Expanding the middle-income group

China demonstrates that generating wealth and reducing inequality can take place together

As China’s leaders assess strategies for implementing the dual-circulation and common-prosperity initiatives, it is useful to reflect on the broad ambitions of the programs: stable economic growth, technological innovation and social equity.

By examining the nation’s previous progress toward these goals, as well as the relevant experiences of other countries, one can develop a clearer view of the challenges and opportunities at hand.

To begin with, we should recall that China’s more than four decades of economic reform and opening-up have created unprecedented growth in individual wealth. GDP per capita rose by about 10 percent per year (on average) from 1981 to 2020.

Furthermore, as a result of both the extraordinary number of highpaying urban jobs created by this expansion and the government’s subsequent targeted poverty-alleviation program, the nation was able to declare the elimination of absolute poverty in February last year. In this way, China demonstrated conclusively that generating wealth and innovation can occur simultaneously with a concrete reduction in economic inequality.

Today’s dual-circulation and common-prosperity initiatives are intended to extend these earlier successes by expanding China’s middleincome group. The two-pronged approach is based on the sensible idea that directing a larger share of the nation’s income from the very wealthy to the middle-income group will not only improve social equity but also create a broader customer base for high-quality domestic goods and services. This increase in demand will then generate higher levels of national income and ensure stable growth at a time of uncertain global trade patterns.

To reduce economic inequality, governments around the world have many tools at their disposal. Often the first to come to mind are direct mechanisms for transferring wealth, including higher income taxes on the wealthiest individuals and corporations, direct financial subsidies for lower-income workers, and minimum-wage requirements. However, another approach — enhanced market regulation to reduce concentrations of power and their economic distortions — offers the potential for deeper and more effective solutions.

Although direct wealth transfers can play an important role in improving social equity, they are most useful as short-term remedies. This is illustrated by China’s poverty-alleviation program, in which loans and subsidies were given to the rural poor as immediate relief while longer-term government investments in local education, infrastructure and commerce took effect. In the context of its commonprosperity initiative, China has focused primarily on regulatory initiatives to reduce a variety of economic distortions: unlevel playing fields for small investors, businesses generating a negative social influence, and anti-competitive concentrations of market power.

In the near future we should expect to see a continuation and natural extension of these types of reforms, with greater focus on measures to ensure reaching the nation’s economic growth, technological innovation and social equity goals.

Such regulatory efforts are likely to include close oversight of real estate development and investment activities; promotion of financial advisory and fund management services; support for innovation in the energy and semiconductor industries; and continued restraints on monopoly power in the technology sector to promote innovation by new market entrants.

China undoubtedly will confront situations viewed by some as tradeoffs between enhanced technological innovation on the one hand and greater economic equity on the other. However, it is important to keep in mind that the innovation versus equity dichotomy is often a false choice, since well-crafted regulatory measures can foster entrepreneurial activity and economic fairness at the same time. Market participants who understand this will have little reason to fear uncertainty.