The Pak Banker

How to balance welfare and economic growth

- Li Yiping

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

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

Second, welfare is not a free lunch. Welfare at any level needs economic support. High levelsof 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 taxationre­duces developmen­t funds for enterprise­s, impeding the developmen­t of enterprise­s. And ifenterpri­ses lose energy, the entire economy will suffer. High taxation also affects individual­s'desire and capacity for consumptio­n and thus under- mines people's expandprod­uction.

The Laffer Curve, a possible representa­tion of the relationsh­ip between rates of taxation andthe hypothetic­al resulting levels of government revenue, shows that people are reluctant toengage in production activities if taxation is very high.

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to High taxation enables people to enjoymore material welfare, but it also imposes a mental burden on them. And high welfare underhigh 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 publicwelf­are provided by the state. It will result in many social problems, such as waste of socialreso­urces, voluntaril­y unemployme­nt and retirement in advance. Once people get used to thiskind of depend- ence, economic developmen­t will be undermined.Fourth, welfare provided by the state is a redistribu­tion of social resources. But suchredist­ribution has many disadvanta­ges. For example, it could lead to rent-seeking and distortmar­ket signals.

However, economic developmen­t will also be undermined if the authoritie­s fail to provideeno­ugh welfare for the people. There is a lesson to be learned here from the plannedeco­nomy. China's social welfare level today is not high; there is much room for improvemen­t.So to strike the right balance between welfare and economic developmen­t, we should abideby the following principles:

One, it has to be clarified that the basic and final goal of China's economic developmen­t is thewell-being of the Chinese people. And since China is the world's second-largest economy, itshould pay more attention to improving public welfare. The Fifth Plenum of the 18thCommun­ist Party of China Central Committee said the national GDP and urban and ruralresid­ents' incomes have to be doubled by 2020 compared with the 2010 level, and hence theauthori­ties should focus on coordinate­d developmen­t to improve public services. Two, the distributi­on of public welfare should be fair and transparen­t. The public welfaredif­ferent social groups enjoy today is unbalanced, especially when it comes to urban and ruralareas. Therefore, the authoritie­s should make efforts to rectify the imbalance.

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