Forty Years of Renovating the Income Distribution in China: Experience, Theory and Expectation 981336243X, 9789813362437

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Heng Quan, et al.

Forty Years of Renovating the Income Distribution in China Experience, Theory and Expectation

Forty Years of Renovating the Income Distribution in China

Heng Quan

Forty Years of Renovating the Income Distribution in China Experience, Theory and Expectation

Heng Quan Shanghai Academy of Social Sciences Shanghai, China Translated by Xie’an Huang Shanghai International Studies University Shanghai, China

ISBN 978-981-33-6243-7 ISBN 978-981-33-6244-4 (eBook) https://doi.org/10.1007/978-981-33-6244-4 Jointly published with Shanghai Jiao Tong University Press The print edition is not for sale in China Mainland. Customers from China Mainland please order the print book from Shanghai Jiao Tong University Press. © Shanghai Jiao Tong University Press 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publishers, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publishers nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publishers remain neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Foreword

2018 marks the 40th anniversary of China’s reform and opening-up. The four decades of reform and opening-up have been a dramatic history in which the Chinese people, with both hands, have been blazing the trail towards prosperity. China’s success over the past 40 years gives us great confidence in socialism with Chinese characteristics. From implementing the joint contract responsibility system in rural areas and economic system reform in towns, the establishment of Shenzhen Special Economic Zone, the accession to the World Trade Organization, the great development of Pudong New Area, to the establishment of pilot free trade zones, from mainstreaming socialist market economy to promoting the rule of law, from opening up the coastal areas to implementing the Belt and Road Initiative, China has braved into various frontiers, substituting new rules for old ones that are restricting our development. Solid facts and dazzling achievements have fully proved that China’s reform and opening-up represents a new great revolution in which the Party has led and is still leading the people to build and realize the two “centennial goals” and the ambitious “Chinese dream”. The program of reform and opening to the outside world, fully aligned with the needs and conditions of China, has been proven right and effective. In retrospection, reform and opening to the outside world is the most critical factor of China’s success. “Reform and opening-up is a great reawakening of the Communist Party of China, nurturing great creativity in theory and practice,” as the report to the 18th CPC National Congress says. Since the Congress, the Central Committee of the Communist Party of China, with Comrade Xi Jinping as its core, has continued to advance reform and opening-up with greater political courage, wisdom, and overall planning. In the practice of reform, we have made strong transformative moves, secured major advances in many areas, and made waves of progress, making breakthroughs in important fields and at key links. Frameworks have been built up in key areas of reform. Over 40 years, we have gained valuable experience and inspiration. A country has identified world trends and historical clues for achieving prosperity in the new age. China’s reform and opening-up program is successful because we’ve met the historical demand of the Chinese people to develop and live a better life, and to meet the needs of all people in the world to grow, cooperate and live in peace. At present, v

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innovation is the powerful driver of development. All countries in the world are speeding up their reform and innovation. A new round of technological revolution plus industry revolution is spreading. The winner of this game is the one who has more wisdom, courage, and commitment to innovation. In this sense, reform is a critical test for the government and a key guarantee for the potential and competitiveness of any country. The determination to reform and achieve the desired outcome is the topmost indicator of the political potential and governing capability of the ruling party of all countries in the world. Any ruling party that can mobilize the country to reform has the biggest competitive power and the strongest resilience in the future. China’s glorious course of reform, to a great extent, reveals the law of development. One of the key reasons why China’s reform and opening-up under the leadership of the Communist Party of China has turned out to be a great success is that reform has been sublimated to the level of philosophy, as CPC has used dialectics in navigating the reform and handling incentive conflicts. In other words, a major revelation is that we should master the course of reform by balancing various needs. The first conflict is between the top-level design and accumulation of experience at the bottom level. Since the 18th CPC National Congress, we have conducted pilot projects to explore the areas where breakthroughs must be made but the prospect has not been clear yet. Then, the successful experience would be accumulated, replicated, and finally promoted as a top-down program. Of course, it is necessary to pick the areas to be explored, the initiatives to be tested, and the regions where the pilot projects can be started. This demands topdown design and overall planning. The achievements of development since the 18th CPC National Congress have shown that the accumulation of experience at the bottom level should be guided by the top-down design, while top-down design should also base on the experience and realities from the bottom level. The second conflict has occurred between overall progress and breakthrough at key points. As China’s reform advances and deepens, we must keep our eyes on its system, integrity, and coordination. We can no longer focus on piecemeal reform in a certain field just as in the early years of reform. The reform should first cover economic development but also embrace various fields such as social and cultural progress and the improvement of people’s wellbeing. On the other hand, reform efforts cannot spread out equally or advance in parallel. Key links, key areas, and key points should be identified and handled with special efforts. Overall progress and breakthrough at key points in fact support each other, so they must deserve equal attention. The third is the conflict between boldness and evidence-based conservativeness. As any reform would seek to change the current pattern and system, there may be risks and uncertainties. Some issues, like those involving interest conflict, may cause troubles. In this case, officials at all levels must possess enough courage, and take bold steps to address issues that they believe must be handled. The general principle is to take prudent steps forward. For this purpose, we must fully consider the issues and scientifically evaluate the initiatives of reform. The key of keys is to follow the leadership of the Party and remain committed to people- centrism. Under the leadership of the Communist Party of China, we must

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always put the interests of the people in the center of everything. In other words, we must mobilize and empower the people to advance our reform. For this purpose, we should understand the people’s needs and raise their awareness that we’re doing what they think we should, in order to create a favorable atmosphere for implementing the reform and opening-up program. We should raise the awareness of CPC members and government officials who are obliged to act as role models for the masses of people. This would create a strong faith in the cause of reform and opening-up, and mobilize the entire community to link personal wellbeing with the outcome of reform and opening-up. We should measure the success of reform by the well-being and satisfaction of the people. Each age group and generation have their own challenges and missions. This is a new era and a historic juncture in China’s development when the timeframes of the two “centennial goals” overlap. We’re about to realize the first centennial goal, and we’re working towards the second. The bright future is just ahead of us, and yet bigger challenges are waiting for us on the way. It is high time we step forward with both power and prudence. The success of China’s reform and opening-up is a great example to show that, in order to go from victory to victory, we must be strongly committed to reform and implement the program across-the-board and refine it from time to time. We must implement the guiding principles established by the CPC’s 19th National Congress and the second and third plenary sessions of the 19th Party Central Committee, embed new development concepts in our work, deepen the supply-side structural reform, accelerate the improvement of the socialist market economy, and realize opening-up on all fronts. We should also deepen the State governance reform, adjust the environment conservation policy, continue to deepen national defense and military reform, and improve Party and State supervision systems. According to President Xi Jinping, “Shanghai should serve as a national leader of reform and opening-up and play a pioneering role of innovation and development.” In fact, since the 18th CPC National Congress, Shanghai has conducted a host of pilot programs to deepen the reform and opening-up program. The establishment of Shanghai Pilot Free Trade Zone aims to address the issue of too much government control by implementing a negative list, and explore a new mode of government services in which government powers are delegated and decentralized, a modern governance model, which boosts efficiency and compliance with the international trade rules. Shanghai’s efforts to build a Technology Innovation Center will enable China to shift from factor-driven and investment-driven development to innovation-driven development. Shanghai has tried to reform its social government model, starting with the community level, which is suitable for a megacity. The reform of State-owned enterprises in Shanghai aims to shift the focus of government work from “managing enterprises” to “managing capital”. Shanghai actively explores to reform its judicial departments, in order to set up a personnel classification system in accordance with the requirements of legal rule and the legal profession. Shanghai has also conducted pilot programs on taxation reform like substituting VAT for operation tax, the comprehensive college entrance examination reform, and the comprehensive education reform. These reform projects aim to align government orders and policies with the realities and needs of economic and social development.

