July 30, 2007

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Inequal numbers

China's official statistics are well known to be woeful...John Ganaut reports on how the wealthy (unsurprisingly) hide much of their income and wealth:

PROFESSOR Wang Xiaolu sparked an online uproar two months ago by publishing the results of his "grey economy" study in China's leading business magazine, Caijing.

His survey showed the top 10 per cent of earners were successfully hiding about two-thirds of their income from the National Bureau of Statistics, meaning official estimates of income inequality, gross domestic product and tax evasion are all woefully understated.

That senior government officials studied his work, rather than bury it, shows how the realm of economic policy has been largely protected from the heavy hand of government censorship.

More below the jump...

It probably helps that Wang's National Economic Research Institute is not beholden to its benefactors. "We receive no money from the Government, so I am free to say what I like," Wang says.

Now the economics professor is set to do it all again. This time, instead of identifying the state as the agent of necessary reform, he sees it as the object of reform.

He believes the glaring contradiction between China's lean, free-market capitalism and its inflating, closed and corruptable government is about to become the country's central economic challenge.

Wang's economics training was practical, if not conventional. His formal education ended in 1966 when Beijing was up-ended by the euphoric madness of Mao Zedong's cultural revolution. When he should have been finishing Year 8, he was went to farm corn and sorghum at a village called Xiaoxiangzhai in a poor crevice of Shanxi province, in China's mid-west.

When he should have been at university, Wang worked at a Shanxi bauxite mine, then an aluminium smelter and an electronic motor factory in Beijing.

He says he was happy enough learning about economics in his country exile by reading Karl Marx, Friedrich Engels and some contraband works of Nobel laureate Paul Samuelson.

As a peasant, Wang wasn't as useless by the time he left as when he arrived, he says, but Mao could probably have put his talents to better use.

In his new paper, jointly written with Professor Fan Gang, a People's Bank of China monetary policy committee member, and PhD candidate Liu Peng, Wang calculates that Chinese productivity rose by just 0.74 per cent a year under Mao.

In 1976 Mao died, as did the Cultural Revolution. Deng Xiaoping soon won control of the Communist Party and Wang was invited into the new Chinese Academy of Social Sciences. He had never studied in senior high school, but neither had most other job applicants his age.

Wang argues that the Chinese economy has been propelled by three distinct surges of productivity, each triggered by institutional reforms that freed resources to be allocated to more efficient uses.

In the first, soon after Deng's rise, peasants were unshackled from their communes. They moved out of agriculture and earned money from whatever they produced. China's productivity growth quadrupled to 2.9 per cent in the 1980s and GDP growth rose from 6 to 10 per cent.

Second, in the late 1980s, as Wang was applying to become an academic at the Australian National University without ever having attended an undergraduate class, peasants were freed to find higher valued work in the city.

The urbanisation phenomenon, which is still continuing, pushed productivity growth to about 4.4 per cent in the 1990s.

Third, the rise of a new entrepreneurial class has diverted resources from China's hapless state-owned sector. Workers were freed to jump from wasteful government entities to more efficient private ones.

In a separate marketisation survey, Wang shows the private market economy (which excludes state-controlled listed companies) now accounts for 69.2 per cent of China's economic output, up from 22.4 per cent in 1978. Privatisation helped to sustain productivity growth at about 3.6 per cent between 1999 and 2005.

China is getting richer largely because the Government has got out of the way and allowed resources to be allocated more efficiently. But now the early agricultural reforms are complete, there is not much left to be privatised and urbanisation is becoming proportionately less important.

Wang argues that the Government needs to remove itself from part of the economy for a fourth time if China is to sustain its phenomenal growth rate.

"The first thing we need is transparency to stop corruption and increase efficiency," Wang says.

His report shows the Government bureaucracy is getting much bigger, even as the services it delivers are shrinking.

Certainly, a glance at recent Chinese media would suggest that corruption and its associated inefficiencies have never been a bigger problem.

Local officials are covering up a child-slave trade in Shanxi; a former Shanghai party boss is about to be prosecuted for "huge" embezzlements; the former head of Sinopec, Asia's largest oil refiner, has been detained for questioning.

And it goes on.

While some of China's intellectuals are lamenting the squandered opportunities for political reform since 1989, some of its leading economists believe the state still has a choice.

It can make its workings transparent and accountable to the people it is meant to serve, or it can lead the country back to the miserable productivity and GDP growth rates that China has not known since the rise of Deng Xiaoping.

posted by Simon on 07.30.07 at 01:21 PM in the China economy category.


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It is said that Chinese is one of those most difficult languages to learn all over the world. I dont know whether or not it is right but i do believe that 'cause I can speak english (or chinglish) and a little Japanese. What I want to say is learning languages is always not interesting as you just began when you step into a higher level. Just endure it. Good luck.

( http://www.chinese-tools.com/learn/chinese )

posted by: Chinese on 07.31.07 at 06:00 PM [permalink]

The previous comment seems to be SPAM, isn't it? :)
Just wanted to mention that hiding by people of their incomes is probably caused by high income taxes or certain difficulties in registration of this income.
I can exemplify: In Russia now there is a new law to oblige all real estate owners-lessors to pay the income tax in the profit obtained from letting their property on lease. Do you know why the most citizens there prefer to hide such incomes? The statistics says - only because the procedure is highly sophisticated and requires a lot of documents to be represented.
Who likes collecting documents?
Consequently: Who will pay the tax? As soon as the procedure is simplified, the incomes will be disclosed.

posted by: Cattlu on 08.01.07 at 08:54 PM [permalink]

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posted by: Vilyamum on 08.02.07 at 01:35 PM [permalink]

@Cattlu : The first comment is very likely spam good catch.

I'd say the main reason people are hiding money is exactly as Cattlu said. Who wants to pay taxes?! However taxes aren't paid because of laziness in relation to filing taxes. In fact quite often those hiding taxes need to pay for good accountants to hide this incoming money so they don't get caught.

On a side note I think people tend to forget that China has a history of corruption that dates back millennia. GuanXi has always been a large factor in business here, and likely will in the future.

posted by: John on 08.06.07 at 04:32 PM [permalink]


posted by: 流水线 on 08.12.07 at 11:59 AM [permalink]

This is "hiding of income issue" is no biggie. It happens everywhere around the world. Even your own countries President might be stashing away as we speak.

posted by: CallCenterVet on 08.15.07 at 02:52 PM [permalink]

Like callcentervet said, it is there in every country. Recently, I happened to see one Indian movie, where the hero rob the black money from businessman's and politicians and spend it for good causes. The estimation of the black money is huge in countries like China, India, etc.,
Churchill Recovery Insurance

posted by: Peter on 08.17.07 at 11:48 PM [permalink]

The previous comment seems to be SPAM, isn't it? :)

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