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Deep thought-China’s inequality

26 Mar

A poverty trap is defined as any “self-reinforcing mechanism which causes poverty to persist.” (Wikipedia 2014)

Income inequality is defined as “the unequal distribution of household or individual income across the various participants in an economy. Income inequality is often presented as the percentage of income to a percentage of population.”(Investopedia 2014)

Following the implementation of China’s “Open door policy” by Deng Xiaoping in 1978 (Wikipedia 2014) China’s economy underwent a huge surge in economic growth. This is made very evident when we examine some facts and figures. Firstly let us compare China’s gross domestic product (GDP) in two periods; 1980, where the reforms had only just been implemented and 2011, where China is widely recognised as the world’s second largest economy. In 1980 China had a GDP of 202.46bn (USD) and in 2011 China had a GDP of 6988.47bn (USD) a value that is more than thirty four times that of China’s GDP in 1980 and tells us that on average China experienced an average growth rate of approximately 12 per cent per annum in the period between 1980 and 2011. (Guardian 2012). While this rapid economic growth brings with it a large number of benefits, for example; improvements in current living standards and higher employment, it can also lead to a large number of problems, for instance; increase environmental degradation, as is evident in the pollution problems and increases in inequality. This week’s blog will focus on the increasing disparity between China’s rich and poor, and factors that may worsen the inequality.
In order to measure wealth/income inequality in a country we will use the Gini coefficient, which shows us the statistical dispersion of income among a country’s residents. For example a Gini value of 0 represents perfect equality, whereby income is the same throughout the country. On the other hand a value of 1 represents total inequality in that one person controls all of the income and everyone else has nothing. (Wikipedia 2014).

Number one

 

The image above shows the Gini coefficient of national income around the world. (Wikipedia 2014). The lighter colours represent countries with a value closer to zero and therefore have less inequality.

As of 2011 China was reported to have a Gini coefficient of 0.477 (China daily 2012) on its own this value is worthless, however when we compare it to the UK’s figure in 2011 of 0.34 (BBC 2012) we can now get a better perspective of the size of inequality. Combine this comparison with the estimate that inequality in the UK results in a cost of 39bn (GBP) per annum (the Guardian 2014) we can now see that China’s inequality is indeed a real problem. Bear in mind that many experts believe that China’s Gini coefficient value is vastly understated. Inequality is problematic because it threatens to lead to an underclass of labourers with low skill sets and education; this harms the economy in that it prevents the economy from functioning at its full potential. (Harvard business review 2012). In other words resources are wasted, in this instance I am referring to the waste of human capital. This underclass of workers could result in political instability, for instance a workers rebellion; in turn this instability deters foreign investment, which in China is a major component of GDP. Inequality also brings with it a large number of social problems. A large gulf between incomes can lead to higher rates of crime, as those on low incomes become desperate and disgruntled at the income differences.

