The Spiral of Income Distribution Reform Should Produce Results

By Zhang Xiangdong
Published: 2010-10-14

News, page 7
Issue 489, October 11, 2010
Translated by Rose Scobie
Original article:

Looking back at China’s income distribution over the past ten years, Wei Zhong has seen big changes. However, the changes are not necessarily positive. In the past ten years, people’s income as a proportion of national revenue has decreased. Recently, from 2005-2007, the proportion’s rate of decrease has grown.

Wei Zhong is an economics researcher for the Chinese Academy of Social Sciences. He participated in the National Development and Reform Commission’s (NDRC) drafting of the 2006 Income Distribution Reform Plan. His research shows that over the past ten years, the actual income of China’s residents has declined in proportion to the national disposable income, possibly falling to around 15 percent.

Since 2005 when the NDRC started drafting the Income Distribution Reform Plan, attention turned to income distribution reform, which had been stalled by the jostling of interests through the end of the “11th Five Year Plan”.

The course of the 12th Five Year Plan is connected to the living conditions of 1.3 billion people and China’s future economic development; can we succeed in avoiding repeating past hesitations and bad practices?

Three Main Keys of Reform

China Society of Economic Reform president Song Xiaowu stated that at present, in regards to China’s domestic income distribution reform, experts and officials say that there is no longer any debate about income distribution reform; it is mainly a question of whether the decision-makers have the determination to carry it out.

Song Xiaowu stated that over the past ten years, endless discussions have taken place about income distribution, and on the whole, all topics have been researched; current discussions are still about old problems and have grown stale.

Song Xiaowu said the three issues that he is most tired of are tax reform, social security and salaries increases. But these are the three core parts that China needs to resolve while reforming income distribution.

This past August, the National People's Congress (NPC) Financial and Economic Committee and the China Democratic League have put forward their suggestions on income distribution reform, touching upon the issues mentioned above. Wei Zhong stated China’s current taxation system has already created large inequalities in income. Because most of local government tax revenue is handed over to the central government, local governments can only use different measures to expand their finances and citizens and enterprises become victims of the income distribution system. The majority of the society's wealth that has been collected by the central government is used on large scale investment to increase economic growth. According to income distribution reform researchers, this is an unsustainable, abnormal development pattern.

Research reports by the NPC Finance and Economics Committee and the Chinese Democratic League on income distribution reform indicate that through reforming the tax system, and increasing public transfer payments, along with other measures, can increase the amount of societal wealth in the hands of local governments and enterprises, motivating local governments to improve social security and enterprises to increase wages. It is still unknown whether this bold suggestion will influence the central government's tax system reform.

In addition, domestic enterprises have also become a lynchpin of income distribution reform. It appears to Wei Zhong that because of systemic problems in many government-run, state-owned industries, basic costs have used society’s resources, but have not benefited the common people. Wei Zhong states, “This is the biggest problem causing inequality in China’s income distribution.”  Experts recommend that centrally-administered enterprises increase the proportions of dividends they hand over to the government and limit the salary and benefits of the heads of industry monopolies and their employees.

During 2006, when the NDRC put forward the income distribution reform draft project, the proportion of revenue centrally-administered enterprises handed over to authorities increased to 50 percent. But due to strong opposition from the State-owned Assets and Supervision and Administration Commission (SASAC), it ultimately fell through. Afterwards, the SASAC put forward a “salary freeze” aimed at the senior management of centrally-administered enterprises. But the reform method of increasing the proportion of revenue centrally-owned enterprises must hand over to government has remained at a standstill.

In regards to social security, during the past few years, related ministries and departments have been constantly improving the basics of the retirement system. The scope of social security coverage is constantly expanding and social security costs are also constantly increasing.

However, the success of these methods is limited. The wealth gap among Chinese residents is continually expanding. Wei Zhong expressed if it is impossible to limit the high salaries of industry monopoly employees, it is impossible to realistically increase the salaries of residents. Starting with social security reform will not solve the problem of unequal income distribution.

Industry experts think a mechanism to increase wages is the key issue of income distribution reform, but it is also a relatively difficult problem for the government to solve. Not too long ago, the All-China Federation of Industry and Commerce submitted to the State Council a research report on income distribution reform. According to the reports suggestions, the tax on privately owned enterprises should be lowered. This suggestion has been repeated in reports by the NPC and the China Democratic League. A representative from the Chine Democratic League stated, “Sufficiently lowering the tax burden of private enterprises will promote the increase of workers’ salaries. If the dividends of privately owned enterprises are all given to the government, how can enterprises avoid lowering their employee wages?”

