I can’t say I was terribly surprised that there was no earth shattering result from the just concluded summit between Presidents Xi and Obama. It was certainly symbolically important because it was their first meeting as heads of state. But really, how many summits in world history have actually resulted in major changes?
If there was any surprise to me at all, it was that as the leaders of two of only three major countries in the world with any real economic growth (the other one being Germany), they didn’t seem to spend as much time as I would have thought discussing economic policy.
This is surprising to me because both countries are at an economic precipice. The U.S. is trying hard not to slip back into recession while China is trying hard to minimize the slowdown that now seems unavoidable.
A subset of my surprise was that on the topic of economic policy, President Xi did not discuss his vision of the “China Dream” with President Obama. After all, President Xi discussed it in his recent inauguration speech and income disparity does seem to be something that interests both leaders. I would’ve thought the Presidents might wish to compare notes on the subject.
I, for one, would have been very interested to know how President Xi intends to pursue his vision. After all, as they say, God or the Devil (I’ve heard it both ways) is in the details. I obviously don’t know how President Obama might have addressed the subject but if President Xi were to ask me, and I’d be quite happy to take his call if he did, I would advise him to tread quite gingerly.
Much was made about the release of China’s latest Gini coefficient earlier this year. The Gini coefficient, named after Italian mathematician Corrado Gini, measures the dispersion of a mass of income data from absolute sameness. Therefore, the higher the Gini, the greater that a country’s income varies from absolute equality. The Gini coefficient is not among the better known economic statistics, and its value for China had not been calculated for several years. And when a Gini statistic is ever released, it is inevitably accompanied by some requisite puns about a Gini out of the bottle or some other such thigh-slapper. (Google it up.)
Anyway, the number released by China’s National Bureau of Statistics was not terribly different from the one most recently calculated for the United States. However, a mass of comments followed about how troubling this is. And from the perspective of the Communist ideal, I suppose it would be troubling. But China has been easing down the yellow brick capitalist road for a good few decades now. Let’s not kid ourselves about Communism. It’s not coming back in any functional form. Therefore, we must actually consider that Gini number from a more realistic perspective, the capitalist one, including the American example.
Again, if President Xi were to ask me, I would ask him in return why he feels the Chinese and American levels of income inequality are necessarily bad? I emphasize “necessarily.” Although capitalism does not endorse income inequality per se, it is the sine qua non of capitalism that some people, by choice, luck or talent, will legally obtain more. Doesn’t capitalism permit and even promote the taking of entrepreneurial risks? Don’t some people have more appetite for risk taking than others? And doesn’t risk generally correlate with expected return? (Yes, yes and yes, if you’re having trouble.)
I contend that income disparity per se is far from the greatest socio-economic problem that countries face. Rather, it is opportunity disparity that is not only a big problem but actually grounds for revolution. That some people in a particular country will earn more than others is a realistic given. This may be because of differences in education, geography or capital but it exists everywhere and has existed throughout history. I believe most people understand this, however begrudgingly.
What stirs the masses to rage is not merely that some earn more. The tipping point is when the masses don’t perceive any opportunity to earn more and/or when officials take much more than they’ve earned. In other words, it’s corruption manifest in income disparity, which brings matters to a boil. For example, consider Duvalier in Haiti, Marcos in the Philippines and Suharto in Indonesia. How could any man possibly have obtained billions while in public office? They couldn’t and the people knew this. It was only a matter of time, admittedly a long time, before the people erupted. It was corruption and hyper-conspicuous consumption of said millions, rather than income disparity per se, which got them ignominiously deposed.
In his zeal to narrow China’s income disparity, I would hope for China’s sake that President Xi does not wind up dampening China’s incipient entrepreneur class. That may be killing the proverbial goose that lays the golden eggs. However, there’s a very simple solution, which admittedly would not be simple in implementation. President Xi could accomplish the trifecta of spurring entrepreneurial investment, narrowing income disparity and soothing the masses, simply by cracking down on corruption.
The same goes for the United States by the way. Thus, I can understand why President Obama might have been reluctant to address this issue following the week he’d just had but in essence, it would be about greasing the wheels of the prosperity itself. And I must assume that is a matter that interests both leaders.
Michael Justin Lee, CFA, is a lecturer in the department of finance at the University of Maryland and the author of “The Chinese Way to Wealth and Prosperity” (McGraw-Hill, 2012). His website is www.michaeljustinlee.com