Number 2

The image above (Wikipedia 2004) helps to visually display the levels of income inequality, with the general trend being an East-West divide with those areas with access to the sea having a higher income.
However many argue that inequality is not a problem and that a Gini coefficient value of 0 is unrealistic and possibly undesirable. It is arguable that inequality can benefit the economy by acting as an incentive for low income earners to work harder, causing productivity to increase. Another argument is that inequality allows for better allocation of resources, wherein resources are placed under control of people with higher skill sets and are therefore utilised better. Finally, it can be said that inequality occurs naturally, as certain people suit different careers. Put differently in an ideal world everyone would be equal, however in reality this is not the case. For example some people have a higher intellect. This means that wages will be different thereby resulting in inequality. While this counter argument is valid, this mostly applies to small amounts of inequality. Having said this it is quite clear that inequality in China is clearly a significant problem.
If China wants to reduce its inequality there are a number of solutions it can utilise a number of responses; Firstly the government could implement a more progressive tax rate, this is where the more you earn the higher a percentage you are taxed. This method can be considered a double sided approach as the increased tax revenue received from the high income earners can be redistributed to those on low incomes. This means fewer extremes in incomes and therefor a higher level of inequality. However getting such a change implemented would be incredibly difficult, as those on high income levels would without a doubt oppose the change. In addition to that the higher tax rates for the rich may result in lower tax revenues as it causes the rich to move their wealth and businesses abroad, thereby damaging the economy.
Another possible solution is the implementation of an education that focuses more on equity, this allows a more equal opportunity for people, and moves the emphasis away from what quality of education your parents can afford. This therefore helps to break the link between the parent’s income and their child’s future income. In addition to this, a policy that focuses on education is very likely to boost an economy’s potential and productivity. However, there are a number of flaws with this proposed solution. Firstly, it is likely to be very expensive and secondly, any benefits from it will take time to come into play.
The most effective solution however would be a combination of the two mentioned earlier, whereby a gradual increase in a progressive tax rate helps to raise revenue and fund the education reform, while the increase in the tax rate is gradual enough to not deter too many of the rich.
While inequality is problematic China has started to address the problem, this is evident when we look at the Gini values from 2008-2011, with the values descending as the years progress; 0.491, 0.49, 0.481 and 0.477 respectively. (China Daily 2013). However as was stated earlier such values should always be seen sceptically. (The Economist 2013). However if accurate it can be said that China is dealing with the problem, however it can also be said that its approach is too gradual, in that any value over 0.40 means that inequality is considered to be a cause of social unrest. (Wikipedia 2014).

Word count including Harvard referencing 1154

The Guardian 2012, China GDP: how it has changed since 1980 http://www.theguardian.com/news/datablog/2012/mar/23/china-gdp-since-1980
Investopedia 2014, definition of income inequalityhttp://www.investopedia.com/terms/i/income-inequality.asp
Wikipedia 2014, Poverty trap http://en.wikipedia.org/wiki/Poverty_trap
Wikipedia 2014, Gini coefficient http://en.wikipedia.org/wiki/Gini_coefficient#Features_of_Gini_coefficient
Harvard Business review 2012, How much inequality is necessary for growth? http://hbr.org/2012/01/how-much-inequality-is-necessary-for-growth/ar/1
China daily 2012, China Gini coefficient http://www.chinadaily.com.cn/bizchina/2013-01/18/content_16140018.htm
BBC 2012, Britain’s recession: Harsh but fair http://www.bbc.co.uk/news/business-19984877
The Guardian 2014, Inequality ‘costs Britain £39bn a year’ http://www.theguardian.com/society/2014/mar/16/inequality-costs-uk-billions
The economist 2013, Gini out of the bottle http://www.economist.com/news/china/21570749-gini-out-bottle

China’s real estate bubble

13 Mar

Image

Little Paris- the ghost town

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Property in China has rocketed over the past nine years resulting in a widespread fear of another bubble and the global crisis that would arise should it burst. Property in China has rapidly shot up with some cities experiencing growth in excess of 10 percent in 21 cities, while the largest two cities in China, Shanghai and Beijing underwent a huge amount of growth in the property market in excess of 20 percent. (BBC). Such extreme rises in the property are becoming increasingly problematic in China, resulting in ever increasing inequality as those with houses become wealthier and those without houses find it increasingly more difficult to purchase property, thereby contributing to the ever increasing divide in inequality, brought about by a large number of factors.     

The dramatic rise in property prices has can be attributed to a large number of factors. For instance, China’s approach in achieving economic growth has meant easy access to money; this means low interest rates and increased lending, thereby resulting in a large increase in demand for houses as consumers have a higher incentive to borrow and spend, while construction of property increases due to easy access to funds due to the low interest rates. In addition to this a cultural shift encouraging young males to become home owners, as is similar to the cultural shift in the UK while under the Thatcher government.

