China has been emphasizing common prosperity again. Is this a policy reversal after the reform and opening-up of the previous planned economy allowed part of the population to get rich first? Not necessarily so.
Inequity in the distribution of wealth in society is a global issue. After studying inequality in France, Britain and the United States using a normative approach, French scholar Thomas Piketty concluded that capitalism has failed to resolve inequality. That contemporary trends of thought in European and American societies are turning to progressivism has a lot to do with unequal distribution of wealth after such basic needs as food and clothing are met.
An essential difference is that China’s failure to achieve common prosperity took place on an economic foundation different from that of the unfair distribution in America and the advanced countries of Europe. Practice has taught us that public ownership is an institutional foundation for tackling the wealth gap, but it’s not a universal panacea with both sufficient and necessary conditions for common prosperity. We have also found out from large-scale social experiments that, at certain stages of economic development, narrowing the wealth gap in a “cake-sharing” manner doesn’t apply to every aspect of social production and may more or less dampen producers’ enthusiasm for cake-making under some conditions, resulting in low social productivity in some aspects. In an international environment where factors of production are highly fluid, the policy balance between cake-sharing and cake-making may influence a country’s international competitiveness.
Talking about reforms in rural China in the 1980s, general descriptions only refer to the format of contract-based household production quotas. Meticulous economic analysts, such as Hai Wen, found that rural economic reforms at the time started with cake-sharing.
Previously, the State got as much as possible from farmers by letting them hand in tax grain and sell their surplus. And farmers’ earnings were basically fixed. After the reforms, the State gets a fixed portion, and farmers can keep the rest. This approach to cake-sharing stimulated farmers’ enthusiasm for production in unprecedented ways. The impasse in agricultural production at the time was resolved quickly.
Allowing township enterprises to develop, allowing a private economy to develop under the umbrella of township enterprises and then, later, formally allowing a non-State economy to develop were all reforms that gave people cake-making rights. When the policy adjustments increased people’s enthusiasm for cake-making, capital accumulation began to accelerate and the economy also grew at a considerably higher speed. Yet price scissors between agriculture and manufacturing caused agriculture to lag, which is an economic conundrum no country can avoid in the industrialization process. It’s also why, at a certain development stage, common prosperity cannot be synchronous prosperity.
From the perspective of social policy evolution, it’s a common phenomenon in all countries’ development processes under various economic systems that in wealth distribution among capital, labor and government, labor is in a relatively disadvantaged position, while capital is allowed to get a bigger share at a certain stage of capital accumulation — or a “competent” government is allowed to get more, as a way of laying a more solid foundation for future economic development.
Under the particular condition that government investments are an important driver of economic growth in China, macroeconomic figures show that income distribution favors capital and government. Moreover, since a great proportion of laborers are farmers who work away from home and are unable to enjoy the kind of social welfare and care available to urban residents, labor finds itself in an even weaker position in cake-sharing.
But things are changing. A macro premise of the present effort to promote common prosperity is that there must be a substantial break from the country’s previous mode of growth. There is a consensus among both domestic and overseas economists that in the next stage the Chinese economy should turn from investment-driven to consumption-driven. The foremost obstacle in the growth mode transfer is that, because public policies have long favored public and capital accumulations, with the labor side not getting a fair share of the cake, the aspiration for a rapid growth mode switch lacks real-world support.
Therefore, from the perspective of economic development, today’s emphasis on common prosperity can be seen as an upgrade of the past development philosophy and corresponding wealth distribution regime. It’s also a sequel to reforming the approach to growth. It should not be understood simply as a policy meant to build a welfare state. If that’s the case, it will change the balance of cake-sharing. Once it is incorrectly interpreted and implemented — and becomes exploitation of capital or a carnival of third-time distribution — the initiative for cake-making will be hurt. Such a mistake will reverse reforms and will be fatal.
Overseas China watchers are speculating, based on the inherent nature of Chinese public ownership, whether or not the country is robbing the rich to help the poor. According to analyses of the distribution of wealth in China, as well as public opinion on social media networks, such suspicions are not entirely groundless. However, so long as China’s policy tools are firmly focused on making the cake bigger in its pursuit of common prosperity, its reforms should place more weight on the aspect of cake-making rights.
Concentrating on reforms concerning those cake-making rights, while unleashing the potential driver of consumption for Chinese economic growth, will truly help expand the economy’s internal circulation and balance internal and external circulation. This will naturally greatly reduce pressure on exports, reduce the influence of foreign exchange reserves on the domestic monetary base and also be conducive to easing tensions with major trading partners.
Tension over trade issues, as a primary factor in China-U.S. relations, will also be gradually eased. Doing China’s own things well will ease tensions in international relations at multiple levels. In addition, reforms to support common prosperity will not be affected by the international environment, as adjustments are made in wealth distribution to capital, government and labor. This is also compatible with China’s application for joining the CPTPP and accepting certain multilateral discipline.