Song Xiaowu recommends the immediate establishment of a mechanism for labor wage negotiations with labor union characteristics. The head of the labor wage research institute of the Ministry of Human Resources and Social Security (MOHRSS) Su Hainan suggests establishing a mechanism to set wage increases in relation with local GDP, CPI and other economic indicators.

Various officials with the NDRC have recently explained to the EO that income distribution reform involves the interests of many departments; it needs to be coordinated with all parties, which is as difficult as one imagines. This is why this plan has been delayed for over five years. 

The NDRC's Research Roadmap

Since 2006, when the NDRC was assigned to draft the Income Distribution Reform Plan, the NDRC has been in heated debate. Starting this year, the NDRC has successively conducted research in various localities and held conferences on the topic of income distribution reform. From their research and discussions the outside world can see the roadmap of income distribution reform.

Last February the NDRC Department of Employment and Income Distribution investigated Sichuan province; their research mainly involved the reform of the rural property system, agricultural industrialization, and the situation regarding wage increases of rural residents who work for enterprises.

In April, the NDRC Department of Employment and Income Distribution investigated Zhejiang province. During the investigation the vice head of the department, Liu Hao stated to a local official that he hoped Zhejiang would maintain and develop their mechanism for increasing worker wages, setting an example for the rest of their country through their experience.

This month after the NDRC department completed their research in Zhejiang, they convened a closed-door conference in Beijing with related ministries and experts focusing on policy regarding social security reform tasks and policy measures of the 12th Five Year Plan.

According to reports the above mentioned conference discussed difficult issues such as the social security of rural residents who faced land requisition, pension system reform, medical aid in the city and countryside, and other basic keys to balancing the inequality in the healthcare system. The aim of this conference is to perfect the social security system during the course of the 12th Five Year Plan.

According to a source who attended the conference the NDRC Department of Employment and Income Distribution expressed, “No matter what it takes, we must come up with something this year, income distribution cannot be empty talk.” It has been reported that at the conference, Zhang Dongsheng, director of the NDRC Department of Employment and Income Distribution,  mentioned that income distribution reform must develop a system to redistribute the dividends of state-owned enterprises and industry monopolies through methods such as the transfer of rights and interests to a social security fund, and putting part of their profits into the public budget, creating an effective channel through which the public can enjoy the profits of state-owned monopoly enterprises.

Zhang Dongsheng expressed that reform should lean towards redistributing income to residents. He also proposed five measures to make sure the reform would favor residents including tax reform, increasing social security and worker wages, and the three core issues regarding reform. Other than lowering the level of unemployment and easing the wealth gap between cities and the countryside, the rest of the measures can be implemented in the next round of reforms. These five measures are basically in line with recommendations provided by the NPC Finance and Economics Committee based on their investigation.

This past June, the NDRC Department of Employment and Income Distribution and the mediation arbitration management office of the MOHRSS conducted building capacity research in Guangxi and Jiangsu. Their research concerned labor dispute mediation and the arbitration of personnel problems existing in the field. They researched and discussed how to further strengthen labor dispute mediation and arbitration services.

On September 13, the NDRC held another closed door meeting about income distribution reform. In this meeting, related experts and officials discussed increasing the proportion of revenue that state-owned enterprises turn over to the central government, and testing out the expansion of the scope of state-owned capital operations budget, increasing the finances and power transferred to local governments, and increasing social security equality. A collective labor and capital bargaining system was also discussed in the meeting.

According to reports, the research conducted by the NDRC is of great concern to the government and this October, at the Fifth Plenary Session of the Seventeenth CPC Central Committee when the 12th Five Year Plan is up for review and discussion, income distribution is one of the most important topics that will be covered. The whole nation hopes that the NDRC will put forward their income distribution reform plan before the release of the 12th Five Year Plan. It is understood that the complete set of documents on income distribution reform and the Wage Increase Regulations drafted by the MOHRSS is basically complete.

At present it looks like there are no means for income reform to regress. But this reform has been in the works for many years; how the reform will suffer due when the interests of different parties come into play is unknown. Whether the reform will actually be able to transform the problem of increasing income inequality remains to be seen.

This article was edited by Ruoji Tang