However as of 2011 the Chinese government have acknowledged the economic and have brought in a number of reforms in order to address the problem. The state has brought in a number of reforms to curb the demand; for instance, the purchase of houses in Beijing has been restricted to those who have lived in Beijing for a minimum of 5 years. This thereby stops the purchase of houses by foreigners done on the basis of making a profitable investment. In addition to this Beijing has prohibited the purchase of houses to 2. These examples of reforms in Beijing give just a broad sense of the action that the government has taken in order to curb in the property bubble and reign in China’s economic growth to a more sustainable level.

Jimmy

http://en.wikipedia.org/wiki/Chinese_property_bubble_%282005%E2%80%9311%29

http://www.bbc.co.uk/news/world-asia-china-24997241

http://www.forbes.com/sites/kenrapoza/2013/09/18/chinas-housing-market-continues-to-soar/

 

 

Key factors in China’s rapid economic growth

6 Mar

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From 1978 to 2014 China has undergone a massive transformation, going from the tenth largest economy with a GDP of approximately 150 billion USD, to the second largest economy with a GDP of approximately 8.5 trillion USD respectively. (WIKI). The question we must ask is what factors have been responsible for this giant leap from a dying empire to an economic giant.

 

The first factor, but by no means the most important was the act of opening up its borders to the rest of the world, this was very beneficial in that it allowed foreign direct investment (FDI) to occur, before 1978 investing in Chinese firms as a foreigner was very difficult thereby discouraging the majority from doing so, this is not the case post 1978. In addition to this, opening up its borders to the rest of the world allowed China to make gains from trade and benefit from its comparative advantage. This notion is a simple economic theory established by many notable economists, for example Adam Smith in “The Wealth of Nations,” and by David Ricardo. To put it simply these economists argue that by allowing free trade both countries will be made comparatively better off than if they refrained from trade. This factor is highlighted in the fact that before 1978 China imported around 7.5 billion USD (1975) however post 1978 China imported around 42 billion USD (1985). (Chinability) This factor is further highlighted in China’s steel production industry, if left to domestic production of iron ore China would be unable to meet the world’s demand of Steel, however due to trade China can import iron ore from abroad, thereby allowing China to control almost 50 percent  (2013) of the steel market. (ISSB)

 

Another important factor is China’s growth in productivity, capital and technology. In the period of 1979-1994 China’s stock of capital grew by approximately 7 percent. (IMF). With new and more capital a country can increase its output and make the country more productive. This increase in capital can be attributed largely to FDI. In addition to this due to the loose enforcement of copy right legislation in China, production firms in China were not tied down by “red tape,” for example Chinese firms could for the most part ignore patents, thus allowing them to copy successful foreign firms. Despite large increases in capital stock, the capital to output ratio has stayed fairly level fluctuating between 8 to 12 percent. (NBER). This therefore suggests that changes in labour also played a large role. There are two aspects to changes in labour, the first being an increase in the labour force, for instance an increase in immigration will increase the labour force, this aspect will be covered in the following paragraph. The second aspect is an increase in labour productivity, for instance an increase in productivity of the average worker caused by an increase in education would result in the ability of the average worker to produce a certain good in a set time to increase. This would mean that while the number of workers remained the same the effective number of workers would increase. The aspect of an increase in productivity is beneficial to China’s economic growth in that it helps attract FDI, which helps explain the increases in capital investment as mentioned earlier. In the period of 1979-1994 China’s labour productivity grew by on average 3.9 percent per annum. A staggering figure when compared to the US’s 0.4 percent in the same period. This increase in productivity can be attributed to broad range of reforms, for instance business reforms that allowed farmers to keep a portion of their produce thus encouraging them to become more efficient, education reforms.

The final factor I will talk about is the large number of reforms. As mentioned earlier the increase in China’s labour force can be attributed to these reforms, these reforms helped move China away from an agricultural based country to a manufacturing giant. This factor is highlighted in the fact that before 1978 around 80 percent of the labour force worked in agriculture but by 1994 this figure had dropped to below 50 percent. The range of reforms also helped move the Chinese people away from outdated beliefs and techniques to more modern beliefs and techniques, this change in belief is also reflected in the movement away from old fashioned processes in mining, agriculture etc. to more modern and more efficient techniques.

