Tag Archives: Government

Economic growth and Boris Johnson inequality debacle

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After returning from an unpaid internship in Austria for the last three months, I was very interested to see Boris Johnson’s latest comments on inequality. After reading a number of articles focusing specifically on his comments relating to IQ, I  believe many had not picked up upon another important part of his argument – the implied justification that the current level of income inequality is acceptable because it a key and necessary driver of economic growth.

The argument that inequality drives economic growth goes back to the roots of economic theory itself. The theory argues that inequality generates incentives for individuals to work hard, compete and innovate within a market economy. A level of inequality allows for there to be winners and losers from this process and drives economic progress as individuals strive to reach the top. The theory therefore predicts that more unequal countries should grow at a faster rate. However, despite the strengths of this argument there are a number of reasons why an unequal distribution of income and assets within an economy may do precisely the opposite.

Many economists argue that highly unequal income distributions can lead to a number of economic efficiencies. Firstly, when the vast majority of wealth is concentrated in the hands of the few, it means that a smaller fraction of the population qualifies for credit because they lack the necessary collateral to obtain loans. As a result they may not be able to invest in the education of their children or gain sufficient funds to start a business. Productive investments within an economy, which stimulate growth, are therefore foregone.

Secondly, a higher level of inequality may lower the overall level of consumption within an economy. This is because people with lower incomes tend to spend a higher proportion of their income than those at the top. Consequently, if most of the national income is concentrated at the top, it is argued that overall consumption may fall. Moreover, the wealthy tend to spend a higher proportion of their incomes on luxury import and foreign travel whilst they may also seek tax havens for their saving abroad. This affects the economy through a process known as capital flight, such investments do not contribute to a country’s productive resources and can therefore hinder the prospects for economic growth.

Other authors have looked at the political economy implications of high levels of inequality for economic growth. For instance, when wealth is concentrated in the hands of the few, these individuals may take measures to safeguard their assets or capture more wealth instead of increasing their own productivity. Individuals may partake in disruptive rent seeking activities such as excessive lobbyingprovide large political donations or engage in bribery. In turn, all of this leads to inefficient use of resources as they are diverted away from productive activites which could stimulate economic growth.

A more recent argument is that high levels of income inequality may precipitate credit bubbles and financial crises. Here the argument is that when incomes grow at the top and those at the bottom stagnate, the demand for cheap credit increases. At the same time there is a push by those at the top for policies that sustain and build upon their wealth, such as lobbying for looser financial regulations. As explained by an influential study by the IMF, the end result is a viscious cycle of inequality whereby more and more individuals at the bottom have to borrow to keep afloat thus increasing the risk of a financial crisis.

This point I find particularly relevant as I believe it builds upon the Marxist theory that rising inequality would lead to the ultimate collapse of an economy. The basic argument here is that as business owners become richer by applying downward pressure on wages, the economy will come to a point where no one can afford to buy what the business owners are selling. At this point the economy will stagnate and reach the point of collapse. From this viewpoint, credit is just merely just a mechanism that allows individuals to spend above their means thus postponing the inevitable credit crisis.

But what about the empirical evidence.  Take the much cited case study of the Philippines and South Korea for example. In the early 1960s, both of the countries were similar on a number of macroeconomic indicators. They had comparable levels of GDP per capita, urbanisation, population size and primary and secondary education. However, over the period 1960-1988, the per capita income in the Philippines grew, on average, by only 1.8% a year. In contrast, per capita income in South Korea grew, on average, by 6.2% a year over the same time period. However, what is most interesting about this story is that, compared to South Korea, the Philippines exhibited a significantly more unequal distribution of income over the period measured. In 1965 the Philippines’ gini coefficient was nearly 17 points higher than that of South Korea. This clearly contradicts the argument that more unequal economies grow at a faster rate.

