Chinese people want equal opportunities, not equal income

Hu Shuli says China's reform of income distribution needs to target the institutional barriers to market access, jobs and opportunities

PUBLISHED : Thursday, 18 October, 2012, 12:00am
UPDATED : Monday, 30 May, 2016, 5:00pm

Will income distribution reform finally be launched in China? Reports said the blueprint - already eight years in the making - will be unveiled this month after repeated delays. What's in it is a matter of great public concern.

Income distribution is not only a major economic problem in today's China, but it's also an emotive political issue that touches on social justice. It's an issue that a government that has pledged to improve people's livelihoods and build a harmonious society must tackle.

How can reforms be effective? First, their focus should be on what economists call primary distribution - that is, the distribution of income through the market - rather than on secondary distribution, through taxes and transfers. Second, a more balanced model of economic growth that discourages the formation of vested interests is critical. Third, the government must deepen market reform and have something to show for its political structural reforms.

Income is generally categorised as salary income, property (asset) income, and transfer payment. The government has focused on adjusting the distribution of salary and transfer payment.

Since the 17th party congress, the government has made it a goal to raise the income of those at the bottom, expand the middle, and cap the rapacious income growth of those at the top. To this end, it has scrapped agricultural taxes and built a safety net for rural residents, among other measures.

But these have not been effective. An award-winning research study has found that reforms targeting secondary distribution, such as in income taxes and agricultural taxes, have done little to narrow the income gap. That's because every such effort was easily countered by the widening salary gap in different industries, and the growing wealth in powerful and monopolistic interests. In fact, monopolistic practices account for a third of the wealth gap between different industries.

We are not all equally talented or hard working. Most people accept that, in a market economy based on a division of labour, our income will be different for this reason. What's not acceptable are the institutional loopholes that keep the income gap wide: the lack of a level playing field; monopolies that abuse their power to earn huge profits; the growth of state-backed monopolies, which creates massive "grey income"; and unfair rules that allow the expropriation of people's assets and properties, so that farmers, for one, are continuously denied the benefits of the development of their land. These systemic flaws stoke public anger. People are not asking for equal remuneration; they want equal opportunities.

The government has a duty to ensure income is distributed fairly. But, first, it has to be clear what its role is.

At the root of China's widening income gap is the government's control of resource allocation that leads to unequal market access. A big government will inevitably dominate the economy. But it should first ensure the fair distribution of income between itself and society; then, and only then, should it turn to questions of taxes and transfers.

The key is to deepen market reform, restructure administrative operations and taxes, and put in place checks and balances in the political system. The over-reliance on income tax reform will not only leave vested interests untouched but also hurt the middle class.

The goal of common prosperity cannot be achieved through the equal distribution of wealth. Whether according to classical Marxist thought or today's macro-economic theories, wealth is distributed primarily via the arrangement of capital in an economy; government action to redistribute wealth can only modify the results.

This is why, to fundamentally change how society distributes wealth, the government must hasten the transformation of China's economic growth model so that growth is less reliant on factors of production and more dependent on technological advances and sound management.

How should the government rein in income growth at the top? The inability to clearly differentiate legitimate income from grey income has hampered its efforts in this area. It can start by tackling the hotbed of grey income - the creation, growth and exercise of power without restraint. It must enforce the sunshine rules that promote fiscal transparency and spur reform of the market for factors of production.

To strengthen the middle class, the government should cut taxes, foster a pro-business environment, create more equal job opportunities and break up monopolies.

To help the low-income groups, the government can do more than providing basic public services. Many people are poor because of a lack of good jobs. Thus, boosting workers' mobility by reforming the household registration system will significantly lower the barriers to good employment and allow migrant workers to make a home where they work.

At the same time, authorities should protect farmers' interests in land development projects, and legally recognise their rights in land contracts and building ownership. And to help the poor break out of the poverty trap, there should be education for all.

To tackle the political hot potato of unfair wealth distribution, the government should say clearly what it can and will do, and what it cannot and will not do, as a way of moderating public expectations.