China's Gini Coefficient and Market Economy

This is my translation of an article by Xue Cong on titled “Is Market Economy A Sure Cause for Wealth Disparity?” (dated August 14, 2007):-

"Recently Mo Yu Xi’s 'the wealthy need to be protected' theory has stirred up heated debate in society. He said 'The difference between market economy and planned economy is that the former is centered on equality of individual (right) while the latter focuses on equality of the economy (income). In the former case, as one individual differs from another in that each has his own level of capability and share of luck, this inevitably leads to unequal distribution of income. In the latter case, equality in the economy is achieved by suppressing the more talented individuals, at the expense of individual right equality.'

Our generation and Mo’s generation have suffered immensely under a planned economy. If we were given a choice, we would not hesitate to opt for market economy.

Before we make such a choice, maybe we should follow this logic and gather some data to verify whether such is really the case: that those countries with more effective market economies are the ones that have more serious income disparity, while those with planned economies are the ones that have less serious disparity. A few days ago, the Financial Times reported a study by the Asian Development Bank, which reveals that China and Nepal are countries that have the widest income gap in Asia, while Japan, South Korea and Taiwan have much more equal income distribution. In our urge to learn about market economy, should we follow Nepal’s example, or that of Japan, South Korea and Taiwan?

Let us now take a look at the global situation. I have found some GINI coefficient ranking statistics compiled by the United Nation. In these statistics, the higher the grading means the more unequal the society. China’s coefficient is 0.447 and is among the thirty countries that have the widest wealth gap. I could not find any developed country whose rich-poor gap is worse than China’s. For example, Denmark, Japan, Sweden and Norway rank No. 1, 2, 3 and 5 as the most equal societies and their respective GINI coefficient are 0.247, 0.249, 0.25 and 0.258. Even the United States, who is well known for having great wealth inequality, has a coefficient of 0.408; Germany – 0.283, Britain – 0.36, and France – 0.327. Those economically advanced countries with ratings over 0.40 include only the U.S. and Singapore (0.425), but they are still lower than China’s figure. As for those countries whose rich-poor gap is worse than China’s, they are mostly the poorest countries like some African countries, Sri Lanka and Haiti, plus some developing countries whose economies are a notch better, like Brazil, Mexico, Argentina and Chile.

From those statistics we can come to the conclusion that a market economy, particularly a healthy market economy, will lead not to wealth disparity, but rather, to even distribution of wealth. Wide rich-poor gap is usually found in countries who do not have market economies, or whose market economies are defective (e.g. some African and Latin American countries).

The so-called 'equality' in our planned economy era was no more than self-indulgent wishful thinking. During that time, although inequality was not expressed in monetary terms, it exhibited itself through the urban-rural gulf, which was a creation of the planned economy. Now Mo Yu Xi suggests creating a separate GINI coefficient for each of the urban and the rural. It is tantamount to concealing the inequality created under our very own system. And then on the strength of such data to declare that our rich-poor gap is not that wide, and the important thing is to protect the rich! How could that be convincing?

I am not qualified to judge whether wealth inequality in China is at an alarming level. But not only has the Asian Development Bank’s study pointed out that China is one of the Asian countries with a noxious wealth gap, it has also warned that this trend will persist into the future. If things continue at the current pace, it will not be long before China catches up with some poor African countries in her GINI coefficient rating. And those countries hardly have any social stability, or political stability, let alone economic prosperity."