A number of more rigorous empirical studies have also found that high levels of income inequality have a negative impact upon growth. For instance, a frequently cited study by Alesina and Rodrik (1994) finds that the gini coefficient has a consistently negative effect upon economic growth. Likewise, Deininger and Squire (1997) investigate whether initial income inequality has a strong impact upon long term growth rates. They find that link between income inequality and economic growth is not strong however they do find that inequality in the distribution of assets (in this case land) exerts a strong negative effect upon growth.

On the whole the empirical evidence on the relationship between income inequality and economic growth is inconclusive at best. The studies conducted suffer from numerous data issues. For instance, inequality is measured in many different ways across countries making comparisons difficult. Conclusions made from many of the studies available are therefore tentative at best. As a result there is no clear evidence that income inequality has any impact on growth whatsoever.

The debate has still not been won by either side. While many accept (and I do too) that a level of inequality is necessary to drive economic development, it is not justification for the significant increases in income inequality we have seen over the past few decades. Furthermore, high levels of income inequality can have far more widespread ramifications for a country besides economic growth. As this interesting lecture by Richard Wilkinson shows, high levels of income inequality can have negative impacts upon a number of socio-economic factors such as health, life expectancy and levels of trust within society. Furthermore, a number of a studies have found a negative relationship between inequality and levels of overall happiness.

Nonetheless these are issues which will not be regularly mentioned within the political sphere. There is still a strong focus on crude indicators such as economic growth to gauge the success of our economy. Unfortunately politicians such as Boris Johnson are still very focused on this narrow gauge of development and therefore fail to see the negative socio-economic impacts that the forces of greed, envy and ultimately, inequality, can lead to.

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When Economists Get It Wrong! The Worst Economic Predictions Of All Time

Economics is often described as the ‘dismal science’. Unlike other traditional sciences, economics rarely provides a simple solution to present day issues. Furthermore economists have a poor record of predicting the future. Even notable economists such as Joe Stiglitz agree that economists only get it right at best around 3 or 4 times out of ten. However it should be acknowledged that economic forecasting is a difficult art at best – human behavior is forever changing and the economy is a complex mechanism with many working parts. Nevertheless I thought it would be entertaining to highlight some of the most wildly inaccurate forecasts in recent times. Here are some of the best…

1. The Great Depression

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Almost every economist failed to predict the great crash of 1929. Most famously the economist Irvine Fisher (who Milton Friedman regarded as “the greatest economist the United States has ever produced”) predicted that stock market prices had reached “what looked like a permanently high plateau”. A week later the stock market crashed and didn’t bottom out until 1932, with the Dow Jones recording a 88% total loss in value.

Even the great John Maynard Keynes failed to see the fore-coming shock allegedly stating in 1927 that “We will not have any more crashes in our time.” 

2. The Japanese Automobile Industry

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In 1968 the BusinessWeek magazine stated that, “With over 15 types of foreign cars already on sale here, the Japanese auto industry isn’t likely to carve out a big share of the market for itself.” Fast forward to the present day and Japanese car manufactures now account for around 36% of the total US car market. Add in other Asian car makers and this figure jumps spectacularly to around 49.9%

3. The Soviet Economy

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In 1989 nobel winning economist Paul Samuelson asserted in his best selling textbook Economics that, “The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” Two years later the Soviet economy collapsed.

4. Dot Com Bubble

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Numerous predictions failed to foresee the dot com bubble. For instance in 1999 Smart Money magazine highlighted AOL, Yahoo and MCI WorldCom as some of its top picks for the forthcoming year. By 2001 AOL had lost 70% of its stock value after its merger with Time Warner. Later in 2002, MCI WorldCom became involved in one of the largest bankruptcy cases the US had ever seen.

However no prediction about the Dot Com boom was as profound as that made by James Glassman and Kevin Hassett in 1999. In their book, “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market”  Glassman and Hassett argued that the Dow Jones Industrial Average may rise to 36,000 within just a few years.  After reaching an initial high of 1,750.28 in January 2000, the Dow Jones fell to a low of low of 7,286.27 in October 2002. Even today the average remains still below 15,000. Glassman and Hassett’s book can now be found on Amazon for $0.01.