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The courage behind the attempts is also a driving force for Shanghai and the country to keep moving forward. When celebrating the 40th anniversary of reform and openingup, we’re obliged to sum up the experience of Shanghai and provide new clues for deepening the reform and opening-up of the entire country. Social science theorists should take this opportunity to review and promote this pioneering spirit. Based on the process, achievements, and experience of China’s reform and opening-up program, we should identify the source of power and renew our theories concerning development which could be the basis of a system of social sciences with Chinese characteristics. We should embrace the realities of contemporary China, focusing on the real issues and interpreting China’s experience to offer practical value. This approach will enrich China’s theory, achieve academic innovations, and inform future efforts. The study of the Chinese history of reform and opening-up and its theories will form the basis of an academic discipline, a Chinaoriented academic system and an international discourse system, thus speeding up the development of the Chinese school of philosophy. In 2017, under the auspice of the Publicity Department of CPC Shanghai Municipal Committee, the Shanghai Office for Construction of Academic Discourse System of Philosophy and Social Sciences and the Shanghai Office of Philosophy and Social Sciences Planning sponsored a series of research projects to mark the 40th anniversary of reform and opening-up in Shanghai. Scholars from many universities and social science institutions in Shanghai, such as Fudan University, Shanghai Jiao Tong University, East China Normal University, and Shanghai Academy of Social Sciences, have developed a host of new theories that form a unique academic discourse, on the basis of reviewing the great practice of China and Shanghai over the past 40 years. Some of the theories, as well as some visionary insights, have been put together into a collection in the name of “Four Decades: Shanghai’s Reform and Opening-up”. This collection covers multiple fields of study: economy, politics, society, culture, philosophy, law, science and technology, education, and international relations. As a thorough analysis of the issues in China’s development, the collection offers a theoretical basis and practical recommendations to address them and further advance China’s reform and opening-up. This collection embodies the reflections of the Shanghai academia on the 40 years of reform and opening-up, the historical awareness of social science theorists in Shanghai, and their confidence in realizing the Chinese dream. Yan Shuang Deputy Head Publicity Department of CPC Shanghai Municipal Committee Party Secretary Shanghai Federation of Social Science Association Shanghai, China

Preface

In 2018, we celebrated the 40th anniversary of China’s reform and opening-up program. China’s transformative efforts and our economic and social achievements have exerted a profound and far-reaching influence on human progress. I have no doubt that this great process includes very valuable practices with Chinese characteristics which are worth reviewing and distilling, and will offer us a lot of inspirations. Among others, the economic miracle of long-term rapid growth and the income distribution system of China are topics of great interest to the academia, and their relationship is bound to be the most intriguing issue when one reviews the past 40 years of China’s reform and opening-up. In economic development theory, economic growth (how wealth grows) and income distribution (how wealth is shared) have always been the key issues. Marxist political economics makes a close connection between income distribution and economic growth, which underlies the Marxist analysis framework and methodologies. It is also fascinating to find that amid China’s rapid economic growth, the income gap coexists and continues to widen. It is a critically theoretical and practical problem. For over 20 years, I have focused my attention on the income distribution issues in China, and I have examined the issues from different angles and published a series of books and papers as follows: A Modern Analysis of “Income DistributionEconomic Growth”: China’s Experience and Theory in the Transitional Period (2004), China’s Regional Economy: Coordinated Development (2007), Income Flow and Free Development: An Analysis of Income Distribution and Income Fluidity among Urban and Rural Residents in Shanghai (2008), Labor and Capital: The WinWin Logic (2008), Income Distribution and Income Flow: Chinese Experience and Theory (2012), Income Distribution and Social Equity (2014), The Changing LaborCapital Relationship: The Logic of China’s Economic Growth (2015), The Structure of National Income Distribution: Formation Mechanisms and Adjustment (2015), and The Economics of Income Distribution (2016). In late 2017, I completed the first draft of A Research on the Civil Servants Wage System Reform as a Step to Realize Rational Distribution, which will be published in a book. During the

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period, I have conducted a host of NSSFC research projects, Shanghai Philosophy and Social Science projects, and decision-making advisory projects for Shanghai People’s Government, with a series of academic papers on income distribution published as research outcomes. It is worth mentioning that all these research outcomes have focused on China’s income distribution. Examining this big subject from different angles, my works cover the inherent relationship between economic growth and income distribution in the transition period, the issue of regional economic imbalance and the goal of coordinated development in China, income distribution in China’s megacities like Shanghai, the relationship between labor and capital in terms of distribution in China and how win-win development has been achieved over the past 30 years of reform and opening-up, the income fluidity of China’s urban and rural residents, the income disparity between urban and rural residents in China, the changing relationship between labor and capital in China and its impact on economic growth and transformation in China, and the overall national income distribution system of China. Among my works, The Economics of Income Distribution studies the theoretical economic principle of income distribution, providing a theoretical and methodological basis for the study of income distribution. These studies have made it possible and imperative to review the practices of income distribution in China and their historical changes. Obviously, it is a highly valuable endeavor. On May 18, 2016, in his speech delivered at the seminar on philosophy and social sciences, President Xi Jinping said, “China has a great tradition of studies in philosophy and social sciences. We have a huge team of scholars who have published a huge number of papers. The government funding is remarkable. China has a high ranking in the world league on these fronts. So far, however, China has been weak in agenda setting, academic proposition, academic standards and academic discourse power. To bridge the gap, we should focus on China’s realities and learn from international best practices, explore history and understand the present, care for mankind and face the future. In so doing, we should be able to develop an academic system of philosophy and social sciences with Chinese characteristics. In terms of guiding ideology, disciplinary structure, academic studies and discourse, the philosophy and social science system should fully reflect our own characteristics, our own style and our own aspirations.” This important speech stresses the urgency of further developing philosophy and social sciences in China, and offers the development direction. The practical experience of China’s reform, opening-up, and innovation provides a solid foundation and inspirations for enriching and updating the theoretical system and framing the discourse system of Chinese characteristic economics. In the areas of income distribution reform and economic development only, there are many practices and lessons which are worthy of our review and theoretical exploration. According to my research over the years, income distribution in China has at least two basic aspects that are worth theorizing. One is that China’s income distribution reform has always meant to strike a balance between the government and the market.

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The distribution reform has tried to highlight the basic law that “the market determines the allocation of resources and makes the government play a better role” in income distribution. Economic studies reveal that the relationship between primary distribution and redistribution is another area of reform to improve income distribution, because the balance between efficiency and fairness underlies the relationship between primary distribution and redistribution, and reflects the relationship between the market and the government regarding income distribution. In the past, under a planned economy, especially because we simply copied the socialist economic theory of the Soviet Union, distribution according to work was implemented as the only mode of distribution, and this regime could not ensure either fairness or efficiency. Of course, the idea that the market determines the allocation of resources was never heard of. Obviously, it is not possible to recognize or handle the relationship between primary distribution and redistribution. In the course of income distribution reform, China has renewed the Marxist principle of distribution according to work to de-link work performance from income distribution. The updated doctrine is that distribution according to work should be the main mode, and should be supplemented by distribution according to production factors. The new mode not only complies with the basic distribution principle of Marxism, but also respects the role of competition and the efficiency principle which are highly valued in the market economy. Therefore, the issue of balance between primary distribution and redistribution came up in the socialist market economy. The basic problem is how well primary distribution reveals the law that market determines resource allocation, and how well redistribution reflects the role of the government to ensure fairness and social justice. In a sense, China’s income distribution reform has always aimed to raise efficiency through primary distribution. Efforts included removing all institutional barriers that bar the market from playing the dominant role in resource allocation and encouraging fair competition and efficiency maximization. Meanwhile, China has also tried to clear up factors deterring government functioning, to build a social policy framework and improve the government transfer payment system, aiming to establish a more effective redistribution system. Balancing primary distribution and redistribution through institutional and systematic reform is helpful to address the relationship between the government and the market regarding income distribution. The other is that China’s income distribution reform has aimed to enhance the rule of law, increase transparency and ensure compliance with regulatory rules to shape a new and more reasonable and dependable regime of income distribution. Over the 40 years of reform, China’s income distribution has progressed from the singular and closed mode under planned economy to a diversified and market-oriented mode. The goal is open, fair and transparent income distribution, and then gradually to establish a pluralistic, rational and open income distribution system. Of course, China’s income distribution reform has faced two thorny issues. One is how to prevent from the widening income gap in the process of economic development, and the other is how to eliminate unfairness in income distribution. On the surface, the widening of income gap and the unfairness of distribution seem to be

