Commentary_on_an_Article_on_Poverty_-_Analysis_by_Lorenz_Curve_and_Gini_Coefficient

Poverty gap expands in China | | | | By Sherlock Ho Agencies 2010-01-22 04:16 PM | | | | In this photo taken Thursday, Jan. 21, 2010, a vendor prepares vegetables at a market in Hefei, in central China's Anhui province. China declared it is over the global crisis and signaled a shift in focus to controlling inflation, sparking concern it could hamper growth and the country's contribution to a worldwide rebound. (AP Photo) | Associated Press | China claims that the GDP growth last year has reached 8.7%. However, over 150 million people have a daily income of less than $1 dollar(NT$31.9). These people account for more than one third of overall population in China, implying an extremely large poverty gap. China govenment spent 4 trillion rmb to reinvigorate the flagging economy last year. With international hot money pours in, the GDP annual growth of the fourth quarter reached 10.7%. And GDP reached 33.5 trillion rmb dollars. But Ma Jian Tang, director of China State Statistics Bureau, notes that the rise of asset price especially real estate has incurred a lot of problems in China. The latest report by World Bank also indicates that the risk of asset bubble is looming. "The latest data shows that tightening policy is ready to fly. Authorities concerned should take pre-emptive action to prevent an overheat economy. It is estimated that China will end the linkage between RMB and US dollar and raise interest rate," says Royal Bank of Canada emerging market strategist in Hong Kong. December consumer price index increases 1.9% on an annualized basis; producer price index increases 1.7%, the first time over the past 13 months. Meng Yuan, an economist of Paris Bank stationed in Beijing says, "China government worries about inflation problem. A series of tightening actions can be expected." Despite the continuing growth of GDP and expanding economic strength, the poverty gap remains. According to reports of China media, the basic wages of farmers and workers in China Yangtze River and Pearl River Delta rarely rise over the past ten years. The weak middle class is almost crushed by soaring house prices and expenses of raising children and parents. The fledging middle class has diminished. Based on the definition issued by UN, he who earns less than 1 dollar per day falls into the category of extremely poor. A third of China people belongs to this group. Sherlock Ho(Taiwan News) | | The article, “Poverty Gap in China Expands,” reports that despite the Chinese government’s efforts to boost the economy, more than a third of the country’s population still belongs to the category of extremely poor. The poverty gap remains very large as inflation remains a problem, and the risk of asset bubble looms. The article further notes that the purchasing power of China’s middle class has been weakened by the rising cost of living, and that the working class continues to receive very low basic wages. Poverty has always been present, in rich or poor nations around the world. Apparently, China, now the world’s second largest economy, is not spared of this problem, as the country’s poverty gap continues to expand. The poverty gap refers to the monetary gap between the rich and the poor. The reason for measuring the poverty gap is to track how equitably the resources of the nation are distributed amongst the population, and to determine the severity of poverty. This measure is usually linked to other inequality concepts, such as the Lorenz curve and the Gini coefficient. The Lorenz curve is often used to represent income distribution, where it shows for the bottom x% of households, what percentage y% of the total income they have. The percentage of households is plotted on the x-axis, and the percentage of income on the y-axis. A perfectly equal income distribution would be one in which every person has the same income. In this case, the bottom N% of society would always have N% of the income. That is, the first 10% of the households received 10% of the income, and 20% of the households received 20% of the income, etc. This scenario can be depicted by the straight green line y = x. which represents perfect equality. On the other hand, a perfectly inequal distribution would be one in which one person has all the income and everyone else has none. This is represented by the kinked blue curve which yields y = 0 for all x < 100, and y = 100 when x = 100. This is the line of perfect inequality. The sample Lorenz curve is the red curve which implies that there is no perfect income equality and there is a degree of inequality in the distribution of income. For example, the bottom 20 per cent of households may receive only 4.5% of the total income. This concept is used to derive another measure of income equity, the Gini coefficient, which  is the ratio of the areas on the Lorenz curve diagram. If the area between the line of perfect equality and Lorenz curve is A, and the area underneath the Lorenz curve is B, then the Gini coefficient is A/(A+B). This ratio is expressed as a percentage or as the numerical equivalent of that percentage, which is always a number between 0 and 1. If the coefficient is 0, perfect equal income distribution exists; when the coefficient is 1, there is perfect inequal income distribution. Derivation of the GIni Coefficient from the Lorenz Curve Diagram The widening poverty gap in China may be explained by the concept of vicious cycle of poverty, which holds that low productivity leads to low income, low income leads to low savings, and low savings leads to low investment and low investment to low productivity. Thus, this implies a direct relationship between investment and productivity. Increase in investment leads to accelerated economic activities, which will then result to high income and high investment and then the virtuous cycle of wealth creation continues.  The key to poverty eradication, therefore, is to intervene in the vicious cycle of poverty. As the article suggests, it is imperative for the Chinese government to spend billions to reinvigorate its economy and to take preemptive action to avoid an overheat economy, which might lead to accelerated inflation. Since poverty is a problem not only in China, but all around the world, poverty alleviation should be a global priority. What the authorities should offer are long term solutions to ensure sustainable development. These include empowering the poor, providing them with the opportunity to succeed in life and giving them the necessary tools to get ahead - quality education, good health and effective social services. But a large share of the responsibility for poverty eradication rests with all the individuals. Each one is responsible for harnessing relevant human qualities to ensure that counter-productive values and attitudes are not manifested and that the concept of the virtuous cycle of wealth creation is embraced.