How to bal­ance wel­fare and eco­nomic growth

The Pak Banker - - OPINION - Li Yip­ing

THE laws of eco­nom­ics say so­cial wel­fare should be in ac­cor­dance with the eco­nomic de­vel­op­ment level of a coun­try. Wel­fare pro­grams that are be­yond a coun­try's de­vel­op­ment level are not good for eco­nomic de­vel­op­ment, as has hap­pened in Greece. On the other hand, if the econ­omy de­vel­ops rapidly with­out cor­re­spond­ing im­prove­ment in peo­ple's liv­ing stan­dards and pub­lic wel­fare, peo­ple will not feel a "sense of gain", which in turn will have a neg­a­tive im­pact on eco­nomic de­vel­op­ment.

First, ex­ces­sive wel­fare be­yond a coun­try's de­vel­op­ment level will im­pede ac­cu­mu­la­tion and harm wel­fare pro­grams in the fu­ture. In eco­nom­ics, pro­duc­tion is the top pri­or­ity and it de­cides con­sump­tion. A so­ci­ety has to im­prove its pro­duc­tion level if it wants to im­prove its con­sump­tion level. Pro­duc­tion here refers to ex­tended pro­duc­tion, be­cause only ex­pand­ing the scale will breed com­pe­ti­tion and pro­vide un­fail­ing sup­ply. The ex­pan­sion of scale should be high-qual­ity and high-level ex­pan­sion of pro­duc­tion through in­no­va­tion and im­prove­ment of the in­dus­trial struc­ture.

Se­cond, wel­fare is not a free lunch. Wel­fare at any level needs eco­nomic sup­port. High lev­els of wel­fare in coun­tries such as Swe­den de­pend on high tax­a­tion and high deficit. But the high-level wel­fare in Greece de­pends on high debt. High wel­fare sup­ported by high tax­a­tion re­duces de­vel­op­ment funds for en­ter­prises, im­ped­ing the de­vel­op­ment of en­ter­prises. And if en­ter­prises lose en­ergy, the en­tire econ­omy will suf­fer. High tax­a­tion also af­fects in­di­vid­u­als' de­sire and ca­pac­ity for con­sump­tion and thus un­der­mines peo­ple's en­thu­si­asm to ex­pand pro­duc­tion.

The Laf­fer Curve, a pos­si­ble rep­re­sen­ta­tion of the re­la­tion­ship be­tween rates of tax­a­tion and the hy­po­thet­i­cal re­sult­ing lev­els of govern­ment rev­enue, shows that peo­ple are re­luc­tant to en­gage in pro­duc­tion ac­tiv­i­ties if tax­a­tion is very high. High tax­a­tion en­ables peo­ple to en­joy more ma­te­rial wel­fare, but it also im­poses a men­tal bur­den on them. And high wel­fare un­der high debt will cul­ti­vate in­er­tia and cre­ate many so­cial prob­lems as has hap­pened in Greece.

Third, ex­ces­sive wel­fare will breed de­pen­dence and re­sult in waste of so­cial re­sources. Al­though high wel­fare comes from in­di­vid­ual tax­pay­ers' con­tri­bu­tion, it seems like a pub­lic wel­fare pro­vided by the state. It will re­sult in many so­cial prob­lems, such as waste of so­cial re­sources, vol­un­tar­ily un­em­ploy­ment and re­tire­ment in ad­vance. Once peo­ple get used to this kind of de­pen­dence, eco­nomic de­vel­op­ment will be un­der­mined.

Fourth, wel­fare pro­vided by the state is a re­dis­tri­bu­tion of so­cial re­sources. But such re­dis­tri­bu­tion has many dis­ad­van­tages. For ex­am­ple, it could lead to rent-seek­ing and dis­tort mar­ket sig­nals. How­ever, eco­nomic de­vel­op­ment will also be un­der­mined if the au­thor­i­ties fail to pro­vide enough wel­fare for the peo­ple. There is a les­son to be learned here from the planned econ­omy. China's so­cial wel­fare level to­day is not high; there is much room for im­prove­ment. So to strike the right bal­ance be­tween wel­fare and eco- nomic de­vel­op­ment, we should abide by the fol­low­ing prin­ci­ples:

One, it has to be clar­i­fied that the ba­sic and fi­nal goal of China's eco­nomic de­vel­op­ment is the well-be­ing of the Chi­nese peo­ple. And since China is the world's se­cond-largest econ­omy, it should pay more at­ten­tion to im­prov­ing pub­lic wel­fare. The Fifth Plenum of the 18th Com­mu­nist Party of China Cen­tral Com­mit­tee said the na­tional GDP and ur­ban and ru­ral res­i­dents' in­comes have to be dou­bled by 2020 com­pared with the 2010 level, and hence the au­thor­i­ties should fo­cus on co­or­di­nated de­vel­op­ment to im­prove pub­lic ser­vices.

Two, the dis­tri­bu­tion of pub­lic wel­fare should be fair and trans­par­ent. The pub­lic wel­fare dif­fer­ent so­cial groups en­joy to­day is un­bal­anced, es­pe­cially when it comes to ur­ban and ru­ral ar­eas. There­fore, the au­thor­i­ties should make ef­forts to rec­tify the im­bal­ance. Three, the au­thor­i­ties should take mea­sures to pre­vent un­fair­ness and cor­rup­tion from creep­ing into re­dis­tri­bu­tion of wel­fare.

And four, they should not for­get that China is still a de­vel­op­ing coun­try, and de­vel­op­ment is key to solv­ing so­cial eco­nomic prob­lems, and only fur­ther de­vel­op­ment can guar­an­tee sus­tain­able and high­level wel­fare. More im­por­tantly, de­vel­op­ment prob­lems should not be used as an ex­cuse to re­duce pub­lic wel­fare.

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