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synonymous, but in the distribution regime of China, they are intrinsically interconnected and influence each other. In fact, in China’s reform and development, income gap is not only a by-product of economic development and market-oriented reform, but also a consequence of institutional imperfections, especially the unfairness in distribution. Obviously, this is not merely about income gap in the general sense, but involves the unfairness in the distribution regime. Therefore, China’s income distribution reform should not only try to address income gaps, but also explore how to increase fairness in distribution. To some extent, the second problem is more difficult, because it involves the issues of legal accountability, transparency and regulatory compliance regarding income distribution. That means, at the end of the day, the reform must try to tackle the issue of fairness, from income distribution fairness to fairness in the broader economy and even social justice. In fact, China income distribution reform over the 40 years reveals twin needs. On the one hand, in order to improve income distribution, we should try to diversify the sources of income through incentives. The diversification of income sources, however, would widen the income gap gradually. On the other hand, we should explore how to exert regulatory supervision over income distribution. Through promoting income and asset openness and regulation, we can make the income distribution regime more reasonable and dependable, and gradually eliminate the institutional factors that affect fairness in distribution. Obviously, the income distribution reform in China is a process of subjecting income distribution to legal rule and regulatory supervision. China has entered a new era, and China’s income distribution reform has also entered a new era. Since the 18th CPC National Congress, China has proposed a host of new ideas or strategies to deepen the reform of income distribution. These new ideas and strategies embody the pursuit of fairness and inclusive development, and aim to address the conflict between people’s aspiration for a better life and imbalanced and inadequate development in the new era of socialism with Chinese characteristics. China’s reform and innovations with its income distribution regime will certainly reflect the new ideas and new achievements in the new era. The socialist income distribution system with Chinese characteristics in the new era will be more mature and more dependable. Both fairness and efficiency will be guaranteed, primary distribution and redistribution will be coordinated, and those who get rich first and those who get rich later will be united and mutually enhancing. In the end, common prosperity as the goal of income distribution and social development would be realized. This book represents explorations and research work conducted with this aim in mind. Reviewing and distilling China’s experience of income distribution reform over the 40 years would not only help theorize the income distribution regime with Chinese characteristics, but also provide deeper insights into the problems with China’s income distribution and the directions of further innovation with the distribution system. By reviewing the practice and experience of China’s income distribution reform, we would try to develop a concept system of income distribution under socialism with Chinese characteristics, as well as basic theories and basic research methodologies. We would also explore the relationship between the rapid

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development of China’s economy and the progress of China’s income distribution reform to offer clues for further innovations with the income distribution regime. At the same time, considering China’s goal, mission and challenges in the new era, this book analyzes the new experience, new ideas and new actions of China’s income distribution reform and the socialist distribution regime with Chinese characteristics in the new era, in order to provide an empirical basis and a theoretical framework for advancing socialist political economics with Chinese characteristics, as well as development economics. Shanghai, China July 2018

Heng Quan

Contents

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Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Preamble . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 Value of Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Subject and Methods of Study . . . . . . . . . . . . . . . . . . . . . . 1.2 History and Practices of Income Distribution Reform in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 Income Distribution over the Past 40 Years: Practices and Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2 40 Years of Income Distribution Reform: Effect and Progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Innovations with China’s Income Distribution System over the Past 40 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 Evolution of China’s Income Distribution System: Ideas and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Eight Major Innovations with the Income Distribution System of China . . . . . . . . . . . . . . . . . . . . . . . 1.4 40 Years of Income Distribution Reform in China: Experience and Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Basic Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 Basic Laws and Principles . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Theory of Socialist Income Distribution with Chinese Characteristics: Framework and Methodology . . . . . . . . . . . . . . . . 1.5.1 Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.2 Basic Theories of Income Distribution with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . 1.5.3 Innovative Methodologies . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.4 Theoretical Contribution of Income Distribution with Chinese Characteristics to Economics Theory . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Practices and Changes in China’s Income Distribution over the Last 40 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Income Distribution from 1949 to the Reform and Opening-up: System, Experience and Problems . . . . . . . . . . . 2.1.1 China’s Income Distribution Regime from 1949 to 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 Lessons from the Twists and Turns of the Income Distribution Regime from 1949 to 1978 . . . . . . . . . . . . . . 2.2 Income Distribution Policies and Practices Since Reform and Opening-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Implementing Distribution According to Work and Opposing Equalitarianism . . . . . . . . . . . . . . . . . . . . . . 2.2.2 Establishment of a New Income Distribution System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Combination of Distribution According to Work and Distribution According to Production Factors . . . . . 2.2.4 Establishment of a Distribution System That Allows Factors of Production Such as Labor, Capital, Technology and Managerial Expertise to Have a Rightful Share According to Their Respective Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 Improvement of Primary Distribution and Redistribution to Make Development Inclusive . . . . 2.3 Evolution of Several Major Relationships in the Field of Income Distribution in China over the Past 40 Years . . . . . . . . 2.3.1 The Relationship Between the Central and Local Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 The Relationship Between the State and Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 The Relationship Between Urban and Rural Areas . . . . . 2.3.4 The Relationship Between SOEs and Private Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.5 The Relationship Between Domestic and Foreign Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.6 The Relationship Between Eastern Coastal and Hinterland Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.7 The Relationship Between Capital Gains and Labor Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.8 The Relationship Between Those Who Get Rich First and Those Who Get Rich Later . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Total Size and Pattern of China’s Income Distribution over the Last 40 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 China’s Overall Income Distribution: Changes over the Last 40 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Changes in China’s Gini Coefficient . . . . . . . . . . . . . . . . . 3.1.2 International Gini Coefficient: A Global Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 China’s Income Distribution Between Urban and Rural Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Changes in the Income Gap Between Urban and Rural Residents over the Past 40 Years . . . . . . . . . . . 3.2.2 Influence of the Urban-Rural Income Gap on the Overall Income Pattern . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Changes in Income Gaps Within Urban and Rural Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 China’s Income Distribution Between Regions . . . . . . . . . . . . . . . 3.3.1 Income Disparity Between Eastern, Middle and Western China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Income Disparity Between Provinces . . . . . . . . . . . . . . . . 3.4 China’s Distribution Inequality Between Economic Sectors . . . . . 3.4.1 Changes in the Overall Inter-sectoral Income Gap . . . . . 3.4.2 Wage Gap and Wage Growth Rates Between Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Changes in China’s National Income Distribution over the Past 40 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Changes in the Primary Distribution of China’s National Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.2 Changes in the Redistribution of China’s National Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.3 China’s National Income Distribution Pattern from the International Perspective . . . . . . . . . . . . . . . . . . . 3.6 China’s Poverty Problem and Poverty Reduction Strategy over the Past 40 Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.1 Poverty Reduction Measures in China . . . . . . . . . . . . . . . 3.6.2 China’s Poverty Problem from the International Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.3 China’s Contribution to the World in Poverty Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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75 75 76 77 78 79 80 82 84 84 86 90 90 91 94 94 95 97 100 102 108 109 111

