China's Enemy No. 1: Income Inequality

China should beware of keeping its population poor, hungry, and suppressed.

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Chinese senior leaders Hu Jintao, Wu Bangguo, Wen Jiabao, Jia Qinglin, Li Changchun, Xi Jinping, and Li Keqiang attend the Seventh Plenary Session of the 17th Central Committee of the Communist Party of China in Beijing on Nov. 4, 2012.

Scheherazade S. Rehman is a professor of international finance/business and international affairs at The George Washington University. You can visit her homepage here and follow her on Twitter @Prof_Rehman

This is the last in the series of discussions on "a new world order" which has focused on the possibility of the prime candidates (European Union, Russia, Turkey, India, Brazil, South Africa, and China) rising to the status of a superpower to potentially rival the world's only current superpower, the United States. This week it is about China. I left the most probable of emerging markets that could take on the mantel of superpower for last.

Let me reiterate that any discussion of a rising new superpower does not imply that the United States will lose its hegemony; it simply means that the United States will have a "balancer" or an "equalizer" next to it. As mentioned in an earlier blog in this series, the EU serves as the most likely candidate as a potential balancer. If China indeed becomes a serious contender it will not serve as a balancer but rather as an equalizer.

As stated in my opening blog in this series, the worse crash in the United States and Europe in 60 years showcased China's prominence as a global engine and its potential as a superpower. It was a stark reminder that everything Chinese is on a scale that we have never seen before; from the size of its population to…pick anything else.

[See a collection of political cartoons on the economy.]

Using almost any metric, the sheer numbers associated with China are overwhelming, be it the number for population, land mass, economic prowess, energy and food consumption, sovereign wealth funds, etc. The sheer size of these numbers are what convinces most people that China is going to rival the United States. Ironically it is the same set of numbers that make a convincing case that this rising power has much to do before it can pose as an equalizer to the world's only sitting superpower.

Let us examine this irony by using the most prominent "number" when we talk about China; its population. China has approximately 1.35 billion people which represent over 19 percent of the world's population. India has approximately 1.2 billion in case you were wondering, and then in third place is the United States with 315 million people representing 4.5 percent of the world's population.

Can you imagine the population numbers if China had not put the "one-child" policy in place? Family planning was put into place by the government in 1979 when the Chinese population was just under one billion people to ease future Chinese social, economic, and environmental burdens. Today, some 30 years later, with family planning still in existence but slightly looser, the newly installed Chinese government still has the same old problem: how to manage the social, economic and environmental future of 1.35 billion people.  But this time there is an added twist…income equality.

[Read the U.S. News Debate: Should Congress Interfere with China's Currency Policies?]

China has had phenomenal economic success over the last 30 years. It has been growing on an average of 10 percent over the last three decades. Around the time the one-child policy was introduced China's gross domestic product  was approximately $200 billion. Thirty years later the GDP has ballooned to $11.5 trillion. If you look at this from the point of view of China's GDP as a percentage of world total GDP (based on purchasing-power-parity) China went from 2.19 to 14.35 percent in 30 years. This boom was possible due to the sheer size of the population.

Now all this growth and subsequent wealth due to a very large and low cost labor population also brought with it the rise of the greatest nemesis for governments today: income inequality. What makes this enemy No. 1 for China is the sheer size of number of people involved in the income inequality equation. A little less than 500 million people live on  $2 a day or less. This number goes up significantly if you count how many Chinese live on $10 a day or less: about 800 million. That is a lot of poor people living in difficult rural conditions (85 percent of China's poor live in rural areas, with about 66 percent concentrated in the country's west). China's GDP per capital is a bit above $8,450. This ranks China at 94th in the world; below Ecuador, Iran, Albania, and South Africa. Moreover, China ranks No. 53 worst worldwide in terms of income inequality (Gini Index). If the new Chinese government does not find a way to even this income gap between the rich and poor, it is in for a very bumpy ride.

[See a collection of political cartoons on the budget and deficit.]

The problem is that in order to close the income gap, the Chinese government must have high growth rates—the critical question is if the country can maintain its past 30 year record of high growth of about 10 percent? The answer…it is going to be very hard to do so. This is especially true since American growth is at a crawl and the European crisis is far from over now that Italy is being thrown into chaos with technocrat Prime Minister Mario Monti's resignation and Silvio Berlusconi running for office again.

The new Chinese government's 10 year economic objective of maintaining growth at a breakneck speed by moving towards domestic demand (consumers spending money) and relying less on exports due to the sluggishness of Western markets is a progressive one, but hinges on closing the income gap and making the average Chinese believe they are rich so they will save less. This will take time. China is also less reliant on foreign investment now; that is good, but is there enough domestic investment to keep their economic engine fired up? What will happen when Chinese savers turn into consumers, where will the investment dollars come from then?

If there is any government, however, who can manage the income inequality issue of 1.35 billion people it is Chinese government.  If they cannot do it then no one can.

[See a collection of political cartoons on the European debt crisis.]

The new Chinese government is keenly aware of what will happen if they keep their very large population suppressed, poor, and hungry for too long a time—remember the Arab Spring! Hence, what they have to do right now is very clear: bridge the income inequality issue quickly. For China the bigger puzzle is what happens if they are indeed successful in bridging the income gap between the rich and poor for 20 percent of the world's population? Will a nondemocratic government, that controls 1.35 billion social media savvy consumers, be able to manage those unknown consequences that accompany development and wealth?

Next week we will start discussing the eurozone crisis and Italy. To be honest, I did not think that Berlusconi would be back; but I forget that this is Italy after all. For now I only have one word for this new development in the Italian election scene: insanity.

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  • Corrected on 12/22/2012: A previous version of this blog post misstated the size of the Chinese population in 1979. It was under one billion.