To put it simple it was the opening of borders that allowed FDI to occur and it was the leaps in productivity that attracted FDI, but it was the large range of reforms that allowed both of these factors to occur.

Jimmy

China’s imports and exports, Chinability, http://www.chinability.com/Trade.htm

Top 15 crude steel producers, ISSB, http://www.issb.co.uk/global.html

National bureau if economic research, NBER, http://www.nber.org/digest/jul07/w12755.html

Why is China growing so fast, IMF, https://www.imf.org/EXTERNAL/PUBS/FT/ISSUES8/INDEX.HTM

List of countries by GDP, wiki, http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29

 

Inequality in China

27 Feb

Over the past three decades China has enjoyed an annual average growth rate in GDP of 9.8 percent, however with this growth comes a number of significant problems, for instance; Environmental degradation, growing wealth and income inequality. The focus for this week’s blog will lie in particular with the growing wealth and income inequality. The extent of the inequality is highlighted by China’s Gini coefficient figure of 0.477 (as of 2005) when compared to that of a developed country, in this instance Sweden which had a Gini figure of below 0.25 (as of 2005) and the warning level of 0.4 as set by the United Nations.

This growing disparity is largely fueled by the rural urban divide, this factor is exemplified when you take a geographical  view of China, where the majority of cities are located around the coastal regions in the East and the South. This is mirrored in the location of the wealthy, which follows the trend in cities. (As is seen in the figure below)

If however, the official Chinese figures are used, inequality does not seem to be as much a problem in the rural areas, for example in 2005 those living below the poverty line was only 2.8 percent however in reality the figure was closer to that of 15 percent when valued at the World Bank method.

http://www.theguardian.com/world/2011/nov/30/china-raises-rural-poverty-line

http://www.bbc.co.uk/news/business-13945072

http://www.project-syndicate.org/commentary/growth-and-the-chinese-economy-s-latecomer-advantage-by-justin-yifu-lin

http://inequalitywatch.eu/spip.php?article58

China’s unbalanced economy

20 Feb

In a typical economy consumer expenditure is usually the largest component of Gross Domestic Product (GDP), making up around sixty percent of total output, this however is not the case in China, where consumer expenditure accounts for only thirty five percent of GDP. A very surprising fact when you consider that China has almost a fifth of the world’s population. China however, makes up for this shortfall in consumer expenditure with high levels of investment, which make up around forty percent of China’s GDP. While large amounts of investment are necessary for a growing economy, it also brings with it a large number of problems.

Investment is considered very volatile and fluctuates wildly with the business and stock cycles, this means that relying on investment as a large component of GDP leaves China’s economy’s growth at risk of fluctuating with the business and stock cycle. In addition to this due to the high levels of Foreign Direct Investment (FDI), caused by China’s open door policy the majority of investment in China is controlled by external factors. This leaves China at a higher risk to exogenous shocks then countries with a more balanced economy. For instance a rise in interest rates in the United States could stifle investment due to the higher costs of borrowing thereby resulting in a fall in China’s GDP and possibly a recession. By relying too much on investment China limits its long term sustainable economic growth, as is with most countries developing countries experience high levels of economic growth but once past a certain threshold those levels of investment begin to fall until they reach a steady level, as is with most MEDCs, with regards to China this means that currently firms are willing to invest more and more since they see potential, however once these firms see China’s economy start to stabilize the levels of investment will start to fall, this means that China will have to fill the void left in order to maintain its economy.

In this case the only viable option is to increase consumer expenditure to normal levels.

But, what is the cause of China’s weak domestic demand, and how can it be resolved?

