Stiglitz: Inequality an equal concern for China, U.S.

Published: Apr 2, 2014 1:33 a.m. ET




BEIJING (Caixin Online) — Countries will pay a high price for their social inequality, both economically and politically, says economist Joseph Stiglitz.

About Caixin
Get the Caixin e-newsletter

The Nobel laureate argued in his latest bestseller “The Price of Inequality” that inequality will hinder dynamic economic growth, but more importantly, it will undermine the public’s confidence in a country’s institutions and erode trust in politicians.

China has done very well in poverty alleviation over the past three decades, Stiglitz told Caixin in an interview, but inequality has emerged because some have grown much wealthier than others.

Thus, instead of pursuing GDP growth, it is critical the Chinese government assess its economy by employment figures in order to create enough jobs.

Other factors such as air quality should also be taken into account to ensure growth benefits the broader population, the 71-year-old economist says. He also suggested the Chinese government make more efforts to support research and education.

In a recent interview with Caixin, the veteran observer of China’s economy discussed his view on the wealth gap, industrial policies and the government’s reform priorities. Excepts of that interview follow.

Your latest book talks about the price of inequality, which is very pertinent to both the United States and China. The Gini coefficient of the two countries is almost the same, surprisingly. What observations would you make of that?

The Gini coefficient is almost the same. The situations are different, and the nature of inequality is different.

So for instance, over the last 30 years, China has done a lot to reduce poverty at the bottom, and the people in the middle have done very well. Where the inequality has come is that people at the top have done even better.

Also, in the early stages of development, it’s almost always the case that some parts grow faster than others. The coast grows faster than the west, urban areas always grow faster than the rural areas.

So in the early stages of development, it is quite often the case that inequality increases. It’s not an excuse, but it is a description of what often happens. It’s also a warning that one has to take strong policies to try to prevent this from getting worse, policies to try to keep the country together.

The distinctive aspect of the U.S. is that it has become the country, among well-developed countries, with the highest level of inequality, whereas China, by any means, does not have the worst inequality amongst the emerging markets. Its increase is a worry, but it’s not the worst. In the U.S., it’s a real worry because it is clearly the worst.

The nature of inequality in the U.S. is that it has all three aspects. The top is getting a larger and larger share. Between 20% and 25% [of wealth] goes to the top 1%. The share of the top 10% has increased three- to fourfold in the last 30 years.

The bottom is getting poorer. The fraction of the population in poverty has increased. One out of 40 American children live in poverty, and then the middle is stagnating. The median income in the U.S. today is roughly the same as it was a quarter century ago.

AFP/Getty Images
Former World Bank chief economist Joseph Stiglitz

The wealthiest 50 delegates on China’s congress control $15.3 billion, while the 50 richest members of U.S. congress only controls $1.6 billion in total. So does that mean the U.S. Congress represents the people, whereas China’s represents rich capitalism?

I think in both countries have to be sensitive to economic inequality getting translated into political inequality, and political inequality creating economic inequality. It’s a vicious circle that one has to worry about undermining our economy and our society. So I think that’s an ailment that is common in both.

The title of my book “The Price of Inequality” reflects my judgment that we are paying a high price for this inequality, a high price in economic performance. We could have a faster growing economy, a more dynamic economy with more equality. But we’re also paying a political price. The sense of confidence in our institutions is being undermined. If citizens don’t believe that politicians are making decisions on their behalf, it corrodes trust.

Now, in the U.S., the people making the decisions may not be the wealthiest, but they may be making the decisions on behalf of the wealthiest because the wealthiest are paying them. That’s the wealth behind power.

In fact, the problem is getting elected in the U.S. is extremely expensive. In the last election, both candidates spent $1billion. Now they didn’t have that billion dollars. They had to raise it, and when you raise it from people, most weren’t doing it as an act of charity but as an investment. And when they make an investment they expect a return.

What do you think China is not doing so well on industrial policy, and what’s the right plan going forward?

Actually China has done well. It hasn’t been perfect, but no country is perfect.

Whenever a private sector invests, sometimes it wins, sometimes it loses. But the very nature of risky investment is you have winners and losers. The issue of industrial policy is not to pick winners, it’s not to pick losers, but to identify externalities, to identify sectors where the growth of those sectors would benefit the rest of the economy.

Almost every country has industrial policy, whether they know it or not. The U.S. has an industrial policy. People think of us as having a free-market economy. That’s nonsense. We have an industrial policy, and part of it has been a disaster.

We had a legal framework that encouraged finance. In our bankruptcy law, we said the first claimants were derivatives, and that encouraged finance. We have a tax law that said speculators get taxed at less than half the rate of those who work for a living, which encouraged finance. The result was we got a very big finance sector, which was a real mistake because it led to instability.

But we had another industrial policy. We invented the Internet and biotechnology. These have transformed not just the U.S., but the world. They come from government. It wasn’t the private sector. So we have industrial policy, and we did most of it well, but some of it poorly.

One industrial policy is broad-based exchange-rate intervention. Actually, China has done that in the past and is gradually liberalizing, but during the process China has accumulated huge foreign reserves that are a major problem now. What do you think is the right approach to balance all these different elements?

