress blogs is the chance to caption images, and add some giggle to serious subjects. 🙂
I agree with “Basti”, the issue of whether “China is communist” would be a good topic or blog post. For the same reasons, I also think the issue of whether “China is a market economy or non-market economy” would be a good topic.
As I earlier stated, the issue of whether China is a market or non-market economy really boils down to a “political” issue. The same holds true concerning the issue of China’s market-economy status.
While I may not be up to date on the issue, it was my last impression that the EU was leaning toward recognizing China as a market economy, but not the United States. The importance of this status, at least in terms of the WTO regime, is that it affects issues such as free trade agreements, trade tariffs, preferences, and subsidies and countervailing measures, and other issues.
Additionally, when I noted the decision would be a “political” one, this is a two-fold “political” process.
First, China hailing itself as communist or Marxist is a subject in and of itself. This is because, as you rightly observed, it hardly fits the model of a pristine model of communism. One should also consider, the ideals of Marxism having for the most part suffering relegation to a nugatory “-ism” notwithstanding, that China embraced Marxism but imbued it with Chinese characteristics. I reconcile this by remembering what Marx wrote, and paraphrasing him, all ideologies are false; which might well be true in this instance. Their variety of communism is hardly of the orthodox model.
Second, then there is the other aspect of the “political”, because, in terms of the WTO regime, the decision about whether or not to grant China “market economy” status will ultimately be a “political” decision made by Western developed countries that dominate the WTO. All of which presents issues for another day.
Third, and finally, there is my opinion, which may shock you, that in modern society there are pristine models of neither capitalism nor socialism; all of which makes these issues all the more difficult, especially when we search to genuinely understand China.
I agree that it would make a good subject for another post (and I may hold it in reserve for another day) – and I agree with you that it’s a complex question, and one to which I think everyone will come to different conclusions on.
I love the way this Theme has opened up so many interesting lines of discussion, I’m just hoping it stays that way. 😉
Well, I am glad to hear that you think so, and I hope the best for your blog. I am also glad that you do not mind my occasional intrusions.
Summarizing the words of another famous “Englishman”, we ought always to remind ourselves that truth is the product of open debate and great discussion.
The famous “Englishman” actually wrote,
First, if any opinion is compelled to silence, that opinion… may be true. To deny this is to assume our own infallibility. Secondly, though the silenced opinion be an error, it may, and very commonly does, contain a proportion of the truth. Thirdly, even if the received opinion be not only true, but the whole truth, unless it is vigorously and earnestly contested, it will … be held in the manner of a prejudice; Fourthly, the meaning of the doctrine itself will be in danger of being lost.
These are the words of John Mill, in his classic, On Liberty.”
So, let the discussions begin. Talk later 🙂
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But,I read dat Norway (as at 2011 statistics) had d lowest gini coefficient of 25.6%in d world while south Africa had d highest with 63.6%.