Most argue that due to the high levels of corruption and the general level of distrust in the banking system, resulting in poor access to consumer credit. Increased access to consumer credit would be very likely to stimulate consumer expenditure. Problems in China’s financial system also means that domestic consumption is limited in that due to consistent poor decision making by the state China has been left with large numbers of non-performing loans which inevitably has been left to the Chinese households to deal with. Another factor is a cultural affinity to high levels of saving, it can be argued that deep set in the Chinese mind is the importance of saving, this aspect is further entrenched by the low levels of “safety nets,” in China. This of course refers to items such as unemployment benefits, health care, etc. This makes saving almost essential for Chinese households. These facts are shown in the increase in demand for gold in China, which overtook India in 2013, this is mostly likely due to the fact that Chinese households see Gold as a solid investment or a safe way too store wealth . If the Chinese government wants to increase its domestic consumption it is clear what it has to do. It must increase confidence in the banking system thereby allowing more domestic lending, and saving which in turn will help boost internal investment. It must also try and change the cultural affinity to saving by increasing its benefit system and by making it reliable. By increasing domestic consumption China also increases its scope for FDI, for instance if it is seen that Chinese households have a high consumption level, firm are more likely to invest in China in order to access that market. For example the coca cola industry. This possibility is increased due to the high population levels in China.

In conclusion if the Chinese government wants a more sustainable economy it must reduce its reliance on foreign injections and increase its domestic infrastructure.

The Economic Times-China overtakes India in Gold demand 2013 http://articles.economictimes.indiatimes.com/2014-02-18/news/47451264_1_gold-demand-jewellery-demand-wgc-managing-director

China’s consumer spending rebounds  http://www.china.org.cn/english/140.htm

Low consumption needs serious reforms http://www.eastasiaforum.org/2011/11/22/low-consumption-china-needs-serious-reforms/

The economist-The world’s second biggest consumer http://www.economist.com/blogs/analects/2014/02/chinas-economy

List of countries by population http://en.wikipedia.org/wiki/List_of_countries_by_population

Consumption expenditure-The world bank http://data.worldbank.org/indicator/NE.CON.PETC.ZS

 

 

 

 

 

 

The cost of China’s economic miracle

13 Feb

Following the first stages of economic reform in 1978, China has seen its economy go from outside of the top 10 economies in 1980 to the second largest as of 2005. With this economic growth comes the usual perks; on average a higher standard of living as is evident in the increase in real disposable income of rural and urban households per annum. A fall in unemployment. 

However as is with everything this “miracle,” comes at a price. Although the economic growth has led to a large increase in disposable income, this has not translated well to wealth accumulation, this can be attributed to China’s development model, continuous replacement of capital. In this instance it refers to the large scale construction and destruction of buildings. Thereby making it difficult to accumulate wealth. For instance in the UK the majority of wealth is tied down in the housing market, if however these houses are constantly being replaced storing wealth in such a manner becomes very difficult. Another issue is that while China accounts for around 20 percent of global manufacturing, it is clear to see that this quantity does not necessarily equal quality as is shown by China’s reputation for the production of cheap knock off goods, this poor quality aspect was made especially evident in the 2008 milk powder scandal, highlighting to the world. Other problems include the high level of Government enterprises, foreign direct investment is a necessity for any economy, however due to the high level of government owned enterprises a barrier is created that makes foreign investment in Chinese firms harder, than it would be in a more free market.In addition China will soon suffer from an ageing population a problem common to many other countries, however unlike the other countries this problem has been exacerbated in China by the enforcement of its one child policy.

This is not to say that these are the only problems faced by the Chinese economy, but that these are among some of the most substantial.  If China wants to secure its place as the world’s dominant super power such issues will have to be addressed.

Jimmy

Emma Wall 2013 Investing in China: the pros and cons 

http://www.telegraph.co.uk/finance/personalfinance/investing/9937056/Investing-in-China-the-pros-and-cons.html

Zhang Jinming 2012 The negative effects of China’s development model

http://www.china.org.cn/opinion/2012-06/16/content_25658927.htm

The Economist 2013 Keeping Watch

http://www.economist.com/news/special-report/21590099-economic-success-has-given-china-greater-weight-not-nearly-enough-tip

BBC news 2012 China’s economic miracle 

http://www.bbc.co.uk/news/world-asia-china-20069627

International Monetary Fund http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/download.aspx