New Economist

China: poverty down, inequality up

Poverty in China has fallen massively, but other social disparities - particularly income in equality - have grown. David Dollar, the World Bank Country Director for China, writes about Poverty, inequality, and social disparities during China's economic reform

China has been the most rapidly growing economy in the world over the past 25 years. This growth has fueled a remarkable increase in per capita income and a decline in the poverty rate from 64 percent at the beginning of reform to 10 percent in 2004.

At the same time, however, different kinds of disparities have increased. Income inequality has risen, propelled by the rural-urban income gap and by the growing disparity between highly educated urban professionals and the urban working class. There have also been increases in inequality of health and education outcomes.

Some rise in inequality was inevitable as China introduced a market system, but inequality may have been exacerbated rather than mitigated by a number of policy features. Restrictions on rural-urban migration have limited opportunities for the relatively poor rural population. The inability to sell or mortgage rural land has further reduced opportunities.

China has a uniquely decentralized fiscal system that has relied on local government to fund basic health and education. The result has been that poor villages could not afford to provide good services, and poor households could not afford the high private costs of basic public services. Ironically, the large trade surplus that China has built up in recent years is a further problem, in that it stimulates an urban industrial sector that no longer creates many jobs while restricting the government's ability to increase spending to improve services and address disparities.

The government's recent policy shift to encourage migration, fund education and health for poor areas and poor households, and rebalance the economy away from investment and exports toward domestic consumption and public services should help reduce social disparities.

Colonialism and inequality

Maybe inequality between nations is less about the present than the past? So argues Glasgow economist Luis Angeles in a new article in the July 2007 issue of the European Economic Review. His article, Income inequality and colonialism, says that "colonial history is a major explanatory factor" behind today’s large differences in inequality among the world’s countries:

This paper proposes that colonialism is a major explanation behind today's differences in income inequality across countries. We argue that income inequality has been higher in the colonies where the percentage of European settlers to total population was higher, as long as Europeans remained a minority. The countries where Europeans became the majority of the population did not suffer from high inequality. These initial differences continue to hold today. The empirical evidence we provide strongly supports our thesis.

At the moment the paper is available on SSRN (though that may not last). An ungated version was published as University of Manchester Economics Discussion Paper EDP-0543 (PDF).

Women and wealth

How many of the really rich are women? Two recent reports suggest divergent trends for wealthy women across the Atlantic. In the United States, a new NBER working paper by Lena Edlund and Wojciech Kopczuk, Women, Wealth and Mobility, concludes:

Using estate tax returns data, we observe that the share of women among the very wealthy (top 0.01%) in the United States peaked in the late 1960s, reaching almost 50%. Three decades on, women's share had declined to one third, a return to pre-war levels.

But not so in the UK. According to a new report by Barclays Wealth, female millionaires are set to outnumber male millionaires in the UK - though not quite yet. The Scotsman reports:

Female millionaires are set to outnumber their male counterparts in the UK for the first time, a new report claims. ...Women will account for 35 per cent of UK millionaires by 2010 and 53 per cent by 2020, the report found. ...The combined wealth of Britain's richest women in 2007 is now £33.27 billion.

A separate report by the Centre for Economic and Business Research found that women currently hold 48 per cent of Britain's personal wealth and that this proportion will grow steadily to 60 per cent by 2025 as women continue to outnumber men at universities and excel in business and as entrepreneurs.

In a statement, Barclays Wealth said: "The affluence and influence of women is growing and is increasingly fuelled by their own individual enterprises - highlighting that the perception of inheritance and marriage as the lead sources of female wealth is outdated."

Explanations welcome.

America's inequality conundrum

The New York Times Magazine has a long piece by Roger Lowenstein on what he calls The Inequality Conundrum. This excerpt (emphasis added) focuses on the policy choices facing government:

You can boil down most economic policy debates — starting with Hamilton versus Jefferson and moving to Bush versus the Democrats — to this tension: how can you promote equality without killing off the genie of American prosperity? The trade-off is clear at the extremes but fuzzier in the middle. A little redistribution, cleverly designed, doesn’t hurt. One example might have occurred during the late ’90s. The stock market was crowning multimillionaires, but the poor also did a little better. Among households with children, cash earnings of the poorest quintile doubled (though their earnings, at $13,000, remained meager and have tapered off more recently).

