Mind the Gap–II

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The widening gap between rich and poor in China–see the ADB report I posted earlier–has set off of a debate among China hands as to just how big a deal it is, and whether it’s unusual given where China is in its economic development. What follows is what Michael Pettis, a finance professor at Beida (Peking University) had to say about this earlier today. In short, he argues that China’s current income disparities are hardly unprecedented.
Mike is one of the more knowledgeable folks around about the Chinese economy and in particular its financial system– and the increasingly critical role China now plays in a global financial marketplace that is, as we speak, having a minor heart attack (More on this later).
For those interested in those subjects, his website, just launched, will be of great value. It’s at piaohaoreport.sampasite.com

I am not sure if (the widening gap between rich and poor here) has to do with post-industrial conditions, or simply with the fact of globalization. During all previous globalization phases, by which I mean periods of “industrial revolution” combined with massive cross-border capital flows and increases in trade (e.g. 1820-30s, 1860-70s, 1880-1914, 1920s, 1960-70s, and 1990-present) there seems to have been systematic increases in income inequality in the affected countries, with the 1960-70s period being, I think, the only exception.

The reason may be that the technology and asset price booms that seem to be the consequence of liquidity expansion tend heavily to favor owners of assets, especially financial assets, and the highly educated (and, what makes things worse, these are often the same class of people).

In the case of China, and perhaps on a lighter note, maybe there is
another reason. One of the only things I can remember from reading Gone With the Wind in my teenage years is when Rhett Butler tells someone that the only two times you can make a great deal of wealth in a hurry is when a world is being created or when a world is being destroyed. It seems to me that in China we are seeing both processes at the same time.

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