5. The Credit Crunch and Financial Crisis.

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In 2008 the sub prime mortgage crisis led to the collapse of a number of financial institutions and a global economic recession. However before 2008 many economists had an optimistic outlook for oncoming years, growth had been steady and inflation was finally under control. Despite the impending financial crisis many economists and policymakers were contend with the health of the banking sector. 

For instance in 2005 Alan Greenspan declared, “The use of a growing array of derivatives and … more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions … Derivatives have permitted the unbundling of financial risks”.  

Similar optimism was forwarded by individuals such as David Lereah, chief economist for the National Association of Realtors, who in February 2006 published “Why the Real Estate Boom Will Not Bust,” which was essentially a guide for homeowners on how to profit from the expanding real estate market!

However these predictions fall short in comparison to the statement made by Federal Reserve Chairman Ben Bernanke  in 2007 who famously declared that, “The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”

 

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Combating Deflation – The Japanese Experience

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The recent announcement by Japan’s new central bank governor Haruhiko Kuroda to engage in a new round of quantitative easing and combat deflation has been met with a rather positive response. This round will increase the monetary base by around 60 to 70 trillion yen a year. The monetary base will increase from the current 29 per cent of GDP to 55 per cent by the end of 2014,  but such a policy does not come without risks.

Firstly we must ask why deflation is such a problem. In the scheme of things a falling price level is good for everyone, right? Well unfortunately deflation can lead to a spiral of reduced demand, production and prices, known as an deflationary spiral. If prices are falling one might ask themselves, “why should I buy now when next week or even next year the price of the item will be lower?” This may lead consumers to withhold demand, lower demand in effect leads to lower prices and at lower prices businesses will be willing to produce less. This in turn leads to lower wages and again decreased demand and the process continues…

Policy makers further fear deflation because it typically renders traditional fiscal policy ineffective. To boost the aggregate demand and prices, central banks will lower nominal interest rates to stimulate investment and make saving less attractive. However if deflation is present the real rate of interest, that is the nominal rate minus the level of inflation, may become negative. This is because the central bank can only lower interest rates to a floor of 0% and not beyond. Doing so would mean that banks would be effectively paying borrowers to borrow from them. Consequently traditional methods of monetary policy become ineffective when interest rates reach 0% in the face of deflation.

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Japan’s experience with deflation began in the 1990s after it the collapse of the real estate and stock asset bubble in 1990. During the 1980s the Japanese economy had been booming and this had led to a substantial increase in the amount of available credit. As a result assets such as stocks and real estate inflated well above their intrinsic values whilst banks continued to lend to investors. When the prices collapsed in 1990 triggered by the an interest rate hike, many banks were left with a large proportion of bad loans. The economic slump meant many firms could not repay their loans and furthermore the the banks could not retrieve the full value of their loans because the price of the collateral (real estate) had declined sharply. Instead of accepting these losses and liquidating these malinvestments the banks were propped up by the government in the hope that asset prices would recover. This in effect tied up essential economic resources and led to a marked decrease in domestic investment. This is the beginning of what most commentators have began to call the lost decade.

Since this crisis Japan has been marred by further crises which have hit aggregate demand and thus put deflationary pressure upon prices. Such crises include the Japanese financial crisis and Asian financial crisis in the latter half of the 1990s; the collapse of the US dot com bubble in the early 2000s and most recently the 2008 global financial crisis. All of which have damaged the Japanese financial system and its ability to provide capital.

In addition to this other factors have hurt demand whilst supply has increased. For instance, the rising cost of imports for many Japanese firms has meant that they have been forced to streamline operations and cut costs. This has meant many job losses despite increases in labour productivity. As the graph below shows, taken from Musha research, wages have fallen significant since 1990 despite increased productivity which goes strictly against micro economic theory.

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Japanese firms have realised that they can cut investments in labour because productivity has increased. The result is an excess supply of labour which has driven down wages and ultimately consumption. The above factors have all contributed to the deflationary output gap, meaning aggregate supply is outpacing aggregate demand.