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Causes and Explanations of Changes in China’s Income Distribution Pattern over the Last 40 Years . . . . . . . . . . . . . . . . . . . . . . 4.1 Industrial Transformation and Changes in the Income Gap . . . . . 4.1.1 China’s Industrialization and the Income Disparity . . . . 4.1.2 The Fast Rise of China’s Services Sector and Change of Income Disparity . . . . . . . . . . . . . . . . . . . . 4.1.3 Unbalanced Geographic Distribution of Industries and the Regional Income Disparity . . . . . . . . . . . . . . . . . . 4.2 Opening-up and Income Disparity . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Benefits of Opening-up, Economic Growth and Income Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 Effects of Opening-up, FDI and Trade on Income Disparity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Changes in the Urban-Rural Duality and Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Causes and Trends of the Urban-Rural Duality . . . . . . . . 4.3.2 The Effect Mechanism of Urban-Rural Duality on Income Inequality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Monopoly and Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Increase in Monopoly Profits and Capital Income as a Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 Income Gap Due to High Wage in Monopoly Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Imperfect Redistribution and Income Distribution System . . . . . . 4.5.1 Imperfect Taxation and Income Disparity . . . . . . . . . . . . . 4.5.2 Imperfect Social Security and Income Redistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debates over Income Distribution in China and Changes in Ideas and Theories over the Last 40 Years . . . . . . . . . . . . . . . . . . . . . 5.1 China’s Income Distribution Ideas and Theories from 1949 to 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Distribution in the Early Years of New China: The “Soviet Textbook” and Distribution According to Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 Debates on Distribution According to Work from 1958 to 1965 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.3 To 1976: Confusion and Controversy . . . . . . . . . . . . . . . . 5.2 Debates over Distribution According to Work and Schools of Thought from 1978 to Late 1980s . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Discussions About the Implementation of Distribution According to Work . . . . . . . . . . . . . . . . . . 5.2.2 Discussions About Distribution According to Work Under Commodity Economy . . . . . . . . . . . . . . . .

113 114 114 117 118 120 120 121 124 125 126 129 130 130 132 132 135 136 139 140

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Debates and Development of Distribution Theory in the 1990s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Relationship Between Distribution According to Production Factors and Distribution According to Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.2 Definition of Labor Remuneration and Non-labor Incomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 Contradiction and Relationship Between Efficiency and Fairness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Controversy over the Income Gap in the Early 21st Century . . . . 5.4.1 Discussions About the Widening Income Gaps and Their Causes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Discussions About the Adjustment Mechanism of Income Redistribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 Questions About the Income Distribution Order . . . . . . . 5.5 Discussions About China’s Distribution Theory and Equality Issues Since 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.1 Further Discussions on Income Gaps and Equality Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.2 Concerns About Social Stratification and the Lack of Income Fluidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.3 Theoretical Research on Urbanization, Service Economy Development and Income Distribution . . . . . . 5.6 Schools of Thought on Income Distribution with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.1 The “System” School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.2 The “Gap” School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.3 The “Factor” School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.4 The “Structural” School . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.5 The “Government” School . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.6 The “Dynamic” School . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.7 The “Growth” School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.8 The “Fairness” School . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Experience and Characteristics of China’s Income Distribution Reform over the Past 40 Years . . . . . . . . . . . . . . . . . . . . . . 6.1 Best Practices of China’s Income Distribution Reform . . . . . . . . . 6.1.1 Coordination Between Innovations in Theory and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Coordination Between Top-Level Design and Grass-Roots Innovation . . . . . . . . . . . . . . . . . . . . . . . . 6.1.3 Aligning Distribution Modes with Production Modes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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155 157 159 161 161 163 165 166 166 168 169 171 171 171 171 172 172 172 173 173 173 181 181 182 182 183

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Taking a Problem-Oriented and Progressive Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.5 Driving Income Distribution Reform Through Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.6 Aiming at Common Prosperity . . . . . . . . . . . . . . . . . . . . . . 6.1.7 Safeguarding Fairness and Justice of Distribution as Socialist Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Key Characteristics of the Changes in Income Distribution . . . . . 6.2.1 Distribution Reform Driving Economic Growth . . . . . . . 6.2.2 Distribution Reform Reflecting China’s Current Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.3 Distribution Reform Following the Market Orientation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.4 Distribution Reform Reflecting the Impact of Globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.5 Distribution Reform Following a Progressive and Innovative Path . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.6 Distribution Reform Creating Synergy Between Market and Government . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.7 Distribution Reform Highlighting Inclusive Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Achievements of China’s Income Distribution Reform in the New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Deepening the Civil Servants Salary Reform . . . . . . . . . . 6.3.2 Deepening Reform on Compensations for SOE Executives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Establishing a Mechanism for Regular Wage Increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.4 Implementing Employee Shareholding Schemes in Publicly Listed Companies . . . . . . . . . . . . . . . . . . . . . . . 6.3.5 Regarding Knowledge and Technology as Factors of Production to Stimulate Innovation . . . . . . . . . . . . . . . . 6.3.6 Giving Farmers More Property Rights to Increase Farmers’ Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.7 Promoting Rural Taxation Reform to Energize Agricultural Development . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.8 Promoting Compensation Reform in Monopoly Industries and Eliminating Unfairness of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.9 Enhancing Government Integrity to Reduce Corruption in Income Distribution . . . . . . . . . . . . . . . . . . . 6.3.10 Implementing Targeted Poverty Alleviation to Build a Well-Off Society in All Respects . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

184 185 185 186 187 187 188 188 189 190 190 191 192 192 193 194 194 195 196 196

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Chinese Income Distribution over the Past 40 Years: Theoretical Development and Innovation . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Income Distribution Theory with Chinese Characteristics and the Marxist Political Economy . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Shift from Unitary Distribution According to Work to the Coexistence of Multiple Distribution Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 Shift from Confrontation to Harmony Between Labor and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.3 Shift from Fighting for the Surplus Value to Sharing Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Income Distribution Theory with Chinese Characteristics and the Neoclassical Distribution Theory . . . . . . . . . . . . . . . . . . . . 7.2.1 Combination of Distribution According to Work and Distribution According to Factors and the “Kaldor Facts” and the Marginal Productivity Distribution Hypothesis . . . . . . . . . . . . . . . . 7.2.2 Unbalanced Coordinated Development and Distribution Versus Automatic Equilibrium Through Market Adjustment . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Fairness of Opportunities, Rights and Rules and the Traditional Concept of Fairness of Result . . . . . . 7.3 Income Distribution Theory with Chinese Characteristics and Development Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Parity of Growth and Distribution Versus Growth Before Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Common Prosperity Versus the “Trickle-Down Effect” Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Synchronization of Economic Growth and Distribution Improvement Versus the Kuznets Inverted-U Curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Key Dimensions of the Income Distribution Theory with Chinese Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 The Basic Socialist Economic System . . . . . . . . . . . . . . . 7.4.2 The Primary Stage of Socialism . . . . . . . . . . . . . . . . . . . . . 7.4.3 Coordinated and Inclusive Development . . . . . . . . . . . . . 7.4.4 Primary Distribution and Redistribution in Socialist Market Economy . . . . . . . . . . . . . . . . . . . . . . . 7.4.5 Functional Distribution and Size Distribution . . . . . . . . . 7.4.6 Income Fluidity with Chinese Characteristics . . . . . . . . . 7.4.7 Existence of Appropriate Income Gap and Unfairness of Distribution . . . . . . . . . . . . . . . . . . . . . . 7.4.8 Relationship Between the Government and the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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202 203 204 205

