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UPDATED: November 9, 2007 NO.46 NOV.15, 2007
Prosperity for All

Hu Jintao, General Secretary of the Central Committee of the Communist Party of China (CPC), pledged at the 17th CPC National Congress that the ruling party will spare no effort to deepen reform of the present income distribution system. Hu said this would help achieve a more balanced income structure for both urban and rural dwellers, which he regarded as a major guarantee of social equity. The 21st Century Business Herald, an influential Chinese business journal, invited Wang Dongjing, Director General of Economic Faculty at the Party School of the CPC Central Committee, and Su Hainan, an expert on income distribution from the Ministry of Labor and Social Security, to comment on the current problems facing earnings equity and the prospects of the ongoing distribution reform. Excerpts follow:

China's problem now is that the value of labor has been greatly underestimated in the market, as a result of the more-supply-than-demand employment structure The Chinese economy maintained a strong growth momentum by keeping the rate above 8 percent for consecutive years, while its national income gap got consistently bigger during this time. Statistics of the Asian Development Bank revealed that China's Gini Coefficient has climbed up to last year's 0.47 from previous 0.407 of 1993. What is your take on this?

Wang: The Gini Coefficient is a major index to measure inequality, but there are also other indicators.

Under a developing market economy, the old "equalitarian" distribution system has been abandoned. In China, we allow some people to become rich first through their own efforts, but an excessive income gap will destabilize social order, and is something that needs government's attention.

Therefore, on one hand, we are calling for fairness, while on the other, we are against extreme gaps. We allow a reasonable wage gap by encouraging people to work more and earn more. But the problem is how to confine this to an acceptable level.

The side effects of this huge gap are mainly seen in the following two aspects. First, as earnings increase, living standards have been generally raised, but low-income groups are slow to reap the rewards of this prosperity for a number of reasons. In the long term, this will trigger emotional dissatisfaction and affect social stability. Second, China must boost domestic demand for a more sustained economic growth, which previously relied more on investment and exports. When high-income groups are not enthusiastic to spend, and low-income people are not capable of buying, the principles of consumption cannot work. Thus, the only solution is to raise the income level of the latter, enabling more people to spend more.

The Chinese Government is more aware of the necessity to reshape the country's current wealth distribution system by adopting new measures, such as the exemption of agricultural tax and subsidies for farmers, as well as an overhaul of the salary system for civil servants. Yet no fundamental changes have taken place in terms of the social wealth gap. What are the obstacles to further reform in your view?

Su: The process of the Chinese economy moving from the outdated planned model to a fledgling market-oriented one is still in transition. At this pivotal stage of reform, problems in the field of wealth distribution have been largely exposed by the absence of government interference and effective mechanisms for adjustments. China's dualistic urban-rural economic structure and low productivity in the countryside, in addition to restraints caused by the land system and restrictive hukou (household registration) system that prevents migrants from entering cities, have made it harder for farmers to substantially increase their income. An inefficient market system, unconnected industrial chain, blocked capital circulation channels, profit-eating subcontracting of construction projects, industrial monopolies in some sectors, and still to be unified taxes for domestic and foreign-funded companies, have all intensified an already imbalanced wealth distribution. In the job market, it is evident that supply exceeds demand. A large number of semi-skilled workers make it possible for employers to exploit their labor forces, making profits through paying poor wages.

Due to geographical and natural differences, transportation conditions and investment environment are comparatively underdeveloped in west China. And this has in turn bred more development imbalance caused by higher costs. People in rural areas also have fewer opportunities to be educated than their urban counterparts. Poverty-stricken youth have little chance of qualifying for higher education, and that is another reason for this increasingly wide wealth gap.

General Secretary Hu Jintao said the present distribution system would be upgraded in a more scientific approach by increasing the share of earned income in primary distribution. He also suggested improving the distribution system "to allow factors of production such as labor, capital, technology and managerial expertise to have a rightful share according to their respective contribution." What would be a fair proportional arrangement for these sectors?

Su: Looking back at the history of foreign countries and China's own path, there should be no omnipotent pattern. The proportional "rewards" for every factor of production must be in line with social development.

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