To deal with deflation the Japanese have resorted to a unconventional form of monetary policy named quantitative easing. Quantitative easing works through the central bank purchasing financial assets such as bonds, in an effort to increase the reserves of the banks and hence the money supply. The main difference from traditional open market operations is that the purchases made are long-term rather than short-term bonds and that it has a money supply target rather than an interest rate target in mind.

The Japanese government’s goal here is to stimulate investment and spending in the economy. Furthermore it hopes by increasing the money supply the value of the Yen will decrease thus making Japanese exports more competitive. However as noted earlier the policy has risks both for Japan and the wider global economy.

Firstly if the inflation generated by quantitative easing rises more steeply than wages this could reduce both Japanese living standards and consumption. Devaluing the currency by increasing the money supply could push up the price of Japan’s principle imports – oil and gas. As a result the cost of heating, transportation and lighting would increase thus damaging consumption of other goods. In the worst case scenario the policy of quantitative might  lead to higher than expected inflation or even hyperinflation if too much money is created. Furthermore there little is known about how to stop the process once it does begin to work.

Secondly the such inflationary pressure could increase potentially lead to an increase in interest rates. If this were to happen the cost of servicing Japanese debt could increase considerably making the fiscal position unsustainable. This is extremely relevant for an economy such as Japan with gross national debt sitting at 229.773% of GDP .

However on a more fundamental and global level the policy could lead to a race to the bottom or currency war as other countries rush to devalue their currencies. Japan has now joined both the US and UK in delivering such a policy and other members of the international community have already begun to expressed their concern. Currency wars as seen from history lead to no winners as such crises cause uncertainty and therefore reduce international trade.

In conclusion, it seems that this policy is a short-medium term remedy for Japan’s longer term problems. The country must look at the structural causes of it’s economic stagnation, for instance the “demographic time bomb”, policy mismanagement and issues of accountability and transparency. Japanese business is renown for investing in long term solutions perhaps its time the government took the same approach.

 

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Japanese Gender Inequality and the Demographic Time Bomb – The Costs of Hard Work

Japan consistently ranks as one of the most developed countries in the world, however it may be a surprise to many that large and persistent gender inequalities still exist. Although Japan has seen increased levels of female education participation this has not translated into gender equality in the labour market. The country consistently ranks low on a number of gender equality measures. Most recently the country fell 3 places to 101st out of 135 counties in a recent survey by the World Economic Forum. The OECD reports that the gender pay gap remains high at 15% and this rises to 40% for older workers – this is the second highest rate among OECD countries. Female labour force participation sits at around 63% in comparison to 83% for men, if the current trend continues it could lead to a reduction in the size of the labour force by 10% over the next 20 years. Furthermore senior Japanese business women are a rare occurrence, the OECD shows that Japanese women only account for 3.9% of listed company board members this again ranks second lowest among OECD countries.

Such inequalities are compounding because gender equality is considered beneficial to many areas of economic development. Increasing female employment in general increases the size of the labour force and thus GDP. In addition gender inequality may lead to labour market distortions whereby men are employed in positions where women could be more productive. Recent estimates by Kathy Matsui of Goldman Sachs, finds that closing the gender employment gap could expand the Japanese workforce by 8.2 million. This she asserts could lead to a increase in Japan’s GDP of around 15%. Coupled with this some studies have found that in general women tend to save more than men. For instance Sequino and Sagrario Floro (2003) find that a one percentage point increase women’s share of the total wage bill tends to increase aggregate savings by approximately one quarter of a percentage point. This means for countries such as Japan that increased female labour force participation could lead to higher rates of saving and hence increased investment.