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207 209 210 210 212

213 214 215 216 217 218 218 219 219 220 220

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China’s Income Distribution Reform in the New Era: New Problems and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Major Issues Already Resolved by China’s Income Distribution Reform over the Past 40 Years . . . . . . . . . . . . . . . . . . . 8.1.1 Egalitarianism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.2 Low National Income Levels . . . . . . . . . . . . . . . . . . . . . . . 8.1.3 Unreasonable Distribution Mechanisms . . . . . . . . . . . . . . 8.1.4 Inadequacy of Public Services . . . . . . . . . . . . . . . . . . . . . . 8.1.5 Poverty-Stricken Population . . . . . . . . . . . . . . . . . . . . . . . . 8.2 New Issues in the New Era: Imbalances in National Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 Unreasonable Pattern of National Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.2 Disparity Between People’s Personal Income and Economic Development . . . . . . . . . . . . . . . . . . . . . . . . 8.2.3 Disparity Between Growth of Labor Remuneration and Productivity Improvement . . . . . . . . . . . . . . . . . . . . . . 8.3 New Issues in the New Era: Towards Common Prosperity . . . . . . 8.3.1 Common Prosperity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 Balance Between Fairness and Efficiency . . . . . . . . . . . . 8.3.3 Targeted Poverty Alleviation . . . . . . . . . . . . . . . . . . . . . . . 8.4 New Issues in the New Era: Equity and Justice . . . . . . . . . . . . . . . 8.4.1 Income Distribution to be Further Regulated . . . . . . . . . . 8.4.2 Equal Access to Public Services . . . . . . . . . . . . . . . . . . . . 8.4.3 Imperfect Taxation Regime and Legal System . . . . . . . . . 8.4.4 Rural Migrant Workers and the Household Registration System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 New Issues in the New Era: Widening Wealth Gaps . . . . . . . . . . . 8.5.1 From Income Gaps to Wealth Gaps . . . . . . . . . . . . . . . . . . 8.5.2 Intergenerational Injustice: A New Challenge Brought by the Widening Wealth Gap . . . . . . . . . . . . . . . . 8.6 New Challenges in the New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6.1 Widening Income Gaps and Long-Term Economic Prospect: Constraints on Consumption-Driven Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6.2 Income Gaps and Economic Transformation: Constraints on Economic Structural Adjustment . . . . . . . 8.6.3 Income Gaps and Their Impact on Social Progress . . . . . 8.6.4 Income Gaps and Their Impact on Socialist Core Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6.5 Income Gaps and Sustainable Development . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

223 223 224 224 225 225 225 226 226 226 227 227 228 228 230 231 231 232 233 234 235 235 236 236

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Further Income Distribution Reform in the New Era . . . . . . . . . . . . . 9.1 China’s Economic Growth in the New Normal State . . . . . . . . . . . 9.1.1 Growth in the New Normal State: Medium-to-High Speed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.2 Structural Transformation Driven by Urbanization in the New Normal State . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Income Distribution Reform in the New Normal: New Thinking and New Paths [2] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.1 Changes in the Speed, Structure, and Dynamics of Economic Development and Their Impact on Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.2 Global Rebalancing and New Challenges for China’s Income Distribution System . . . . . . . . . . . . . . 9.3 Factors and Trends Influencing Income Distribution in the New Normal State [2] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 Favorable Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.2 Unfavorable Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.3 New Trends of Income Distribution in the New Normal State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Relations to Be Addressed Through the Income Distribution Reform in the New Normal State . . . . . . . . . . . . . . . . 9.4.1 Economic Growth Versus Income Distribution . . . . . . . . 9.4.2 Top-Level Design Versus Classified Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.3 National Income Distribution Pattern Adjustment Versus Taxation System Reform . . . . . . . . . . . . . . . . . . . . 9.4.4 Labor Productivity Versus Labor Remuneration and Household Income Growth . . . . . . . . . . . . . . . . . . . . . 9.4.5 Regulating Income Distribution Versus Offering Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.6 Government Versus Market Forces . . . . . . . . . . . . . . . . . . 9.5 Deepening the Overall Reform and Expected Innovations of the Income Distribution System [2] . . . . . . . . . . . . . . . . . . . . . . . 9.5.1 Shaping a Reasonable Income Distribution Order . . . . . . 9.5.2 Giving Full Play to the Roles of the Market and the Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5.3 Aligning Primary Distribution with Redistribution . . . . . 9.5.4 Integrating Top-Level Design and Distribution Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5.5 Building a Perfect Factors Market System Covering Both Urban and Rural Areas . . . . . . . . . . . . . . . 9.5.6 Building an Incentives-Based Income Distribution System to Drive Innovation and Development . . . . . . . . . 9.5.7 Establishing a Well-Regulated and Transparent Income Distribution Order . . . . . . . . . . . . . . . . . . . . . . . . .

243 245 246

246 251 253 253 255 256 256 257 257 257 258 258 259 259 259 260 260 260 261 261 262

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9.5.8

Accelerating the Establishment of an Income Regulatory and Supervision System . . . . . . . . . . . . . . . . . 262 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 10 Policy Framework for Promoting Income Growth and Income Distribution Reform in the New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Disparity Between Personal Income Growth and Economic Development in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1.1 Interaction Between Personal Income Growth and Economic Development . . . . . . . . . . . . . . . . . . . . . . . . 10.1.2 Scientific Thinking and Awareness Needed to Realize Parallel Growths . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Growth of Personal Income: Influencing Factors and New Trends in the New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.1 From Factor-Driven to Innovation-Driven Development: TFP and Changes in Labor Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.2 Labor Supply and Demand: Limited Labor Supply and Changes in Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.3 Future Fiscal and Taxation Reforms: Stabilizing Tax Burden and Optimizing the Macro Distribution Pattern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.4 Optimizing the Market Environment: Fair Competition and Improvement of Resource Allocation Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Policy Options for Synchronizing the Growth of Personal Income with Economic Development in the New Era . . . . . . . . . . 10.3.1 Promoting High-Quality Employment . . . . . . . . . . . . . . . 10.3.2 Implementing a Knowledge-Oriented Distribution Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.3 Improving the Business Environment to Raise Operational Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.4 Aiding the Low-Income Group and Expanding the Middle-Income Group . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.5 Deepening Fiscal and Tax Reforms to Enhance Fairness and Justice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.6 Building a System of Reasonable and Orderly Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 Implementing Classified Income Distribution Policies . . . . . . . . . 10.4.1 Promoting the Compensation Reform in the Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.2 Deepening the Reform on the Compensation of Executives in SOEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.3 Updating the Regular Pay Rise Mechanism for Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

263 263 263 269 271

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Contents

10.4.4 Intensifying the Wage Reform in Monopoly Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.5 Strengthening Rules to Prevent Corruption . . . . . . . . . . . 10.4.6 Improving the Civil Servants Wage System . . . . . . . . . . . 10.4.7 Improving the Performance-Based Wage System of Public Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.8 Developing an Innovative Distribution Mechanism for Factors like Knowledge and Technology . . . . . . . . . . 10.4.9 Improving the Targeted Poverty Alleviation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Appendix: Milestones in China’s Income Distribution Reform (1978–2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 Epilogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299

Chapter 1

Introduction

Over the past 40 years of reform and opening-up, China has made profound changes to the pattern, system and policies of national income distribution. This book reviews the reform and evolution of China’s income distribution system, as well as its system of wealth distribution. After experience summary and analysis, this book attempts to develop theories concerning income distribution with Chinese characteristics, and provides an evidence basis and a theoretic framework for advancing and shaping discourses pertaining to socialist political economics with Chinese characteristics.

1.1 Preamble Forty years of reform and opening-up have created a miracle of economic and social development in China. It is of great significance to review and summarize the experience and practices of reform and opening-up. We believe that income distribution may attract worldwide attention, just like the miracle of high-speed economic growth. For a long time, people have focused their attention on how China economic miracle has happened and whether it could last.

