The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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November 22, 2006

Inequality: Not Just Made In The USA

From the Financial Times:

China’s poor grew poorer at a time when the country was growing substantially wealthier, an analysis by World Bank economists has found.

The real income of the poorest 10 per cent of China’s 1.3bn people fell by 2.4 per cent in the two years to 2003, the analysis showed, a period when the economy was growing by nearly 10 per cent a year. Over the same period, the income of China’s richest 10 per cent rose by more than 16 per cent...

China, which had relatively even income distribution in 1980 when it embarked on market reforms, is now “less equal” than the US and Russia, using the Gini co-efficient, a standard measure of income disparities.

The Wall Street Journal has more (on page A4 of today's print edition):

The reason for the income decline at the bottom isn't clear. The World Bank hasn't completed its analysis and its conclusions haven't been published. Even so, the data call into question an economic model that economists have held up as an example for other developing nations.

"This finding is very important. If true, it sheds doubt on the argument that a rising tide lifts all boats," said Bert Hofman, the World Bank's chief economist in China...

Many observers place part of the blame on the way China dismantled its social-welfare system as it phased out state control of the economy -- without building up much to replace it. Health care has become a point of particular concern, as costs shoot up without any widespread system of medical insurance to cover them.

Here is an important piece of information:

The World Bank's Mr. Hofman says the bank's analysis shows the majority of China's poorest 10% appear to be only temporarily poor, thrown down by some setback like sudden illness, the loss of a job or the confiscation of land. That suggests that a basic social safety net, like medical insurance or unemployment benefits, could help move them back out of poverty. Only about 20% to 30% of the poorest appear to be long-term poor, and even they have some savings.

... the survey compares snapshots of the lowest tier of Chinese society at two different points, rather than tracking the same of group of households over time. So, it doesn't necessarily mean that the people who were in the poorest 10% of society in 2001 were all 2.5% worse off in 2003.

Temporary bouts of economic hardship are clearly a much different thing than persistent poverty traps.  And if, in fact, poverty is predominantly transitory, we should perhaps be more circumspect about declaring that a rising tide fails to raise all boats.  Rising inequality -- here and elsewhere -- may be very well be a problem.  But policymakers would be well advised to understand what problem it is, before the surgery begins.

November 22, 2006 in Asia , Inequality | Permalink


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nice little summary of the wall street journal
there definately has something to be done about the poor chinese

Posted by: Otto | November 22, 2006 at 06:52 AM

Well, I guess the World Bank chief economist ought to read up on Kuznets. Also, there must be some kind of reason (and not just BW2) why China wants to make welfare a priority in coming years.

Posted by: 4degreesnorth | November 23, 2006 at 05:47 AM

I wonder if there is a correlation between educational achievement and poverty in China. The linkage in the United States is clear.

Posted by: jeff | November 24, 2006 at 10:08 AM

One place to look may be labor market rigidity. Not the kind we tend to think of in G10 countries. Labor mobility is limited in China by a social/legal system that is arranged to maintain stability. Those who are from the countryside have very limited right to work elsewhere. (Those from anywhere have a limited right to work elsewhere.) One consequence is that they can be paid less and treated worse in industrialized areas than those from the industrial region. That makes insecure, non-local workers preferable to factory managers. Those with employment rights have a harder time getting work, while those who get work have limited bargaining power. Locals from industrialized areas become transients if they go in search of work beyond their own region, adding to downward pressure on low-skilled factory wages. This system also puts pressure on incomes in farm areas, because it discourages farm workers from moving to industrial areas.

I would also point out what looks like over-eagerness on the part of our host to warn against jumping to conclusions when the conclusion is that classical assumptions don't work. Evidence shows up questioning a rising tide lifting all boats? Oh, we must wait before acting. Hint that one's priors are confirm don't seem to require equal caution. Doesn't objectivity imply equal scepticism in both directions?

Posted by: kharris | November 24, 2006 at 11:27 AM

kharris -- Sorry if I was unclear. I don't dispute the evidence that growth alone does not seem to have reliable effects on poverty numbers. But I am not convinced that we really know how to think about poverty statistics when we see it, nor do I think all proverty is created equal. We know for example that the labor force particpation rates of young people have fell sharply in the last recession, and have not recovered. That is likely to increase poverty numbers, but is it something to worry about? I'm not so sure -- you have to tell me why the participation rate fell. If it is because of delayed entry into the labor market to build human capital, then I am not worried at all.

I'm not saying that is the answer, least not for all of the incidence of poverty we observe. But neither am I willing to accept knee-jerk reactions to poverty numbers that offered without any thought about what the numbers really reflect.

Posted by: Dave Altig | November 28, 2006 at 07:32 AM

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