So what are the problems Japan faces? One of the most potent statistics is that 70% of women in Japan leave the workforce as soon as they have their first child. The ratio of Japanese mothers with children under six who work (34%) remains extremely low compared to 76% in Sweden, 61% in the US, 55% in the UK, and 53% in Germany. Matsui’s report suggests that once Japanese women leave the workforce they generally find themselves returning to limited part time employment due to increased responsibilities  She explains the “typical” lifestyle for a Japanese women is as follows;

  1.  Graduate from high school or university and find a job (average age: 18-22 years)
  2.  Get married (age: 25-29 years)
  3.  Become pregnant, then drop out of workforce in order to raise the child(ren) (age: 30-39 years) 
  4. Once the child(ren) become(s) independent, resume work (approximate age: 45+ years) 
  5. Even if work is resumed after age 45, it is typically limited to part-time employment, since by this stage either her husband’s or her own parents often begin requiring convalescent support.

A particular issue is that of lack of available and affordable daycare. For instance Tokyo government statistics show that there are more than 20,000 children waiting for daycare places in the city. In addition to this the work culture in Japan means that men tend to devote less time aiding in childcare. The graph below from Matsui’s report shows the average number of hours spend by men on household activities and childcare.

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The graph shows that on average Japanese men spend less than an hour on these combined activities. To further compound this problem only 2.63% of men take paternity leave due to the fear of losing their jobs. Such statistics show the increased pressures placed upon Japanese mothers to leave the labour market.

In addition, these issues have led to two principle problems, firstly women who are having children are not working. Secondly those that are working are  not having children. Consequently Japan now has one of the lowest birth rates in the world with 1.3 births per women and now faces the prospect of seeing its population decline by a third over the next century if trends continue.

The irony of such problems is that Japan’s famed work culture and ethic which once drove the country’s rapid development  is now partly responsible. The pressures of long hours and vigorous commitment mean that the country is now facing a demographic time bomb whilst many of its potential female workers remain under utilized. However government policy to provide more daycare centres and child bearing incentives is only one half of the solution. As a recent survey by the The Yomiuri Shimbun shows the share of Japanese who thought wives should stay at home jumped 10.3 percentage points to 51.6 percent between 2009 and 2012. The dilemma therefore is therefore not only policy problem but also a cultural issue as well.

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Facing the resource curse: The Challenge for Burma

 

Burma is a country with vast reserves of natural resources. It’s territory includes substantial reserves of natural gas, oil and minerals. Despite this Burma remains one of the poorest countries in the world. However the establishment of democracy within the country has now meant many international sanctions have been lifted and the country is now open for business. Dependence on resource wealth however may limit Burma’s progress towards development.

The resource curse, coined by the economist Richard Auty in 1993, describes the observation that resource dependent countries tend to under perform on a number of development indicators compared to their resource poor counterparts. For instance GNP per capita decreased by 1.3% per year in the OPEC countries during the period 1965-98 compared with a 2.2% average per capita growth in all lower to middle income countries.

Burma has already contracted one of the symptoms of the resource curse – the Dutch Disease. The disease describes how the increases in wealth brought about by a resource boom may cause an appreciation in the real exchange rate in turn decreasing the competitiveness of other exports such as manufactured goods. Burma presents a clear example of this, natural resources have helped drive up the value of the country’s currency, the kyat, from over 1400 to the U.S. dollar in 2007 to less than 700 in 2011.

In addition to this much of the valuable land and resources are controlled by the military and political elite. Although Burma has established democracy, there is a significant lack of transparency regarding resource earnings and how they are spent. The government does not report annual figures regarding resource revenues and foreign oil companies do not publish how much and how they pay the established military regime. The military still operates firmly outside the law in Burma, the constitution means that the one quarter of all government seats are reserved for members of the army. As a result levels of corruption are particularly high in Burma. Transparency International’s Corruption Perceptions Index (CPI) ranked Burma 172nd out 174 countries, showing the perceived extent of the problem.

This poor institutional and economic environment means that upcoming expansions in the oil and gas industry could further hamper development and fuel corruption. With many western countries lifting economic sanctions upon Burma, the increased levels of trade could further drive up the value of kyat prolonging the effects of the dutch disease. In addition the characteristics of such industries mean that they typically provide few benefits for the wider population. Oil and gas extraction tends to be highly capital intensive employing a small number of workers and concentrate wealth in the hands of the few.