1.1.1 Value of Research Like the high-growth miracle, the profound changes in China’s income distribution pattern and the expansion of income gap amid high economic growth are worth investigation, and the research will satisfy global curiosity. In China, economy has maintained high growth speed, but the growth is not balanced. Despite the increase of China’s overall economic power, the income gap has expanded quickly. In fact, the Gini coefficient in China has surpassed the warning line, but no serious consequences and problems have occurred as generally expected. These strange phenomena deserve © Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_1

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our research efforts. We must examine what China has done and is still doing to cope with the income distribution issue, and how China has tried to reform its income distribution system. The co-relationship between the income distribution reform and the economic growth miracle is also worth a serious review. Finally, we need to summarize the characteristics of China’s income distribution reform and distill the essence of the reform practices, which would help us highlight the theoretical implications and realistic impact of China’s income distribution reform. Researchers are supposed to go deeper into this historical phenomenon. First, by reviewing and distilling the experience of China’s income distribution reform, they should reconsider the income distribution system amid China’s high-speed economic growth and its underlying logic, which will further the understanding of China’s economic development model. About the economic growth miracle in China, we should not only focus on the growth, but also try to understand its logic by correlating economic growth with income distribution. Second, by examining the innovations of the income distribution system with Chinese characteristics, they should build an income distribution terminology with Chinese characteristics, which would be a great support for developing the science of socialist political economics with Chinese characteristics. After all, political economics is not only about productive forces and productive relations, but also about the distribution of material interests and its impact on production. Third, to frame a theory of income distribution of socialism with Chinese characteristics would offer a new perspective to the Marxist theory of income distribution and correct the income distribution theories of the West. In short, such a new theory would highlight China’s experience and its significance in the global academic community of economics. Fourth, the new theory of income distribution with Chinese characteristics would give the world an opportunity to use the experience of China to address the pressing income distribution issues. China is ready to offer our solution and wisdom to make the world a better place. Finally, theorizing China’s income distribution reform would create a basis for China to deepen the reform and achieve further economic growth through innovation and transformation in the next 10—20 years. After all, problems of income distribution arising in the process of China’s economic development have not been completely solved, and some underlying contradictions deserve our attention. Through reviewing historical experience, this study provides some references for China’s future development.

1.1.2 Subject and Methods of Study Based on China’s 40-year experience of reform and opening-up, this study examines the evolution of China’s income distribution pattern, changes to its ideological basis and policies, as well as the academic disputes on this issue. It conducts a historical, academic and theoretical analysis of China’s income distribution over the last 40 years, reviewing and theorizing the experience and offering cues to future improvement. Considering China’s reform and opening-up practices and achievements over the past 40 years, the analysis tries to reveal the logic of income distribution and

1.1 Preamble

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its changes amid China’s miraculous economic performance and its role in China’s growth. Obviously, this analysis will deepen the understanding of the fundamental logic of China’s economic development and the historical significance and practical benefits of reform and opening-up.

1.2 History and Practices of Income Distribution Reform in China During the past 40 years of reform and opening-up, China has tried various innovation attempts regarding income distribution, like scrapping the equalitarian practice of eating from the same pot which was mainstreamed under planned economy, exposing income to market forces and allowing business enterprises to adopt their own compensation policies. The change was intended to drive the initiative of enterprises, employees and other market participants to engage in economic growth, in addition to improving the wellbeing of people. With the State slightly withdrawn to conduct macro-control only, the income distribution pattern has gradually optimized and the social security mechanisms have continued to improve.

1.2.1 Income Distribution over the Past 40 Years: Practices and Changes The progress of reform and opening-up over the last 40 years is virtually synonymous with the history of income distribution innovations. 1. Income distribution before reform and opening-up The income distribution regime of China before reform and opening-up was formed after the reform of the ownership of means of production in 1956 and the rural people were organized into communes. At that time, distribution according to one’s performance was regarded by all as the only method of distribution in a socialist country. In implementation, distribution according to performance followed different modes in rural areas and in urban areas. In rural areas, distribution was based on “work points”, whereas people in urban enterprises and government offices were paid in form of fixed wage or wage. This scheme was a typical pattern of income distribution under planned economy. Although it claimed to be based on performance, it had institutionalized duality between rural areas and urban areas while mainstreaming equalitarianism. The obvious characteristics of this income distribution pattern are as follows. The first is high centralization. Business enterprises in towns implemented an eight-level wage system and a piecework wage system, with the wage grades and payment standards stipulated by the State. In rural areas, work points were adopted as the basis of distribution and the points one could earn depended

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on the outcome of production of each “production team”. Because the price of agricultural products was controlled by the State, the income level of rural laborers was basically controlled by the State. The second is low income. The wage standards of business enterprises stipulated in 1956, in Beijing for instance, varied between industry sectors. The lowest monthly wage was 30–36 RMB yuan, while the highest was 100–120 RMB yuan. In 1985, the wage standards of State-run enterprises were renewed, but the levels were still very low. The lowest monthly wage was 34–38 RMB yuan, and the highest wage was 102–114 RMB yuan. The third is equalitarianism. Wage payments under the old income distribution regime, including the eight-level wage, rewards and various allowances and bonuses, were delinked from the actual economic performance and individual contribution. Under the eight-level wage system, the highest income was only three times higher than the lowest. According to the World Bank’s estimates, the Gini coefficient of Chinese urban residents in 1980 was 0.16, which indicates near perfect equality. Although it had played a certain positive historical role, the old income distribution regime had its drawbacks. Equalitarianism, as an inherent characteristic of planned economy, was a policy to maintain social stability and ensure people’s basic livelihood under low productivity and in a time of short supplies. Centralization was a necessary means to pool the country’s total surplus and guarantee the development of heavy industries under the special circumstances. In this sense, it had played a positive role. On the other hand, it was the culprit of the increasing income gap between urban and rural residents of China. The bigger problem of this regime is to violate the fundamental law that production decides distribution, so in that context distribution was unlikely to drive production. It may be reason to say that the regime was inevitable and necessary in the extremely backward age after the founding of New China, but as socialist economy gained momentum, this equalitarian regime became an obvious restriction. It cooled down people’s enthusiasm and hampered social progress [1]. 2. Changes since reform and opening-up Considering China’s duality between its urban and rural economic systems, the changes of income distribution had followed two paths, one for rural areas and the other for towns. Changes in rural areas In the early years of reform and opening-up, income distribution was still mainly distribution based on performance. The first change came when the Third Plenary Session of the 11th Central Committee of the Communist Party of China decided to “overcome equalitarianism”. First, in rural areas, China implemented the “household contract responsibility system” step by step, linking the rural people’s production outcome with their family income. This was the start of profound changes. In the winter of 1979, the household contract responsibility system was implemented on

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a trial basis in some areas of Sichuan and Anhui. In the spring of 1980, the pilot program was rolled out around the country and became a national system. The result of this new system was inspiring. It stimulated the enthusiasm of farmers, and drove up agricultural productivity quickly. As a result, farmers’ income rapidly increased. The reform of income distribution in rural areas was an important part of China’s income distribution reform. The rapid development of agricultural production and the rise of farmers’ income formed a solid basis for China’s national economic development. In a sense, it drove the reform of China’s urban economic system [2]. Reform in towns The reform of income distribution in towns was about utilizing market forces to overcome equalitarianism and reasonably narrow down the income gap. The new policy encouraged some areas and some people to become rich first, and requested the people who got rich first to help others realize common prosperity step by step [3]. Over the 40 years of reform and opening-up, income distribution reform in urban China has experienced several stages: Stage 1: In the early years, the wage system was performance-based, which generated strong motivation within business enterprises. In October 1984, the Third Plenary Session of the 12th Central Committee of the Communist Party of China adopted the Decision of the Central Committee of the Communist Party of China Concerning the Reform of the Economic System, pointing out that the emphasis of reform would shift from the rural economy to the urban economy, and the reform would focus on stimulating the potential as well as motivation of enterprises. The decision also included remarks about the income distribution system in towns. As the reform moved on, more and more enterprises adopted and improved incentives to encourage good performance, and at the same time the wage policy of State-owned enterprise began to change. In January 1985, the State Council issued the Circular on the Wage Reform of State-owned Enterprises, which mainly focused on decentralization. State-owned large-sized and mediumsized enterprises were allowed and even encouraged to link up the total workers’ wage to their profitability, while the State would no longer dictate over wage payments. As wage levels differed according to the economic performance of enterprises, the new policy was called “performance-based wage”. Performance-based wage represents a big step in China’s income distribution reform. Although there were still many problems in practice, the new wage policy played a very important role in the reform and development of China’s enterprises. In June 1986, China started to reform the wage policy for its government departments and public institutions. Aiming to offer incentives to mobilize people’s initiative, the income distribution reform marked the start of the broader economic system in China [3]. Stage 2: Measures were taken to deepen the income distribution reform in enterprises, mainly redefining the relationship between the State and enterprises as well as internal relationships within the enterprise. As an important part of the national income distribution reform, the reform of income distribution within enterprises was carried out in two ways.

