Research Highlights Featured Chart

July 2, 2018

Embracing capitalism, concentrating wealth

A homeless man looks for food and valuable items in a garbage tin in Chengdu, China.

Southtownboy/Bigstock

We hear a lot about the growing disparity between the “one percent” and blue-collar Americans.

But income inequality also is a concern outside of the U.S. It’s a trend that has been particularly pronounced in China and Russia since they began transitioning to more capitalist systems in the past few decades.

In AEA Papers and Proceedings, authors Filip Novokmet, Thomas Piketty, Li Yang, and Gabriel Zucman examined the evolution of private wealth, public property, and income disparity since each communist country began transitioning toward market-oriented economies.

Figure 4 from Novokmet et al. (2018)

The figure above shows the income inequality dynamics in China and Russia. The top panel charts the evolutions of the top 10 percent and bottom 50 percent of income shares since 1978. Panel B compares the evolution of the top 1 percent income share in four countries — Russia, China, the U.S., and France — since the turn of the 20th century.

Inequality has increased substantially in both China and Russia. It was higher in China until the dynamics changed in the early 1990s following the collapse of the Soviet Union. At that time, the top 10 percent income share shot up in Russia and coincided with a massive collapse in the bottom 50 percent share. China has followed the same trend, though its path has been more gradual.

The difference between China and Russia partly reflects the privatization strategies pursued in the two countries, according to the authors. The gradual privatization process in China — where the government is still the majority owner of corporate assets— has limited the rise of income concentration. Russia, by contrast, had a rapid and chaotic transition that led to an abrupt shift in the distribution of wealth.