On a broader scale such industries can decrease the need for high quality education. Notable economist Thorvaldur Gylfason argues that resource rich countries tend to neglect education because resource extraction is primarily low skilled. This can have a knock on effect for the development of more labour intensive industries such as manufacturing which require higher levels of education. Furthermore a recent article in the guardian reports that many families are now buying plots of land in oil rich regions with the hope of striking lucky. This has meant that many children now find themselves working in oil fields with obvious consequences for their education and health.

company-worker-working-on-connet-pipeline-at-the-construction-site-outside-of-kyaukmaeThe construction of the new Shwe gas pipeline to China is expected to earn Burma $29 billion over the next 30 years.

Although such abundance of resources should be a blessing for Burma in the long run it could be a substantial burden. The country lacks the institutional framework and regulation to successful reinvest the earnings of such industries into development. Its inefficient tax regime means little of the wealth generated by the resources ends up in the hands of the poor. On the other hand the high levels of corruption and state control mean such wealth is destined to end up in the hands of the influential few.

Burma could learn a lot from the case of  Botswana which is one of the few countries that has beaten the resource curse. This success has been directly attributed to its good governance and the integrity of its public institutions. The country has good levels of democratic accountability, an independent judicial system and a free media. All of which have contributed to Botswana exhibiting low levels of corruption – the country ranks 30th on Transparency International’s CPI outperforming even some western countries such as Spain.

Despite signing up to the Extractive Industries Transparency Initiative, Burma still has a long way to go. There is a strong need for the development of a robust institutional and legal framework to help utilize resource wealth for poverty reduction. Until this is established the opening of trade and construction of more gas pipelines could further hamper efforts towards such development goals.

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Austerity – Time to admit defeat? Part 2

So looking back to my earlier blog the inevitable has happened, the UK has lost its AAA credit rating, surprise, surprise! It was just a matter of time but what does the loss mean to us? Well not a lot actually and this is the point. The chancellor has been using this rating to justify the drastic cuts the country has experienced, in order to reassure the markets. The reality is however that Britain is still seen as a safe haven for investors and in addition many other major countries such as America and France have also lost their AAA ratings. This means that the government will still be able to borrow at low costs for a while yet. So what has went wrong?

Well firstly you will here a lot from the chancellor about ‘the mess the last labour government left the country in’, however when the coalition was installed the economy was recovering albeit slowly. However at this time the chancellor decided to raise VAT this as argued in a recent guardian article wiped 1% of GDP annually by flat lining demand.

To further reduce aggregate demand in the economy, the government set about cutting spending in many areas, all in the name of reducing the deficit and reassuring the markets. However the total amount of debt in the economy has increased. Why? Well when the economy is shrinking tax receipts tend to go down whilst government spending on areas such as unemployment benefits increase. This is, in the classic Keynesian view, why cutting spending during a recession is self defeating. 

The government has hoped that monetary policy through lower interest rates would counteract this fall in demand. It was also hoped that these lower rates would devalue the pound and make UK exports more competitive. However progress has been slow and the UK is still running a large deficit in its balance of payments. Demand in the global economy is at a low and therefore the gains from a currency devaluation are small. Even more worrying is that during a time when we are trying to re balance our economy towards net trade, David Cameron is proposing a referendum on the EU, the UK’s largest trading partner.

These facts again leave an observer like myself dumbfounded. Whilst monetary policy has failed to deliver the goods, Austerity hasn’t worked and if anything it has exacerbated the problem. Demand within the economy is flat, total national debt is higher than ever and the UK has lost its AAA credit rating. Its time for the government to hold its hands up and admit that an injection of spending is needed to kick start demand and economic growth as argued by prominent economists such as Joe Stiglitz. Ultimately economic performance is what will determine the confidence of the markets and thus the UK’s credit rating.

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China – a country example of the Kuznets Curve in the making?

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.

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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.

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