Narrowing the Wealth Divide

By Mei Xinyu

The time has come for the government to act on China’s growing income gap

The author is an op-ed contributor to Beijing Review and a researcher with the Chinese Academy of International Trade and Economic Cooperation

‘Common prosperity”—an aspiration deeply rooted in the Chinese people—is key to the sustainable economic and social development of the country. Fair and equal income distribution will help inspire a majority of laborers instead of a small coterie of company owners and managers.There’s no doubt that fair income distribution is more conducive to increasing production and supplies and maintaining social stability.

An urgent task

Consumption is the purpose of production.Today’s China faces the dual pressures of expanding consumer demand and transforming the country’s economic growth model. In terms of consumption and demand, fair and equal income distribution plays a significant role in economic growth and the sustainable development of developing countries.

The market economy is a demand-oriented one, which is highlighted by the modern economy featured in mechanized large-scale production. In any country, a more equal income distribution is conducive to expanding effective demand, and in developing countries,this will benefit domestic-oriented industries instead of export-oriented ones. The reason is that high-income earners tend to spend less than low and middle-income groups when the same amount of income is raised. A fair and equal income distribution helps expand overall effective demand.

Moreover, a developing country with a huge wealth gap will have most of its demand concentrated in luxuries, since the poor have little money left over after paying for food and accommodations. Cars and other luxury goods are either imported or produced by foreign-invested enterprises, because domestic enterprises or investors have neither enough capital nor the technologies to produce such high-end products. As a result, local enterprises lose out, and national economic and social development cannot be sustained.

On the contrary, if a developing country has a comparatively balanced income distribution structure, more of the country’s purchasing power will be spent on domestic products instead of the more expensive imported ones. Therefore, once there is demand for a certain product, such demand will grow explosively, further strengthening the scale advantage of the domestic market and make domestic enterprises—that are more swift in responding to domestic demand—more competitive. For example, after World War II, Japan had the most balanced income distribution among developed countries.Such balanced income distribution fueled the rapid consumption growth of major commodities with domestic enterprises playing a leading role.

In China, so-called “equalitarianism” after the socialist revolution offered adequately balanced consumption in the early period after the People’s Republic of China was established in 1949. Also, the foundation for domestic industries was established during this period. Between the late 1970s and the 1980s, the above scheme along with trade barriers inspired the upsurge of home appliance makers in China. The Chinese home appliance industry, which started from nothing, rapidly spawned giants capable of competing with their Western counterparts.Today, China is the world’s largest home appliance producer and exporter, none of which would have been possible without a legacy of equal income distribution from the early days of New China.

MY MONEY: A migrant worker in Yangzhou,Jiangsu Province, counts his salary

For these reasons, greater attention must be paid to China’s growing income gap over the past 20 years. Narrowing the wealth divide must be a top priority for the Chinese Government. According to figures from the National Bureau of Statistics, China’s Gini coef ficient was between 0.473 in 2004 and 0.491 in 2008, higher than the levels in developed countries such as Canada (0.33 in 2000), the United States (0.41 in 2000), Japan(0.25 in 1993) and Germany (0.28 in 2000),while the internationally recognized warning line of this income inequality index is 0.4. It is no surprise that China has been discussing for years ways to narrow its wealth divide and realize common prosperity. After the 18th National Congress of the Communist Party of China last year, the issue came to the fore,and the Chinese Government has also issued a document on income distribution reform.

Action principles

The government realizes it must narrow the country’s wealth gap, but the question is how.

To begin with, a better redistribution of the country’s social welfare safety net will produce an immediate effect. However, we should be mindful of the experience and lessons of the welfare system in Western countries. Excessively high social security can impair economic and social development in a country.

Furthermore, a high social security and welfare standard may make people less inclined to work hard. A high income tax rate,a necessity to fund a generous social safety net, will also hurt laborers. After World War II, the proportions of social welfare spending compared to total GDP in Britain and other developed countries grew rapidly, and even the anti-welfare “Reagan-Thatcher Revolution” did not reverse this tendency.In 1960, 1980 and 1993, the proportion in Germany stood at 18 percent, 25.4 percent and 24.7 percent respectively; in France, 13 percent, 23.5 percent and 28.7 percent; in Italy, 13 percent, 18.3 percent and 25 percent; in the United States, 7 percent, 12.4 percent and 15.6 percent; in Britain, 10 percent, 18.3 percent and 23.4 percent.

Since spending for social security and welfare comes from the taxes paid by workers, a growing social safety net will inevitably lead to over-taxation. In the 1950s, when Britain and other European countries began to adopt the policy of the “welfare state,” high income tax rates frustrated laborers who wished to work overtime since those extra earnings would be greatly diminished.

From a broader point of view, we see that excessive social security has accelerated the breakup of the traditional family structure and reduced the fertility rate in Western countries, intensifying an aging population and further weakening the vigor of social development. ■