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The first is to redefine the distribution relationship, or wealth sharing ratio, between the State and enterprises, mainly in favor of enterprises. In the early years of reform, State-owned Enterprises could retain a certain proportion of profits. In 1983 and 1984, the substitution of tax payment for profit delivery (tax for profit) was carried out in two steps. In 1987, contract responsibility was implemented for enterprises, marking a further change to the relationship between the State and enterprises. In 1994, as part of the fiscal and taxation reform, the State separated tax from profit for SOEs. The separation means that SOEs would make contributions to the State in the form of income tax like other enterprises, rather than based on contract responsibility. The fiscal and taxation reform implemented in 1994 was a major step in adjusting the relationship between the State and enterprises. The reform aimed to redefine the financial interests of the State, SOEs, and enterprise managers. In fact, it was an attempt to change the wealth distribution pattern [4]. The second is to overhaul the internal distribution pattern within enterprises, and the balance was tipped in favor of workers to ensure their life quality. In the enterprise wage reform in the 1980s, market mechanisms and competition were used to renew the methods of wage and bonus payment, while in the 1990s, market mechanisms played a fundamental role in enterprise wage distribution. Wage payment was decided by enterprises independently, while the State was only responsible for macro control. In November 1993, the Third Plenary Session of the 14th Central Committee of the Communist Party of China made the Decision on Several Issues of Building a Socialist Market Economy System, which explicitly proposed to transform the operation mechanisms of SOEs, develop the market system, and build a modern corporate system and a reasonable income distribution pattern for individuals. In July 1994, the Labor Law of the People’s Republic of China (the “Labor Law”), together with a series of implementation regulations and supporting laws, was promulgated, which further defined the methods of wage payment by enterprises. The Labor Law meant that China’s wage payment reform has come to a new stage, as it gave enterprises a high level of autonomy in wage payment. Enterprises had the right to determine the wage level and standards for their employees independently. That was a big breakthrough and a major step to build a modern corporate system [4]. Under the Labor Law, minimum wage guarantee was realized, which played an important role in assuring employee wellbeing. Stage 3: In line with the development of market economy, China gradually established a social security system and improved the wealth redistribution mechanism. Since 1990, the State has taken active measures to establish a social security system, taking a series of reform initiatives, especially to promote social insurance. In June 1991, the State Council made the Decision on the Reform of Endowment Insurance for Enterprise Employees, which demanded that, along with the development of economy, a new endowment insurance system be built up combining basic endowment, enterprise supplementary endowment and employee personal savings endowment. The insurance won’t be covered by the State and enterprises alone, but it would be the joint responsibility of the government, enterprises and households. In March 1995, the State Council issued the “Notice on Deepening the Reform of Employee Endowment Insurance System”, which proposed the combination of social pooling

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account with personal account so that enterprises and individuals would share the endowment premium. It was a major innovation for China’s social security system. On July 16, 1997, the State Council made the “Decision on Establishing a Unified Basic Endowment Insurance System for Enterprise Employees”, laying down the principle that the basic endowment insurance premium paid by enterprises should not exceed 20% of their total wage payment, and that the proportion paid by individuals in 1997 should not be lower than 4% of their wage income, and should increase by one percentage point every two years since 1998 and finally reach 8%. In 1998, the expected unified national basic endowment insurance system took shape, the reform of the national basic medical insurance system was launched nationwide, and the unemployment insurance rules were revised and updated [4]. Stage 4: Labor contract law was put into effect in order to build harmonious employment relationships. As China’s market economy grew, employment scenarios diversified, and labor relationships changed accordingly, with new employment relations emerging. The Labor Law taking effect in 1995 could not cope with the new issues and the existing problems. On January 1, 2018, the Labor Contract Law took effect. The promulgation of the Labor Contract Law reflected in a way the problems with labor relationships in China: most employers didn’t sign contracts with their employees, the labor contracts signed were largely short-term contracts, and some employers abused the rule of probation. The problems affected employees’ legitimate interests and labor relations. The promulgation of this law could not transform China’s labor market into a flexible market with free competition quickly, but it played a positive role in safeguarding employees’ legitimate rights and interests. The Labor Contract Law was a milestone in China’s income distribution reform. Stage 5: The pattern of income distribution was adjusted at the macro level, and the model of people’ income growth was gradually improved. Macro adjustment was made to the wealth distribution pattern that the proportion of employees’ remuneration and personal income had remained too low for a long time. In 2008, the State issued a policy that clearly aimed to raise the proportion of personal income in total national income. In 2009, the proportion of workers’ income in primary distribution was raised. However, due to the impact of the global financial crisis in 2008, the costs of operation increased, especially the cost of labor, and the profitability of enterprises dropped gradually. Since 2009, State policy documents have modified the aim into “gradually increasing” the proportions of workers’ wage and household income. In fact, government work reports of the past ten years indicated that the policy goal of increasing people’ income has changed from “increasing the proportion of personal income in national income distribution” to “increasing the proportion of residents’ income in the distribution of national income” before 2012 to “synchronizing the growth of personal income with economic development” from 2013 to 2015. In the last three years, the statement has changed from “synchronizing” to “basically synchronizing”. Anyway, personal income and economic growth of China have been better coordinated and there is more parity. Stage 6: Income distribution was better regulated to realize the fairness and justice of wealth distribution. In this long process, besides exploring how to rationalize the wealth sharing relationship and how to increase the income of both urban and

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rural residents, the State has gradually enhanced regulation over income distribution to ensure fairness, justice and transparency. The government has taken a series of measures, ranging from the “eight-point frugality code”, demanding high-ranking officials to declare their income and family assets, to government integrity rules, which have gradually improved the legitimacy, transparency and justice of income, and accordingly raised the fairness and justice of national income distribution.

1.2.2 40 Years of Income Distribution Reform: Effect and Progress Over the past 40 years, income distribution reform has progressed alongside with the development of economy. While high-speed economic growth has laid down a solid material foundation for the income distribution reform, the improvement of income distribution has provided strong incentives to speed up economic growth, drive social development and raise the living standards of both urban and rural residents. The economic development, income distribution reform and social progress of China have been interconnected. Economic growth and income distribution improvement are mutually enhancing, and their combination has produced remarkable benefits. (1) China’s economy has grown very fast over the last 40 years, which is a prerequisite and an enabler for income growth and the fairness of distribution. According to the World Bank, from 1978 to 2016, China’s annual GDP growth rate was as high as 9.7%, and China’s nominal GDP grew from 149.5 billion US dollars to 11 trillion US dollars, and rose from 1.8 to 14.8% as a percentage of the world economy. Deducting the influence of price rise, the actual GDP has increased by 31.3 times. Meanwhile, per capita GDP of China went up from 156 US dollars to 8,123 US dollars, which is a 50.9-fold increase. In 2010, China became the second largest economy in the world. (2) The disposable income of Chinese urban and rural residents has reached an all-time high after 40 years of reform and opening-up, and their living standard has seen significant improvement. Reform and opening-up has removed the mismatch between productive relations and productive power, so the productive power has been unleashed, the size of wealth has grown, and the people’s life has been gradually improved. According to the Statistical Yearbook of China, from 1978 to 2016, the income of urban and rural residents in China rose phenomenally. In this period, the per capita disposable income of urban residents increased from 343 RMB yuan to 33,616 RMB yuan, and the per capita net income of rural households rose from 134 RMB yuan to 12,363 RMB yuan [5]. Of the disposable income gap between urban and rural residents, although the absolute difference grew year by year, the growth rate declined from 36.5% in 1979 to 1.1% in 2016. The disposable income of urban residents was 3.3 times

