China's dangerous rich

FE Team | Published: August 11, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

Paul Maidment
China's leaders have for a while now been concerned about the rising level of social unrest in the countryside, which has played second fiddle to the cities as the economy has grown rapidly.
Newly published numbers in the latest annual issue of the Asian Development Bank's Key Indicators provides some statistical basis for that concern: China now has both the largest and fastest growing wealth gap among Asian nations after tiny Nepal, the ADB says.
Asian levels of wealth disparity are still lower than those in Latin America and sub-Saharan Africa, but, on the basis of the ADB's numbers, countries like China are getting there.
China's Gini coefficient, a widely used measure of wealth inequality, has risen from 40.7 in 1993 to 47.3 in 2004, the latest year for which the ADB can calculate the number. That is twice the growth rate of wealth inequality in India.
The Gini coefficient for the U.S. in 2000, the most recent year available, was 40.1: a coefficient of zero indicates perfect wealthy equality, one of 100 would mean one person owned everything.
Widening wealth gaps increase the potential for social unrest, with a Gini coefficient of 40 the number which raises a red flag about the potential for civil unrest. "You could have street demonstrations which could lead to violent civil wars." Ifzal Ali, the Bank's chief economist said at the press conference in Beijing announcing the numbers, without ever implicitly connecting the dots to his hosts.
That is the political fault line that so scares the leadership in Beijing. It knows its history. Historically, the overthrow of dynasties in China starts with unrest in the countryside.
The growing number of protests in rural China have already prompted the Beijing authorities to take measures to raise living standards in the countryside and of the urban poor through spending on social programs. The ADB emphasizes the importance of government spending on basic health care and education for social development.
For the past half century, economists have argued that wealth inequalities are an inevitable consequence of rapid economic development. The ADB posits a revisionist view and says that the rise in inequality poses "a clear and present danger" to sustained growth in the region.
For one, a wealth gap exacerbates the poverty reducing impact of a given amount of growth. That can constrain people with little wealth or lower incomes from investing in productive opportunities, either their education or starting businesses.
Its more damaging impact may be to increase the political pressure for market distorting wealth redistribution and for a super-wealthy elite to distort market outcomes in their favor.
South Korea and Taiwan have managed to industrialize their economies while maintaining relative small wealth gaps. China, though, is a big country, with vast differences in economic growth between its regions and less susceptible to central management in a way that let South Korean and Taiwan benefit from being integrated into the world economy, not marginalized by being so.
The growing wealth gap in China, as in India, is a byproduct of globalization. That brings higher incomes to urban, skilled, English-speaking workers, and the migration to the cities of what becomes an unskilled urban underclass.
That cannot be rolled back, and China's position as an emerging world power depends on the economic growth that globalization has allowed. Managing the unruly social impacts of that growth is the party's greatest challenge, for both its own and China's future.
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