For starters, by lowering trade and investment barriers,globalization has created a sort of winner-take-all environment, inwhich the most technologically advanced actors have gained marketshare through economies of scale. In particular, as the globaleconomy moves toward knowledge-based value creation, a fewinnovators in global branding, high-technology, and creativeindustries win big, with the global boom in tech stocks augmentingtheir gains.
In fact, while the rise of China and other emerging economies hasreduced inequality among countries, domestic inequality has risenalmost everywhere. The Piketty framework highlights several driversof this trend.
But property prices have risen faster than wages and profits inmanufacturing, causing the return on capital for a select fewreal-estate owners to grow faster than China’s GDP. The same grouphas also benefited from the leverage implied by strong creditgrowth. As a result, China’s top 1% income earners are accumulatingwealth significantly faster than their counterparts in the rest ofthe world – and far faster than the averageChinese.
As the investment rate rose to almost half of GDP, the share ofconsumption fell to as little as a third. The government,recognizing the need to rebalance growth, began to raise theminimum wage in 2011 at nearly double the rate of real GDP growth,ensuring that the average household had more disposable income tospend.
Of course, a large share of China’s population has gained fromthree decades of unprecedentedly rapid GDP growth. Thefixed-capital investments that have formed the basis of China’sgrowth model largely have benefited the entire economy;infrastructure improvements, for example, have enabled the ruralpoor to increase their productivity and incomes.
In hisbestselling book Capital in the Twenty-First Century, ThomasPiketty argues that capitalism aggravates inequality throughseveral mechanisms, all of which are based on the notion that r(the return on capital) falls less quickly than g (growth inincome). While debate about Piketty’s work has focused largely onthe advanced economies, this fundamental concept fits China’srecent experience, and thus merits closer examination.