Most of the improvement at the bottom was because of people working more hours rather than for higher wages: a red-hot economy provided more jobs. The retooled federal welfare program, however, as well as the expansion of the earned-income tax credit (E.I.T.C.), gave people an added financial incentive to work.

Some redistribution is clearly good for the entire economy — providing public schooling, for instance, so that everyone gets an education. But public education aside, the United States has a pretty high tolerance for inequality. Americans care about “fairness” more than about “equalness.” We boo athletes suspected of taking steroids, but we admire billionaires.

...When it comes to raising the bottom in the short term, Washington basically has two choices: it can try to change market outcomes or it can redistribute after the market results are in. The first method is more intrusive. It includes limiting trade, regulating the workweek or restricting access to certain jobs, through mechanisms like licensing. Since the ’70s, the United States has moved away from such market interventions, but Congress seems to be acting on two of them. It just voted to raise the minimum wage, for the first time in 10 years, and it is seeking a compromise to revise the immigration laws.

And what about redistribution after the fact? The United States does less of it than Europe, and less of it than we used to. Even though the United States is richer than Belgium, a poor person in Belgium is better off than one here. On the other hand, the price for being Belgian is steep: Belgium’s median disposable income — what people have left to spend after they pay taxes and collect welfare-type payments — is only 72 percent as high as ours.

Even in the United States, the rich pay a disproportionate share of the federal income tax, which mildly reduces inequality. Other taxes, however, like Social Security, are regressive: the rich pay a lesser share. Thus, the upper tenth of households pay 70 percent of the income tax, but only 52 percent of all federal taxes. State sales taxes make the system even more regressive, because poorer people spend a higher share of their total income on them. Kevin Hassett, of the American Enterprise Institute, estimates that a family of four earning $50,000 pays exactly the same share of its income (30 percent) on taxes as one earning $150,000.

There is little agreement on how much redistribution is too much. But common sense tells you that a small increase in taxes when rates are relatively low, as they are now, isn’t going to curb people’s animal spirits. Higher taxes in and of themselves, however, won’t cure inequality. The point of taxing, as Becker is quick to point out, isn’t to confiscate: it’s to raise revenue for things that will benefit society, in this case helping those at the bottom. Though such thinking is a good argument for further expanding the E.I.T.C., which rewards people for working, in the long run you want to get folks moving up the skills ladder, so fewer people are in need of wealth redistribution. That this hasn’t happened is rather a conundrum. The incentives are certainly there. College grads make more than 40 percent more than high-school grads. Those with postgraduate degrees earn twice as much.

To Becker, this is a good thing; it offers an incentive for people to pursue education. The trouble is, it hasn’t worked. The Americans that Freeman once called overeducated are plainly undereducated today. Only about a third of the population graduates from college. Among the poor, there has been only a very slight increase in college-graduation rates.

To get more Americans to enroll in and complete college, the theory goes, you can either fix the schools (more teachers, longer school years, more student loans or fix the students (more nurturing of kids from disadvantaged homes). Both approaches would cost a lot. But if you’re worried about inequality, it’s hard to see any alternative. Hamburger flippers simply don’t command a high wage. We can pass laws to change that — a minimum price for cheeseburgers, maybe — or we can, finally, invest in teaching the flippers to do something else.

UPDATE: Mark Thoma has also linked to the piece.

Bernanke on inequality

It's good to see Fed Governor Ben Bernanke talk today about The Level and Distribution of Economic Well-Being. Not another contribution to the 'happiness debate' - the talk is really about inequality. In this excerpt he propounds the standard skill-biased technical change thesis:

..understanding the sources of the long-term tendency toward greater inequality remains a major challenge for economists and policymakers. A key observation is that, over the past few decades, the real wages of workers with more years of formal education have increased more quickly than those of workers with fewer years of formal education. ...To a significant extent, to explain increasing inequality we must explain why the economic return to education and to the development of skills more generally has continued to rise.

