July 29, 2014
The West has been enthralled with Thomas Piketty’s bestseller, but his work seems less persuasive in Asia.
Thomas Piketty has stunned the United States and Europe with his bestseller analysis of the growing inequalities in developed nations. For middle-class Western readers, influenced by the Occupy Wall Street movement and the lasting consequences of economic crisis in Europe, the thesis about wealth concentration being equal to that of 100 years ago has clearly touched a nerve.
However, less attention has been paid to the story told by other data in Piketty’s book. Emerging economies, especially in Asia, have actually reduced the inequality gap when compared with developed nations. “Regardless of what measure is used, the world clearly seems to have entered a phase in which rich and poor countries are converging in income,” writes Piketty in the first chapter of Capital in the Twenty-First Century.
This gap reduction is mostly the result of economic growth in very populous nations such as China, India and Brazil. According to a study published by the National Bureau of Economic Research (NBER), the North-South GDP/capita gap was reduced by 28 percent between 1990 and 2009 (or 58 percent if we only take China, India and Brazil). Other key indicators of global capitalism, including the share of world trade, the market capitalization or the percentage of global exports, also demonstrate how the developing nations have made a “huge leap forward.” Again, the Asia-Pacific region is the best example.
In fact, Piketty clearly acknowledges this phenomenon and includes several figures that demonstrate almost the exact opposite of the stories told through the graphics commonly published by the international media. It was in the 1980s, just as the super rich in the United States, France and United Kingdom started to increase their share of national wealth, that many emerging countries started their wealth catch-up process. “From 1900 to 1980, 70-80% of the global production of goods and services was concentrated in Europe and America, which incontestably dominated the rest of the world. By 2010, the European-American share had declined to roughly 50%, or approximately the same level as in 1860,” explains Piketty. According to that analysis, the world has never been as equal as it is today, at least since the Industrial Revolution.
Although this convergence process has been very important, inequalities between rich and poor countries are still wide, and while some countries have significantly reduced that gap, many others are as far behind as they were 100 years ago. “India and China are very large economies and both of them have populations of more than one billion, so when you compare the North and the South, including China, definitely there has been a massive catch-up; but if you exclude China you would see that the change in the inequality might not be as great,” says Mudit Kappor, assistant professor at the Indian School of Business.
Moreover, while the gap with developed nations has decreased, the price that many emerging economies have paid is an increase in inequality within their national borders. Almost all of the most unequal countries in the world, at least according to the Gini coefficient, are in the South, mostly in Latin America but also in Africa and Asia.
Thomas Piketty talks very briefly about Asian economies in his book, but when he does so, he argues that the richer only keep getting richer – and fast. Although the data is not very accurate, his analysis of South Africa, India, Indonesia, Argentina, Colombia and China concludes that the wealthiest 1 percent have continued to dangerously accumulate more and more capital. The most visible example might be the Forbes Billionaires List, which since 2010 has been led by a Mexican, Carlos Slim, and where more and more Indian and Chinese have been moving up year after year.
Economists in Asia have obviously become interested in Piketty´s bestseller (among other languages, there is a coming translation into Chinese), but so far his theses have not been as well received as in the West. “In India, Piketty´s book hasn´t attracted as much attention as in the U.S. Quite understandably, because India is not facing the concerns that he is talking about,” explains Mudit Kapoor. “I’m not sure of the influence of Piketty’s book, and perhaps the reason is because inequality in Asia is not a new story, inequality in Asia has been there for centuries now,” says Bala Ramasamy, professor of economy at the China Europe International Business School of Shanghai (CEIBS).
The doubts over Piketty´s ideas are explained not by the lack of inequality, but by the different form of economic environment in Asian countries. One of the most important theses of the French economist is that when the rate of economic growth (g) is slower than the return on capital (r) – where he includes profits, dividends, interests and rents – then inequalities increase. His famous formula (r > g) means that in these cases the wealth accumulated in the past can grow faster than wages, which make for the most important source of wealth for the middle and low-income workers. “The interesting thing is that India and China are countries with very high rates of growth, so if you use the logic that Piketty applies, then India and China will not have such an inequality problem as compared with the countries whose economies are slow,” says Mudit Kapoor.
Apart from the differences in the rate of growth, other economists point out that inequalities have other particularities in the East. “I think in many Asian emerging markets the inequality problem is between the rich and the poor; whereas, I believe, in the developed world the problem is between the middle-income and the rich. So the gap that we are talking about in the emerging markets is much larger, because we still have a significant portion of the population who are still below the poverty line,” says Bala Ramasamy.
Most of the arguments Piketty makes are based on numbers from developed Western nations like the U.S., France and the U.K., which enjoy a high GDP per capita and high living standards. In the populated countries of Asia, however, some economists believe that inequalities are a necessary evil. “In emerging economies, at least in India, we have to focus fundamentally on growth. First we need to increase the size of the pie before we can talk about meaningful distribution. If the government doesn’t have resources, there’s nothing to redistribute,” says Mudit Kapoor.
Another weak point in Piketty’s thesis, at least according to several experts in Asia, is his exclusive emphasis on income. In many countries of Latin America, Africa and Asia, the problem of inequality is linked with the urban/rural divide, gender discrimination or access to health and education. In China, cities like Beijing and Shanghai might have standards of living close to those of developed nations, but in provinces like Guizhou or Gansu living conditions are closer to those in Sub-Saharan Africa. In India, on the other hand, wages have increased significantly in the service sector, while the agricultural sector –where half the population still works – have stagnated. “Not every citizen in India has equal access to the government, to the system of justice. That is the biggest inequality battle that we have to fight. It’s not a question of income inequality, because in any case we are a Third World country with very low level of income,” argues Mudit Kapoor.
Piketty also makes a harsh critique of market economy and private property, but many emerging economies in Asia face different challenges, such as state monopolies, unequal access to credit, or government corruption. In countries like China and India a big part of the population believes that globalization and the free market are responsible for their increasing wealth in the last decades, so there is a strong support among intellectuals and economists for more market reforms. “We need more economic freedom, we need to make opportunities available to everyone. Small and medium enterprises don’t grow, they are limited because most of the opportunities are monopolized by the state or by some of the larger companies that are already in the country,” says Bala Ramasamy in Shanghai.
One of the intriguing aspects of Piketty’s analysis is that, except for the United States (the one rich nation with income inequalities similar to developing countries) some of the other nations he explores (France, United Kingdom, Germany and Sweden) are among the most equal in the world. It is surprising that his work proved much less persuasive when it came to discussing the emerging economies, which make for some of the most unequal societies of the planet.
Daniel Mendez is a multimedia journalist based in Beijing.
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