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Home >> Opinion
UPDATED: 15:19, July 20, 2006
The limitation of the Gini Coefficient in China
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A research by the Finance Ministry has concluded that China's Gini Coefficient stands at 0.46, which is well above the internationally recognized warning line of 0.4. It has sparkled wide spread concern over the inequality in income distribution and possibility of social turbulence and economic slump.

The real situation, however, seems to have offered an ironic reality to any other economy which is undergoing a transitional phase. While the Gini Coefficient is up, China still experiences fast growth for its economy, reduced poverty for its population, a low-income group that earns more, and has an improved quality of life for people.

Is the Gini Coefficient still a perfect indicator of the rich-poor gap in China? This is the interview of Wei Jie, a well-known Chinese economist and Director of the National Center for Economic Research at Tsinghua University.

Q: Are there any limitations in the Gini Coefficient?

A: It is true that the Gini Coefficient reflects information of different income groups. But the analysis of income gap is a different concept from the analysis of the influence of the income gap.

Countries, which have finished the urbanization process and industrialization process, enjoy social stability and economic rise under a Gini Coefficient of 0.3-0.4. Those with a Gini Coefficient higher than 0.4 have too large an income gap and suffer from a sluggish economy and serious social problems. In these cases, the criteria and analysis of income gap overlaps with that of the impact of income gap.

In China' case, however, where urbanization and industrialization are far from being finished and urbanization lags far behind industrialization, criteria applied to economies which have completed the processes may not work well.

Theoretically, the industrialization and urbanization process brings about a flow of labor and capital to urban areas and industrialized sectors, which in turn benefits urban residents and capital owners more in the income distribution and deteriorates the income gap.

Once the urbanization and industrialization process has been finished, the capital will return to the agricultural sector to relieve the income inequality.

Therefore, the Gini Coefficient will first go up and then down. It is natural to see countries in the process of urbanization and industrialization with a higher Gini figure than those that have completed the process.

The criteria should be softened when it comes to economies that are still going through the urbanization and industrialization process.

Although China has a Gini Coefficient of more than 0.4, which indicates a severe income gap, ithas not seriously shown negative impact on the economy. Nor has this hindered the industrialization and urbanization process. That means that it does not suggest an alarming impact on the income gap.

Q: The Gini Coefficient is a static indicator. What about its role in dynamic analysis?

A: Yes, it is static. It reflects well the changes of the income gap in a year. It does not tell us dynamic changes within a particular income group.

For instance, when the Gini Coefficient rises from 0.35 to 0.4, two scenarios will be possible behind the rise. One is that incomes increase for each group but the high-income group has earnings rise faster than the low-income group. This leads to a wider income gap, which is made evident in the Gini Coefficient.

The other is that the low-income group earns even less while the high-income group earns more money which also results in a bigger Gini figure.

The changes of the income structure must be considered when analysis is made on the income gap. The Gini Coefficient itself does not tell the whole story.

China witnessed a fast growth of Gini Coefficient over the 20 years since 1981 when the Gini was only 0.288 until 2001 when it rose to 0.447. But people's income also rose. Urban residents saw more money in their pockets and enjoyed a better life between 1988 and 19995. The widening income gas was widely accepted.

From 1996 to 2004, complaints were heard among urban low-income groups, especially those in poverty whose incomes tumbled. There was no drastic social problem as even the poor groups enjoyed income growth.

From 2002 to 2004, the five incomes sub-groups among rural residents all made better money than previously. Thus the existing gap was still acceptable.

Q: What does the Gini Coefficient imply under the rural-urban dual structure?

A: The Gini Coefficient integrated the income gap of all people, no matter whether experienced in urban or rural areas. The same Gini Coefficient, for example, 0.4, may happen in two kinds of social structures.

In the rural-urban dual structure, as in China now, the income gap within the urban area or rural area is small, but the gap between them is big. Then the overall gap is up to a Gini Coefficient of 0.4.

In an urbanized society where the gap between urban and rural areas is very small, the Gini Coefficient may also be 0.4.

China's large Gini Coefficient is caused by the rural-urban dual structure. The data from the National Bureau of Statistics shows that the Gini within the urban area was only 0.23 in 1988 and rose to 0.319 in 2002, still much below 0.4. The Gini Coefficient was 0.303 in 1988 and 0.366 in 2002 for rural areas, also well below 0.4.

This meant that residents did not feel much affected by the income gap. The separate Hukou and employment system between rural and urban areas in China hardly made residents feel the difference in income.

In this case, residents are not so impressed by the income gap. The high Gini Coefficient is acceptable to them.

Q: The Gini Coefficient integrates information about various income groups. Will that reflect the real scenario of the income structure?

A: No. It does not reflect the income structure. Let's have a look at the income structure over the years. The four lowest income groups are all farmers. An analysis of their total population and income finds their annual income per capital was up from 394.37 Yuan in 1988 to 1711.5 Yuan in 1999. However, its share in the national income was down from 26.42 percent in 1988 to 20.25 percent in 1999. But the Gini Coefficient did not reflect the increasing inequality.

Although the Gini Coefficient in 1997 was similar to that in 1993, income of the poorest groups in 1997 accounted for less in the national income than they did in 1993, indicating more severe inequality in 1997.

From that, we see changes in the income structure, which are not evident in the Gini. The shrinking share of low-income groups in the national income suggests deterioration in quality of situation. These are changes that the government must pay attention to.

By People's Daily Online


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