Economists have hypothesized that technological advances, such as improvements in information and communications technologies, have raised the productivity of high-skilled workers much more than that of low-skilled workers. ...If new technologies tend to increase the productivity of highly skilled workers relatively more than that of less-skilled workers--a phenomenon that economists have dubbed "skill-biased technical change"--then market forces will tend to cause the real wages of skilled workers to increase relatively faster. Considerable evidence supports the view that worker skills and advanced technology are complementary.

Buit it doesn't explain all recent trends:

Although skill-biased technical change appears to be an important cause of the rise in earnings inequality, it does not provide a complete explanation for that trend. The hypothesis cannot explain, for example, why the sharp rise in investment in information technology in the 1990s was not accompanied by a higher rate of increase in wage inequality. Nor can it explain why the wages of workers in the middle of the distribution have grown more slowly in recent years than those of workers at the lower end of the distribution, even though, of the two groups, workers in the middle of the distribution are typically the better educated (Autor, Katz, and Kearney, 2006; Autor, Levy, and Murnane, 2003).

As for the policy conclusions, you can probably guess those:

...the challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible. Policies that focus on education, job training, and skills and that facilitate job search and job mobility seem to me to be a promising means for moving toward that goal. By increasing opportunity and capability, we help individuals and families while strengthening the nation's economy as well.

No surprise there. But I was surprised (and disappointed) that he failed to cite the excellent recent paper by fellow FOMC member Janet Yellen, on Economic Inequality in the United States.

Krugman on poverty in the UK

Paul Krugman has some nice things to say about the UK government's efforts to reduce poverty in his 25 December New York Times column. As usual, it's subscribers only - but Mark Thoma has some lengthy excerpts:

Helping the Poor, the British Way, by Paul Krugman, Commentary, NY Times:
It’s the season for charitable giving. And far too many Americans, particularly children, need that charity. ...

[F]our decades after L.B.J. declared war on poverty ..., I’m not sure whether people understand how little progress we’ve made. In 1969, fewer than one in every seven American children lived below the poverty line. Last year, although the country was far wealthier, more than one in every six American children were poor.

And there’s no excuse for our lack of progress. Just look at what the British government has accomplished over the last decade.

Although Tony Blair has been President Bush’s obedient manservant when it comes to Iraq, Mr. Blair’s domestic policies are nothing like Mr. Bush’s. Where Mr. Bush has sought to privatize the social safety net, Mr. Blair’s Labor government has defended and strengthened it. Where Mr. Bush and his allies accuse anyone who mentions income distribution of “class warfare,” the Blair government has made a major effort to reverse the surge in inequality and poverty that took place during the Thatcher years.

And Britain’s poverty rate, if measured American-style ... has been cut in half since Labor came to power in 1997.

Britain’s war on poverty has been led by Gordon Brown, ... Mr. Blair’s heir apparent. There’s nothing exotic about his policies, many of which are inspired by American models. But in Britain, these policies are carried out with much more determination.

For example, Britain didn’t have a minimum wage until 1999 — but ... Britain’s minimum wage rate is now about twice as high as ours. Britain’s child benefit is more generous than America’s child tax credit, and it’s available to everyone... Britain’s tax credit for low-wage workers is similar to the U.S. earned-income tax credit, but substantially larger. And don’t forget ... Britain’s universal health care system...

The Blair government hasn’t achieved all its domestic goals. ... But there’s no denying that the Blair government has done a lot for Britain’s have-nots. ... Providing a strong social safety net requires a higher overall rate of taxation than Americans are accustomed to, but Britain’s tax burden hasn’t undermined the economy’s growth.

What are the lessons...?