I think China did it exactly right, in terms of keeping the exchange rate down which stimulated exports. There were other ways it could have stimulated exports, given subsidies.

One of the advantages of using the exchange rate is that it was broad-based. They didn’t have to say this industry or that industry. It meant that whoever could compete at that advantageous exchange rate came in and flourished.

Going forward, are there any improvements China could make?

It’s going to be difficult for China to use the same strategy for the future that it used in the past. In the future, more of the role of the government will be through supportive research and education.

It’s another broad-based form, so if you’re creating research labs, a research university, make sure there is access to finance because if you don’t have access to finance you won’t have enterprises that develop. I think that’s going to be the strategy going forward.

In a way it’s more similar to the U.S., like Silicon Valley. Why is it where it is? It’s because of Stanford University, U.C. Berkeley, which were supported by the federal government to do research, and then the benefits of that research flowed out to the private sector. But it was industrial policy.

What’s your view of the Trans-Pacific Partnership (TPP)? You mentioned in your book there is trade diversion, but many in China want China to join the TPP in order to push for reforms. What are the advantages or the perils of this kind of approach?

I think that there are many risks. The main barrier to trade today is not tariffs. Tariffs have come very far down, and the tariffs that remain are related to special interests, like with cars in China.

With the negotiations with the TPP with Vietnam on textiles, another sensitive sector, the U.S. is not lowering tariff barriers. So the argument in Vietnam is very similar. We ought to join for reform. But you are not getting any trade advantage. It’s a hope, but the reality is that the remaining tariffs are reflecting the special interests like cars and textiles.

Beyond these, the other so called non-tariff barriers are for the most part regulations. Regulations are not just there capriciously. They are there to protect workers, the environment, the economy. Businesses on both sides would like to get rid of the regulations, but if you do that who will suffer? Profits may go up, but our environment, our workers, our citizens, our consumers, would suffer.

So, the analysis is totally different. When tariffs came down, consumers benefited. Now when regulatory regulations come down, everybody except the businesses suffer.

Of course we want to make more efficient regulation, but that’s not what this is about. If it were for regulatory harmonization, we move it to the top, but that’s not what they’re interested in. They’re interested in a race to the bottom.

To give you an example, one of the worst examples, is under one of these agreements, Uruguay signed a bilateral investment agreement. It then passed legislation to regulate smoking because smoking is bad for the health. It was praised by World Health Organization for their initiative in protecting citizens’ health. But it was sued by Phillip Morris, saying you’re interfering with our economics. Our profits are more important than the lives of the Uruguayan people.

That will happen to China. You will be sued over and over and over again by American and other corporations if you join these trade agreements. So I would say no trade agreements with these investment provisions. They are so noxious that the cost is far greater than any benefit you will get.

Stepping back, with the WTO not doing so well, what are the alternatives?

You have to ask yourself: “Why is the WTO not making progress?”

The main reason is the U.S. refuses to do anything about agricultural subsidies. Were it not for the U.S. refusal, I believe we would be able to complete the development round and then go on to something else.

But should the rest of the world give in to U.S. blackmail? Should the rest of the world say: “OK, you can keep your agricultural subsidies. We understand you believe in free trade but you’re full of hypocrisy”?

It seems to me that the answer is no. That we’re not going to put at risk our citizens, their health, our environment, our workers, just because you’re trying to protect your rich cotton farmers, rich rice farmers. So it should be very clear. Maybe the best thing to say right now is that maybe we don’t have a perfect world, but let’s not make it less perfect.

China is gradually moving away from GDP targeting. But it is struggling to find a good alternative, which is metrical and succinct like GDP. Do you have any suggestions?

We provided a framework for thinking about how to create some alternative measures of economic performance and social progress. What we said is that every country needs to create its own, reflecting its own values and what it cares about.

You can’t summarize what goes on in a country by one number. You need a dashboard of indicators. You should do that.

One of the critical things for China is employment. And the government has been very explicit: “We want to make sure that our economy creates enough jobs for the labor force.” That seems to be one of the important criteria. A second one is we want to be able to breathe. Another benchmark should be the quality of air.

The job argument is what Premier Li Keqiang has been talking about, but there are many concerns. If China sticks with this 7.5% growth target, there may be less room for pushing through reforms. Do you agree with those concerns?

Not really. I think that reforms are always going to be difficult. That it is absolutely imperative that, if the reforms are going to be accepted, they can’t be seen as creating social problems.

If you have large unemployment, you have a social problem as well as an economic problem. You’re wasting an important resource. How can you say it is a reform, when the consequence is you’re wasting the most important resource, the human resource? So it undermines confidence in the notion of reform.

Any reforming agenda has to be based and sequenced in a way that makes sure that not too many people suffer. It’s one thing for corporations to lose profits. It’s another for large numbers of people to have their basic livelihoods put in jeopardy.

Inter researcher Will Spence also contributed to the article


More MarketWatch news:

Asia Markets blog: Chasing those U.S. gains

Search shifts for missing Malaysia Airlines jet

Four states hit record highs for home prices

MarketWatch Partner Center

We Want to Hear from You

Join the conversation