Free Tibet ... and Every other Country Deprived of Capitalism

by Dexter Samida, Research Economist, The Fraser Institute

Prime Minister and part-time social activist Jean Chrétien took time out of his taxpayer-sponsored European tour to bash capitalism at the recent World Economic Forum in Switzerland. His gripes with capitalism include his belief that the gap between the rich and the poor, even in wealthier countries, is growing unacceptably. Chrétien also fears a backlash if the rich don’t share their wealth more equitably.

Chrétien’s statements do not accord well with reality. The perceived widening gap between the rich and the poor does not exist domestically or internationally. A recent study by the C.D. Howe Institute, Are We Becoming Two Societies? found little change in income inequality in Canada from 1972 to 1992. That study’s statistical analysis of Statistics Canada data found no trend towards increasing or decreasing income inequality.

Internationally there is no evidence of a trend toward greater inequality, either. In 1998 three economists, Li, Squire, and Zou, examined 45 countries where high-quality household income or expenditure data were available. In 29 of these countries, the researchers found no clear trend in either direction. Of the remaining 16 countries, 8 showed signs of rising inequality, 8 declining inequality. Clearly it is difficult to conclude that inequality between rich and poor is growing.

It is also noteworthy that inequality measures are inherently flawed. Lifetime earnings tend to vary significantly over any one individual’s lifetime, starting low early in our working lives, peaking in our middle age, and finally declining in retirement. Given this, Chris Sarlo of Nipissing University discovered an interesting phenomenon concerning the income distributions of identical individuals. “Identical” in this case means that each individual of a particular age earns the same amount (say, all 40-year-olds are assumed to earn $30,000). He found that even in this imaginary world of “identical” individuals, there was income inequality. The source of this inequality is that at any given time, people are different ages, and thus have different incomes.

Therefore, income inequality statistics may tell us little about the conditions of those in the economy and their future prospects. They only provide a snapshot of one time period. More meaningful are the opportunities one has to progress up the scale. If, as other studies suggest, Canadians typically have good income mobility, we need not worry about these snapshots. If someone at the bottom of the income distribution is likely to move upward, it seems unnecessary to subsidize and encourage him to stay at the bottom. Yet this is what many government programs do.

Chrétien was also quoted as saying, “For me, capitalism hadn’t come up with all the answers.” But in important areas such as economic well-being, economic growth, infant mortality, literacy, poverty, and life expectancy, capitalism has produced the best results in human history.

Economic Freedom of the World, a 15-year long project of The Fraser Institute, rates countries on the amount of economic freedom they provide their citizens. High levels of economic freedom (i.e., capitalism), are powefully related to nations’ standards of living.

Countries in the bottom 20 percent of economically free nations have an average income of $1,538, whereas those in the top 20 percent have an average income of $18,142. Moreover, the income gap between economically free and unfree countries is widening. Per capita GDP of the top 20 percent is growing at an average annual rate of 1.84 percent, while the per capita GDP of the bottom 20 percent is shrinking by 2.10 percent annually. This suggests that instead of rejecting capitalism, countries need to give more economic freedom to their citizens.

For other measures of well-being, economic freedom also plays an important role. Citizens of the most economically free nations have longer life expectancies, are more literate, are less likely to be poor, and experience less infant mortality than their less economically free counterparts. As economic freedom declines, so does each of these statistics.

Capitalism may not be perfect, but it has enabled many nations to lift themselves out of poverty. It has enabled technological innovation and vastly superior standards of living compared to those of our ancestors. Maybe capitalism doesn’t answer all the questions. But for those questions it does address, it provides better answers than the alternative.

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Last Modified: Wednesday, October 20, 1999.