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China Must Push Ahead with Income Distribution Reform
Summary:Income inequality is one of the most pressing problems reaching every corner of China. With the planned Income Distribution Reform, the government should focus on dismantling state-owned monopolies to increase competition and curb corruption, as well as invest more in social security fields that will encourage personal consumption and business investment.

By EO Editorial Board
Issue 590, Oct 15, 2012

Translated by Zhu Na

Original article:

At the “Two Sessions” in March, Premier Wen Jiabao said that an overall plan to reform the country's income distribution system must be launched this year. At present, a reform plan is already circulating among ministerial-level officials and will hopefully be launched soon.

Reform of the income distribution system is an enormous and complicated task with implications for the interests of the entire country. Hence, the difficulty and slow speed of its implementation is understandable. But the closer its introduction gets, the more uneasy people feel.

It’s an indisputable fact that the income gap in China has widened to a dangerous level. Whether it’s the gap between lower class workers and the wealthy upper class, or the differences between various industries and regions, a wide gap exists at all levels of society.

It’s even more shocking when looking at the amount of corruption - the massive hidden expenditure of public funds as officials funnel hundreds of millions of yuan into their own pockets.

China’s current unfair distribution of income is partly caused by the disparity between urban and rural areas and coastal and inland regions. But it can also be attributed to industrial monopolies and government agencies competing with the private sector.

The household registration system also continues to exclude rural people from the same level of social welfare enjoyed by those living in the cities, and the wealth of coastal cities hasn’t driven the economy of central and western regions nearly fast enough. State-owned monopoly enterprises make use of advantageous policy settings and trade barriers to greedily suck away the earnings of ordinary people, leading to a substantial increase in the wealth of those work in monopoly industries.

China’s Gini coefficient - an index used by economists to measure income distribution - hasn’t been released since the year 2000. The official explanation is that it’s hard to obtain accurate data in relation to the wealth of high-income earners. Experts have predicted that China’s Gini coefficient long ago surpassed the “international warning line" of 0.4. Now, it could be as high as 0.5.

Fiscal revenue absorbed by the government through tax collection and the leading of land is increasing year-to-year, while ordinary people’s income growth is slowing. 

In the period from 2002 to 2011, the country’s fiscal revenue increased 20.4 percent while people's income increased by only 13.7 percent. During the same period, the average growth of fiscal revenue in the U.S. was 1.86 percent while incomes grew by an average of 3.95 percent. In South Korea, revenues were up 6.6 percent and income 6.4 percent.

Government spending on areas that matter to people’s livelihoods can narrow the income gap effectively. But the reality is that expenditures in 2011 on education, healthcare, social security and public housing accounted for only 30.6 percent of the government’s budget. In U.S., however, the expenditure in these four areas accounted for 52 percent. It was 53 percent in Taiwan and 63 percent in Japan. From this point of view, China’s spending on livelihood concerns is still far from enough.

Therefore, to alleviate the issue of unequal income distribution in China, the first thing that needs to be done is dismantling the monopoly of state-owned enterprises and introducing market competition. This will make the profit margins in monopoly industries return to the normal range.

Meanwhile, the government can also cut taxes for businesses and residents while spending more on people’s welfare.

As for calls to raise the minimum wage, the government needs to make detailed and specific considerations. After the introduction of the new Labor Law, many private enterprises suffered because of the substantial increase in labor costs coupled with the deterioration of the macro-economic situation and market environment.

In a market economy, the government should respect the law of markets and reduce intervention through tough policies. The success or failure of income distribution system reform is about whether China’s economy can maintain steady growth in the next stage of economic development. 

Breaking industry monopolies can bring more vitality to the market through fair competition and can provide better and cheaper services for consumers. Thus, it will also promote consumption.

And through reducing the tax burden on businesses and residents while increasing investment in social security, the construction of a social safety net can be sped up. This will provide support for residents in increasing consumption and enterprises in expanding investment.

However, even if the income distribution reform plan breaks through various barriers being erected by special interests and is finally introduced, the government will still need to effectively plan the details of implementation in order to make sure that this important policy benefits both the people and the country. 

It’s predictable that implementation of the reform plan won’t go smoothly.


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