Friday, March 4, 2011

Income distribution in China worse than in the USA?

Dear Colleagues

Someone suggested that I should read an article about income distribution posted on the Roubini website. I do not have access to the whole article but the start is not promising. The URL is:

I sense from the title of the article ... Just How Rich Is the National People’s Congress? ... and the first small snippet of the main text that the idea is that the fact of huge wealth in among the governing elite in China makes the situation in the United States quite desirable. This is absolute hogwash.

Here is the snippet of text.
Just How Rich Is the National People’s Congress?
Adam Wolfe Mar 4, 2011 6:04PM
A Bloomberg News article from Michael Forsythe on China’s National People’s Congress is making waves today. Coming on the heels of the failed “Jasmine Revolution” in China, the article seeks to show that the NPC is representative of the widening income gap in China.

The richest 70 of the 2,987 members have a combined wealth of 493.1 billion yuan ($75.1 billion), and include China’s richest man, Hangzhou Wahaha Group Chairman Zong Qinghou, according to the research group Hurun Report. By comparison, the wealthiest 70 people in the 535-member U.S. House and Senate, who represent a country with about 10 times China’s per-capita income, had a maximum combined wealth of $4.8 billion, data from the Washington-based Center for Responsive Politics show.
In my view, the success of China is much more about many millions of very poor Chinese becoming somewhat better off. In the process the elite has also become very very rich, which is the way the enterprise system tends to work.

But the problem in the United States is that while the poor Chinese are moving up the economic ladder, the once rich Amnerican middle class is moving down the economic ladder. In absolute terms Americans are wealthy by world standards ... but they are incredible concerned about the direction of the American economy.

Until American leaders ... and that includes corporate and financial sector leaders ... take the jobs issue seriously, the USA is in trouble. President Obama cannot be a lone voice talking about jobs, when every institution in the USA is doing all it can to handle its own "agenda". Republicans in Congress have a focus on cutting government spending even though it has been government spending that successfully saved the USA and the global economy from catastrophe after many years of regulatory failure, greed and a whole lot more.

Corporate leaders have done a good job for their stockholders building back profitability ... but in the process there have been jobs lost with a huge impact on US quality of life. But that is not a corporate responsibility ... a corporate management team has responsibility to its stockholders ... and this might well be a fact of law ... but it is a bad situation for society.

And the dialog about taxation does not help. The argument goes that lower taxes stimulate the economy and create jobs ... but again taxes can be legally reduced in many different ways, but government services cannot be paid for without appropriate levels of revenue. The first job in corporate social responsibility (CSR) must be for a company to pay the right amount of taxes.

Government has a responsibility to spend money wisely, and it is true to say that there has been profligate spending in good times and then crisis job cutting in bad times. There is blame for this both on the side of the government and also on the side of the workers and their unions. But there is another issue, and that is the accounting used in government and the public sector. Most of the accounting is cash based rather than accrual based, and the balance sheets that are so important in corporate accounting really do not exist in the public sector. This means that the dialog around matters like current wages and future pensions are not included in any rigorous accounting, and over years this has become a terrible problem. Many unionized public employees are going to get great pensions that have to be paid for ... but the decisions that made this problem go back a very long time.

The concentration of wealth in China is a problem for the Chinese. The wealth differentials in the USA are different, but are also bad. Sorting it out is going to be difficult, but it must be done.

TrueValueMetrics will help because of its focus on value and the importance of a value balance sheet for all the actors in society!

Peter Burgess

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