First, government truly can be a force for good. Decades of propaganda have conditioned many Americans to assume that government is always incompetent... But the Blair years have shown that a government that seriously tries to reduce poverty can achieve a lot.

Second, it really helps to have politicians who are serious about governing, rather than devoting themselves entirely to amassing power and rewarding cronies.

While researching this article, I was startled by the sheer rationality of British policy discussion, as compared with the cynical posturing that passes for policy discourse in George Bush’s America. Instead of making grandiose promises that are quickly forgotten — like Mr. Bush’s promise of “bold action” to confront poverty after Hurricane Katrina — British Labor politicians propose specific policies with well-defined goals. And when actual results fall short of those goals, they face the facts rather than trying to suppress them and sliming the critics.

The moral of my Christmas story is that fighting poverty isn’t easy, but it can be done. Giving in to cynicism and accepting the persistence of widespread poverty even as the rich get ever richer is a choice that our politicians have made. And we should be ashamed of that choice.

The British debate is much less upbeat, with most commentators from both the right and the left giving little credit to Blair and Brown for what they've achieved so far. True, low pay or child poverty or homelessness have not been eradicated in Britain - but they're considerably less of a problem now than in 1997. Some of that progress reflects specific anti-poverty programmes. Some reflects a longish period of stable growth and falling unemployment. Not all the praise should go to our political leaders - but some, surely?

Which matters: nature or nurture?

Both do, according to a pathbreaking paper presented to Harvard's Inequality Summer Institute earlier this year. Using a quite remarkable Swedish dataset by merging data from administrative sources and censuses, the authors Anders Björklund (Stockholm University), Markus Jäntti (Abo Akademi University) and Gary Solon (University of Michigan) examine the correlation of socioeconomic status  between parents and children, and find that both nature and nurture matter. The paper, Nature and Nurture in the Intergenerational Transmission of Socioeconomic Status: Evidence from Swedish Children and Their Biological and Rearing Parents (PDF), concludes:

The adult socioeconomic status of Swedes born between 1962 and 1965 appears to be positively associated with the socioeconomic status of both their biological parents and their rearing parents, when those parents are not the same as each other as well as when they are. Accordingly, our paper is entitled “Nature and Nurture,” not “Nature vs. Nurture.” We see no logical or empirical need to choose between the two. Our evidence suggests substantial importance for both.

Note: An earlier paper by the two authors, Influences of Nature and Nurture on Earnings Variation:
A Report on a Study of Various Sibling Types in Sweden (PDF), published in 2005, used data from the Swedish Twin Registry, to examine the importance of genes and environment in accounting for earnings variation. It concluded that genetic influences were important:

Even our smallest estimates of the genetic component of earnings variation, however, suggest that it accounts for about 20 percent of earnings inequality among men and more than 10 percent among women.

However, almost two-thirds of earnings variation could be explained neither by genetics or environment:

Although our results point to a significant role for genetic variation, perhaps the most striking finding is the most obvious one – about the importance of non-shared environment. The largest sibling correlation in earnings that we estimate is a 0.36 correlation for monozygotic twin brothers. Even though these brothers have identical genes and, according to our preferred model, experience even more similar environments than other sibling pairs do, an estimated 64 percent of their earnings variation is explained by neither genetic nor environmental resemblance. In other words, much and perhaps most of earnings variation in Sweden stems from environmental factors that are not shared even by monozygotic twins.

Neither genes nor the environment in which we are raised determine (most of) our future earnings.

Who are the world's wealthy?

Both the BBC News and The Economist point to a new World Institute for Development Economics Research study on The World Distribution of Household Wealth. The report was written by James Davies (University of Western Ontario), Anthony Shorrocks and Susanna Sandstrom (WIDER), and Edward Wolff (New York University).

The study finds that wealth is shared much less equitably than income: the richest 2% of adults in the world own more than half of global household wealth. The definition of wealth used is broad: the value of physical and financial assets less debts, not just money. Here is an excerpt from the paper's (PDF) conclusions:

This paper has provided a first estimate of the world distribution of household wealth. We have seen that the distribution is highly concentrated - in fact much more concentrated than the world distribution of income, or the distribution of wealth within all but a few of the world’s countries.

