48 - Income Gap, Outcome Bad

Summary

It is certainly true that never before in human history have so many been lifted out of poverty as has been the case in East Asia over the last few decades. The suggested reasons for these are many, though few easily agreed upon.

In China, the poverty rate fell from 85% of the population to 27% between 1981 and 2004. An incredible 600 million moved above the poverty line, for we are after all talking about the most populous country in the world. In neighbouring Vietnam, the proportion of poor people dropped from 58% to 14% between 1993 and 2008.

As we know, Malaysia has also done remarkably well. In 1970, 49.3% of its people were poor, but by 2004, that figure had dropped to 5.7%. In 2007, it was as low as 3.6% but rose again to 3.8% in 2009.

Whether or not we agree with the definition of poverty used in all these cases, the statistical trend downwards is beyond doubt.

But also beyond doubt is the widening income gap. And that is going to be the largest challenge the region will have to face.

A quarter of a century ago, the Gini coefficient for China was around 0.3, which was not strange under communism's control economy. But a small income gap without growth was not a desirable situation in the long run. However, after Deng Xiaoping's ethos that being rich was glorious was fully accepted in the early 1990s, both wealth and inequality have been rising.

China's Gini coefficient today is a state secret (a very ominous sign indeed), but observers suggest that it is now close to 0.5. Anything above 0.4 on that scale, according to experts, is a warning sign, and social unrest is to be expected above that point.

Now, one can safely argue that this was part of the Deng's plan for economic development to remedy the ill effects of Mao Zedong's ultra-egalitarian ideology. Deng realized that he had to allow some to get rich first. In effect, his slogan was, “Let the Income Gap Grow”.

The trick now for his successors in this risky plan is to manage the next step—maintaining economic growth while decreasing inequality. A huge income gap is thus seen as a temporary condition which becomes a serious problem when ignored and allowed to continue.