So its Valentines day. With my girlfriend away and another 9 hour shift at work finished I’ve decided to talk about inequality! After reading this article (http://theconversation.edu.au/china-tackles-income-inequality-but-is-silent-on-state-corruption-12065) the other day it struck me that China may be fulfilling the predicted Kuznets Curve.
Observed by Simon Kuznets in 1955, the Kuznets Curve predicts that inequality within a country will follow a determined path as it develops. At low levels of income, countries may exhibit traditional industries such as subsistence farming which generates low levels of inequality. However as a country urbanizes and industrializes, income accrues to the owners of physical and human capital (e.g. factory owners and university graduates) causing inequality to rise. As more and more individuals are drawn into cities from the rural countryside, there may be calls for democratization and welfare policies. Furthermore there may be the emergence of trade unions as factories and cities allow workers to easily conglomerate and effectively organize themselves. The result is that inequality decreases leading to an inverted U-Curve as shown below.
Originally observed as a cross sectional relationship over many countries, the Kuznets curve has been disputed by many as they argue that the relationship depends on the inclusion of Latin American countries – which typically exhibit high levels of inequality. In addition some developed countries such as the UK and United States have been exhibiting rising levels of inequality in the past decade. The curve is important because it represents the search for an implacable law of development.
It seems China may be about to follow this path. For instance in the late 1970s China’s Gini coefficient, an indicator of income inequality that lies between 0 (perfect equality) and 1 (perfect inequality), hovered around 0.27. Back then the economy was largely agriculturally based and socialist. However after years of rapid growth and industrialization the country now exhibits a gini coefficient of 0.474 whilst some unofficial estimates have been as high as 0.61.
Interestingly though the article asserts that the Chinese government has now introduced a number of reforms to combat inequality. Notably it points out that the reforms are in response to the need to maintain social stability amid concerns of rising inequality. So here we maybe seeing the Kuznets Curve in action and it will interesting to see if inequality in China does truly decrease over the next few years, more importantly I believe this may be the start of a long process of democratization in China. On the other hand it does show that the hypothesis is ultimately dependent on a number of conditions such as government action.