Fairer sharing of the fruits of growth
The long-term challenge of reducing inequality calls for remedies that address the causes
China’s development since 1949 can be viewed as being in three stages. The first one was the period from the founding of the People’s Republic to approximately the mid-1980s. It was a period in which the foundations of a new China were laid. The level of education and health of the population were improved substantially, and serious industrialization began. The second stage, from the mid-1980s to a few years ago, was a period of extraordinary rapid growth and urbanization accompanied by significant increases in inequality.
China’s GDP per capita, measured in real international dollars, increased from about $1,000 in 1985 to $10,000 in 2010. Inequality, measured by the Gini coefficient (a standard gauge of inequality), went up over the same period from 0.31 to 0.49 (2010 was the peak year for inequality). The inequality increase is not the same when overall incomes shrink or are stagnant as it is when all incomes go up. Still, even under such favorable circumstances, the increase in inequality has been a matter of concern.
The period of “common prosperity” may be seen as the third stage of development. It may extend over several decades during which higher incomes are to be accompanied by reduced inequality.
Any attempt to reduce inequality must start from two considerations: first, what are the main causes of the inequality, and second, how they can be tackled without affecting the growth rate. In today’s China, some causes of inequality are very Chinaspecific, and others are shared by many middle- and highincome countries. The causes specific to China are large inter-regional, or more exactly, inter-provincial inequality, and inequality between rural and urban areas.
Although both types of inequality have been reduced during the past decade, they are still very large. They are also an inequality of particularly undesirable kind because they make the chances of success in life for children born in richer parts of China very different from those born in poorer provinces. The average income of people in the three richest areas (Beijing, Shanghai and Jiangsu province) is four times as high as the average income in the three poorest regions (the Guangxi Zhuang autonomous region and Heilongjiang and Gansu provinces). Here, the objective of reduction of inequality is closely tied with the objective of higher growth rates of poorer areas. A redirection of government investment strategies in favor of less developed provinces is at the same time a pro-growth and pro-equality measure.
The second specific source of inequality in China is the urbanrural gap. That too has diminished over the past decade. In 2010, the gap, measured using the data from household surveys, was almost 3 to 1 (urban incomes were three times greater than rural incomes), while in 2019 it was 2.7 times. It will be reduced further by the process
of eliminating the disparity between urban and rural areas and advancing rural-urban integration.
There are also, as mentioned, inequalities not specific to China but common to many countries. One of the most important is the high concentration of wealth and income from assets. How can excessive wealth concentration be tackled? There are several ways in which it can be done.
The government can reduce the monopoly power of very large companies. Such monopolies exacerbate income inequality. Another policy consists in encouraging middle-income groups to invest in financial assets by protecting small investors from excessively turbulent movements in asset prices or by giving them special tax advantages. Increasing the number of workers who own stakes in companies where they work is another way to promote the deconcentration of wealth. And finally, higher taxes on capital incomes or wealth are an obvious way to reduce inequality.
As these examples show, active measures need to be combined with “passive” measures. The best results can be expected not from using one set of policies alone but by combining several. That approach also allows for self-correction: if certain policies do not yield the desired results or have negative effects, they can be scaled down or stopped.
If the objective of “common prosperity” is understood to mean a more equitable sharing of the fruits of growth, attaining such an objective cannot be done overnight. It implies having consistent policies in place for a long period of time since changes in income distribution often take a whole generation to take effect. There are thus similarities between the “common prosperity” era and that of the accelerated growth period that began 40 years ago, since “common prosperity” is also a long-term objective that requires the implementation of appropriate policies pursued in a steady fashion.
The author is former lead economist in the World Bank’s research department and author of Capitalism, Alone. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.