While a typical share of the top 10 per cent of wealth-holders within a country would be about 50 per cent, and the median Gini around 0.7, we have estimated that for the world as a whole the share of the top 10 per cent was 85 per cent in the year 2000 and the Gini equalled 0.892 using official exchange rates, Milanovic (2005) estimates that the world income Gini was 0.795 in 1998.

While wealth (and income) concentration is somewhat less when the estimates are done on a PPP basis, we have argued that the large share of wealth that is owned by people who can readily travel and invest globally means that converting at official exchange rates is preferable for many purposes when one is studying the distribution of wealth, rather than income distribution or poverty.

According to the study, almost all of the world’s richest individuals live in North America, Europe, and rich Asia-Pacific countries. Each of these groups account for about one-third of the world’s wealthiest 10%. The Economist is not wrong to have called its piece Winner takes (almost) all.

Are China's poor better off?

Not everyone in China is benefiting from the economy's stellar growth, according to a new World Bank report. FT Beijing correspondent Richard McGregor reports that China’s poorest worse off after boom

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.

“Preliminary analysis on Chinese data indicates that average income of the bottom decile went down slightly between 2001 and 2003, whereas all other income categories saw significant increases,” said Bert Hofman, the bank’s lead economist in China. “Our analysis suggests that a considerable number of people below the poverty line were hit by an income shock – they only kept up consumption by spending their savings.”

The findings challenge the basis of government policies aimed at narrowing the country’s politically sensitive wealth gap. ...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 fall in income for the poor cannot be explained by declining farm incomes, as food prices were rising at a faster rate than urban prices in December 2003. Over the period that the study covers, inflation was low and in one year, 2002, negative.

The findings challenge the basis of government policies aimed at narrowing the country’s politically sensitive wealth gap. Hu Jintao, China’s president, who came to power in 2002 and is likely to win a second five-year term next year, has made narrowing the gap between rich and poor a centrepiece of his administration’s economic policies.

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 also reported the findings today: In China, Growth at Whose Cost? The story, by Andrew Batson and Shai Oster, points out that "the poorest of the country's 1.3 billion people are getting even poorer."

From 2001 to 2003, as China's economy expanded nearly 10% a year, average income for the poorest 10% of the country's households fell 2.5%, according to an analysis by the World Bank that has been presented to the Chinese government. Those roughly 130 million Chinese earn $1 a day or less, the World Bank's global benchmark for poverty.

Meanwhile, the nation's total income rose sharply, and other income groups saw gains, suggesting that the rich are getting richer at the expense of the poorest.

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.

...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.

Unfortunately I have not been able to find the report on the main World Bank website, or their China website. If anybody can send me a link, I'd appreciate it.

UPDATE: Dave Altig at Macroblog has also posted on this report. He comments:

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.

Human Development Report 2006

The UNDA has just published the 2006 Human Development Report. The full report is available online, with this year's issue focussing on 'the global water crisis'.

The latest Human Development Index, which analyses 2004 statistics from 175 UN member countries, is published in the report. It once again ranks the Nordic and Anglo-saxon economies highly, accounting for seven of the top ten: 

1. Norway
2. Iceland
3. Australia
4. Ireland
5. Sweden
6. Canada
7. Japan
8. United States
9. Switzerland
10. Netherlands

Finland, for once, didn't come first - it ranked 11th. The United States moved up from tenth to eighth place. The UK was 18th, down from 15 in 2005 "because of a change in how education statistics are reported". The press release notes:

After a costly setback in human development in the first half of the 1990s, Central and Eastern Europe and the Commonwealth of Independent States (CIS) have recovered strongly, and progress since 1990 in East and South Asia continues to accelerate. But  sub-Saharan Africa shows no sign of improving, principally because of the devastating effect of HIV/AIDS on life expectancy.