Is China too unique for Engel’s Law?

Xinhua Daily Telegraph

September 1, 2009

Since its inception in 1857, Engel’s Law has become a widely accepted way to measure people’s living standards. Its key hypothesis is, “as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises.”

If the theory holds, one can tell how rich a country is simply by dividing food expenditure by GDP. The smaller the quotient, the richer the country.

However, the reality turns out more convoluted when it comes to China. On October 25, the Beijing Municipal Bureau of Statistics announced the inspiring news that Beijing’s standard of living “is in line with moderate and advanced developed countries.” The discovery was based on two pieces of data: the city’s Engel Coefficient is 33%, and the average GDP per capita is US$9,000.

Yu Xiuqing, vice director of the Bureau, also stated that Beijing “has passed many landmarks” during the 60 years since the founding of the country. One example is that the current GDP per capita, in real terms, is 90.7 times what it was in 1952.

Such exuberance triggered massive backlash in the media. An front-page editorial in the today’s Xinhua Daily Telegraph rebuffed the claim, arguing that “China has its own conditions” and therefore, “it is neither scientific nor practical to apply Engel’s Law, which was discovered in 1857, to the Chinese people.”

More criticism has come from Internet users, who suggested alternative explanations such as high property prices that force people to cut back on food spending to pay mortgages, and a lack of socialized medical care that brings great costs to people when they fall ill. Other people were skeptical for another reason: they suspected that the illusion of affluence is created through “creative accounting,” or that the calculation of the total GDP included the contributions of non-residents, but only permanent residents were included in the per-capita results.