Sometime back, I was looking at the data on equality. Since, I was mainly interested in the subcontinent plus China etc. So, I compiled this data.
Country Gini Coefficient (%) Year
China 47.0 2007
India 33.4 2005
Pakistan 30.0 2008
Sri Lanka 40.3 2007
This data is based on World Bank sources as reported in Wikipedia. Here, point to remember is that all the countries aspire for the lower Gini coefficient as that means there are less unequal citizens . Therefore, it is also a measure of the stability of the political system of any country as it indicates less room for strife (crime, protests etc) by unequal citizens of a country.
Looking at this data, I noticed that India is better in terms of equality than China but perhaps, it is worse than Pakistan. I tried to reason why. I thought perhaps, Muslim organisations are more charitable (Islamic Zakaat concept) and even if the people are poorer there they are redistributing the wealth in such a way that people are not feeling the poverty as much as they are in India or may be even in China. Pakistan data is even more enigmatic given the worst level of corruption and instability it has in comparison to India and China. But then after coming across this report recently from US govt on China, I felt differently. It says this about the data that comes from China and trusted by all.
“NBS surveys continue to provide inadequate samples of important sectors of China’s economy. Small-scale businesses in manufacturing and retail are hard to capture, while sectors like transport logistics are almost completely unaccounted for. Although the NBS measures 94 sectors of the economy on an annual basis, it does so for just 17 sectors on a quarterly basis.
Surveys also fail to capture “opaque spots” in the economy. One of the most egregious is household income. In the United States, tax returns provide a proximate indication of household income. Indeed, personal income tax accounts for about 40 percent of U.S. government tax revenue. But in China, the personal income tax in 2011 makes up just six percent of revenue. A big reason for this is that even the wealthiest Chinese households are taxed directly on their wages, but not on their non-wage income, such as real estate, stocks, bonuses, and personal gifts. Households must actively report such income – but many understate their income in tax returns, or refuse to participate in sample household surveys. In this way, they can evade taxes and also avoid the political implications of having excessive wealth in a nominally socialist state. Chinese economist Wang Xiaolu has determined that national spending on real estate, luxury goods, and travel in China implies much higher income among the top 10 percent of earners than is given in official income data.
In January 2012, the NBS in fact admitted that it does not publish the Gini coefficient –a leading measure of income inequality – because data on high earners is inaccurate. It is also notable that, in an economy with a large state sector, government officials have only recently begun to disclose their own salaries and wealth to the public, and none are under any legal obligation to do so. Opacity extends to other sectors as well. Many state-owned enterprises remain secretive about their income statements, especially if they are not publicly listed. New types of large corporate entities, such as fund management companies and real estate arms of conglomerates, often go unaccounted for in both the direct reporting and enterprise survey systems. In local governments, “off-balance sheet” budgets can also skew fiscal revenue and expenditure.
Opaque Areas of the Economy
The Outdated System of Direct Reporting Enterprise revenue determines which firms are eligible for China’s direct reporting system. As China’s economy grows, so does the number of firms with sizable revenue, which combines to overwhelm the data processing capacity of the NBS. The NBS has tried to reduce the number of firms by continually raising the revenue threshold for direct reporting. When this reform began in 1998, the number of direct reporting firms was decreased from 460,000 to 165,000. However, by 2009, 434,000 firms were again reporting. As of 2011, only firms with annual revenue exceeding RMB 20 million report to the NBS, a measure that has again reduced the number of reporting units.
This data unreliability from China has big similarity to under reporting of data in Indian economic system The Indian economy has a parallel black economy which remains unaccounted for. I had a chance to meet someone on my last trip to India. He is not only an industrialist but also sells his finished goods from his retail outlet besides distributing it across the country. This person does not use banks most of the times for his business transactions. He uses cash and prefers it over any debit or credit cards. He chose not to have any. It helps him to remain anonymous or untraceable for any tax liabilities. It was incredulous to hear that all his capital (turnover) remains fully invested in the market all the time either in raw material or lent to the buyers who will repay it at different dates all in cash . As his business grows, the extra generated capital also gets absorbed into the same business hands. When a big spending need arrived for him, he merely clears some lent positions and invests it or spends it on the required need e.g. to buy land or spend on something like children’s expensive (no hold bar) marriage. He also gave me another insight how they have never paid full excise duty. Excise can indicate the produced goods or turnover of the firm. He said, “Usually, they fill just one excise form for the whole day and every time the transport carries the goods from manufacturing unit, it goes with the same excise form. The form did not register any loading time or departure time of the goods vehicle . So, this way they could report whatever turnover they are comfortable to pay tax on. Since, they never bank the business money and only do it when some customer is making a payment via bank draft or cheque. The whole of the business community in the capital region of India employs this same method. Of course the problem just does not lie with business community alone. The officials(bureaucrats) who are prepared to accept either bribes, donations for their respective parties or some gifts and favours on various occasions are hand-in-glove. The problem of under reporting by business is considered so much high as to 50 to 60 percent of real data. But this remains a guess in the absence of unreliable official data.
This indicates that India as well as China are growing at far larger rates than they report. They hardly know themselves the correct figures. This national data is from the trading economics Website.
The unreliability of income data makes the estimate of inequality even more difficult to judge. The official Gini
coefficient, the measure of inequality around the world can never be worked out in reliable manner as in corrupt countries (most of the world is) the estimate of income of top earners as well as that of poor can never be done reliably. Just like rich, the poor also does not want to give their real income so as to seek bigger handouts from govt or charities. But, I still relied on Indian data far more because first of all India is reporting far more indices than China does and there is also a possibility of cross checking of its data . Also it has so many NGO and some world bodies like UNESCO, ILO operating in India. Its democratic system and open, free press certainly should cause less data manipulation. I saw my this view-point resonated in this Bloomberg report which wanted to bet on India for investment and growth more than it does on China but no matter how much India may be a better bet in terms of growth, I certainly have been very naive to trust any data quality on equality or the GDP. Let that be from India, China or elsewhere.