Wen Jiabao

Long live the wealth revolution; now it's time for some parity

PUBLISHED : Monday, 05 April, 2010, 12:00am
UPDATED : Monday, 05 April, 2010, 12:00am

About 30 years ago, the late paramount leader Deng Xiaoping smashed egalitarianism by uttering the famous slogan 'Let some people get rich first', thus unleashing a revolution of energy and entrepreneurship that has made the mainland into an economic powerhouse.

The slogan was an integral part of Deng's most important legacies and still has profound implications. President Hu Jintao and Premier Wen Jiabao intend to launch another revolution, aimed at spreading the wealth and allowing the poor and disadvantaged to share more economic benefits. They want this to be one of the most important parts of their legacy - converting 30 years of only economic growth into a pursuit of twin goals - economic progress and parity.

They will face strong resistance from the various interest groups enriched thanks to Deng.

Hu and Wen began to push for parity soon after they came to power in late 2002, but fierce debates both within and outside the Communist Party leadership have yielded no concrete results.

With retirement two years away, Hu and Wen are mounting their final and most ambitious attempt to redistribute the nation's wealth.

Other factors have also necessitated the push. The mainland's economy has already become the third largest in the world and is set to overtake Japan's as the second largest this year. Meanwhile, widespread social discontent over the ever-widening income gap has become a clear and present danger.

According to various estimates, 10 per cent of the mainland's urban households control more than half of total urban assets. Anger is mounting over the wealth of the government compared with the poverty of the people. Wen admitted in a long article last week outlining his vision for wealth redistribution that the widening income gap, left unchecked, could threaten economic development and social stability.

Besides boosting spending on education, social security and medical care, the plan has a key provision that aims to transform national income distribution. The measures include raising salaries of workers and incomes of farmers, curtailing salary growth among workers in the hugely profitable state monopoly industries such as telecommunications, reforming personal income tax and cracking down on grey and other illegal incomes.

Since late last year, several key provinces and municipalities strong in industry and finance, such as Beijing, Shanghai and Guangdong, have announced hefty increases in minimum wages and are expected to continue doing so annually over the next few years.

The powerful National Development and Reform Commission is drafting rules on national income distribution to be released towards the end of this year, focusing on raising the personal income tax threshold and imposing heavier taxes on the profits of state firms in monopolistic industries.

Hu and Wen's plan has received overwhelming support from mainland people, but it has also generated considerable concern among businessmen and economists.

The primary worry is that the government will disregard market forces and adopt heavy-handed tactics to force firms to raise salaries.

In his speech, Wen made it clear that the government would enhance its control over corporate salaries and force firms to set up mechanisms to ensure normal growth in salaries.

While the government may exert such controls over the salaries of workers at state-owned firms, it would be wrong to dictate to private firms how much they pay workers. There are already reports that some local authorities have begun setting minimum growth rates in salaries in the name of improving people's livelihoods. This is ridiculous and dangerous.

Governments everywhere have proved to be bad at managing businesses. Forcing firms to meet growth targets in salaries can be counterproductive. Over the past 30 years, the mainland has become the world's manufacturing powerhouse mainly because of its cheap labour and flexible salary mechanisms. The Labour Contract Law passed in 2008, which contained rigid requirements on hiring and firing, has already made it very difficult for small businesses to operate. Setting salary growth targets would not only add costs but could also kill many of them. It will also be difficult for less skilled workers to find jobs. This will be bad news for the government's job creation efforts.

Instead, the government should allow competition and market forces to determine salary levels, a more efficient and effective approach. The government should also be careful not to raise minimum wages too fast as experience in other countries has shown that too much control over wages and hiring or firing stops poor people from finding jobs.

Hu and Wen's aim is to transform the national income picture into the shape of an olive, with most workers in the middle-income bracket.

Attaining this goal means that the government must boost farmers' incomes. This will be the most difficult part. Although nearly 200 million farmers have gone to work in the cities, several hundred million still till the soil for a living. The massive mainland push towards urbanisation forces farmers to sell their land cheaply to property developers, and yet land trading among farmers is still strictly controlled. Because of confusion over land ownership, farmers cannot mortgage their land or houses to raise money.

As repeatedly argued in this column, the fortunes of farmers cannot improve significantly without major land reform.