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the rural residents’ disposable income in 2007, but the figure lowered to 2.7 in 2016. (3) China’s income distribution pattern has undergone profound changes in the last 40 years. Government revenues, corporate income and urban and rural residents’ income have all increased dramatically, and the pattern of primary distribution and redistribution has been gradually optimized. A multi-win pattern has taken shape. Especially, after the transition from planned economy to market economy, the basic factors of production, mainly labor and capital, were freed and mobilized. Labor could flow freely between urban and rural areas, while capital also realized free flow. The flow of production factors raised the resource allocation efficiency. In the meantime, government’s tax revenues witnessed an unprecedented increase, especially after the reform of the tax system. The central government’s income rose obviously, which laid a foundation for realizing transfer payment and national income redistribution. Workers’ income as a share of the total increased at first but then dropped, government’s revenues and the corporate income have increased steadily. To a large degree, all parties have benefitted from the 40 years’ reform and opening-up. Therefore, China’s income gap has expanded but problems have not occurred that would have occurred when the Gini coefficient passes the critical point. It is worth mentioning that, according to the Statistical Yearbook of China, the residents’ income as a percentage of the GDP declined steadily from the peak of 56.5% in 1983 to 40.5% in 2007, after a short period of rise. After 2007, it rose again and reached 50.0% in 2016, showing a “U” turn. In a sense, in the first 30 years of reform and opening-up, the low-paid Chinese workers had made outstanding contributions to the rapid growth of Chinese economy, the high returns of capital, and the enhancement of national financial power. In recent years, as the State determined to increase workers’ income and expand the domestic demand, the income of workers has continued to rise in China. In addition, from 1978 to 2016, the general budget revenues of governments (including the central government and the local government) increased from 113.23 billion RMB yuan to 1.60 trillion RMB yuan, which was a 140-fold growth. While the annual growth came to 14.5%, the growth rates exceeded 10% for 22 years in a row, and the peak growth was 32.4% in 2007. This phenomenal growth has provided a strong guarantee for China to speed up government transfer payment and wealth redistribution. (4) The growth of urban and rural residents’ income has risen remarkably over the past 40 years, which has made it possible for Chinese people’s spending to soar. Anyway, income growth is always the basis of consumption growth. Like the rapid rise of income, the growth of urban and rural residents’ spending also provided a strong guarantee for the sustained development of China’s economy. According to the Statistical Yearbook of China, from 1978 to 2016, the annual consumer spending of Chinese people rose from 175.9 billion RMB yuan to 29 trillion RMB yuan, up 165.4 times, and the annual average growth was 14.4%. At the same time, the Engel’s coefficient of Chinese urban and rural households decreased from 57.5% and 67.7% to 29.3% and 32.2% respectively,

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which indicated the gradual shift of consumption away from foods and clothing and the improvement of people’s life quality. (5) The rapid growth of Chinese economy, the rise of income and the upgrading of consumption in the past 40 years have played a positive role in the industrial and technological progress of China. China’s income distribution reform is intrinsically linked with its economic growth, consumption restructuring, economic upgrading, and technological progress. The rapid growth of economy has driven up income and consumption, which in turn promoted economy upgrading and technology progress. According to the World Bank, from 1978 to 2016, China’s economic structure underwent great changes, with the ratio of the three economic sectors gradually improved. In China, the tertiary sector exceeded the primary sector in 1985 in terms of economic value added (or output), while it exceeded the secondary sector in 2012. Its output as a proportion of the total increased from 24.6 to 51.6%. China’s economy shifted its focus from manufacturing to services. Meanwhile, the proportion of the primary sector in China’s GDP has kept declining, and its internal structure has improved gradually. The proportion of the secondary sector has experienced fluctuations, but its share of the national economy has remained between 40 and 50% for a long period of time, and the internal structure has optimized, with manufacturing claiming over 70% of the total in terms of added value. The tertiary industry has kept rising steadily [6]. In the meantime, China has also made significant progress in science and technology. Since 1978, the number of China’s sci-tech personnel has been growing, reaching 3.81 million in 2016, the largest in the world. National sci-tech investment has been expanding as well. In 2016, the total investment on technological R&D amounted to 1.57 trillion RMB yuan. The second largest in the world, China’s sci-tech investment was 2.11% of its GDP, which was above the average level of the world. From 2000 to 2016, China rose from the eighth to the second place in the world in terms of the number of papers published on international journals, and rose from the 19th to the second place on the citation index side, occupying the first place in the materials field. Today, China claims leadership in many fields like quantum communication, optical quantum computing, high-temperature superconductivity, neutrino oscillation, stem cells, synthetic biology and structural biology. (6) The continuous improvement of China’s income distribution and social security over the last 40 years has also raised China’s human development index (HDI). Over the past 40 years, economic growth and income distribution improvement in China have been interconnected and mutually enhancing. In the process of rapid economic growth, China has paid close attention to social security and poverty reduction. China has made unparalleled progress in social security and human development. Over the 40 years, dramatic changes have occurred to education, healthcare, old-age pension and other social undertakings in China. In the early years of reform and opening-up, only about 20% of the employed population of China had access to social security.

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Now, a multi-level full-coverage social security system, with basic old-age insurance, basic health insurance and minimum living standard guarantee as the key pillars, has been established. According to the Statistical Yearbook of China, the illiteracy rate of China fell from 22.8% in 1982 to 4.1% today. Every year, millions of college students are graduated in China and enter the labor market. The life expectancy of Chinese people went up from 67.8 years in 1981 to 76.5 years in 2017. Meanwhile, according to the World Bank, China’s total health expenditure as a percentage of its GDP rose from 3.5% in 1995 to 5.5% in 2014; college enrollment rate rose from 0.7% in 1978 to 43.4% in 2015; and the unemployment rate of the vulnerable population dropped from 73.4% in 1991 to 31.6%. Rapid economic development, optimization of industrial structure and income distribution improvement have given a strong boost to China’s poverty reduction program. According to the UN Human Development Index Reports, China’s extreme poverty (living with less than 1.90 US dollars per day) rate dropped rapidly from 66.5% in 1990 to 1.9% in 2013, while the extreme poverty rate in East Asia fell from 60% in 1990 to 3.5% in 2013. The middle class population (annual income ranging from 11,500 to 43,000 US dollars) in China rose from 5 million in 2000 to 225 million in 2015.1 China has paid closer attention to improving the education and health of its people. From 1990 to 2015, China’s HDI reported an annual average growth of 1.57%, with its ranking moving up 11 places from 2010 to 2015.

1.3 Innovations with China’s Income Distribution System over the Past 40 Years Over the past 40 years, China has made a wide range of innovations with its income distribution system. The innovative practices have produced great positive changes in China’s income distribution.

1.3.1 Evolution of China’s Income Distribution System: Ideas and Policies After the Third Plenary Session of the 11th CPC Central Committee, China began to reform its old wealth distribution regime, gradually moving away from equalitarianism, based on the development of socialist economy with Chinese characteristics. China’s income distribution reform has gone through several stages: from mere performance-based distribution, to performance-based distribution supplemented by other distribution methods, and finally to performance-based distribution going 1 Data

from China Family Finance Database (CHFS).

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1 Introduction

parallel with other methods of distribution like production factors-based distribution [7]. These institutional innovations reflect the profound changes in the economic growth, the need to achieve both fairness and efficiency, the policy design to let some people get rich first and then help others to get rich later, the alignment of the central government and local government initiatives, and the goal to create mutual benefits for individuals and enterprises. These new concepts not only manifested the understanding that production factors should play a role, even if it is a supplementary role, in income distribution, but also encouraged the combination of performance-based distribution and production factors-based distribution. This implies a deeper understanding of the role, form, content and characteristics of performance- based distribution under the new historical conditions. As a result, China’s income distribution policy has changed from time to time along with the conceptual renewal.

1.3.2 Eight Major Innovations with the Income Distribution System of China During the 40 years of reform and opening-up, China has continued to improve its income distribution system, creating a basic framework in which performance-based distribution takes the lead but co-exists with other methods of distribution. This is a process of practical and theoretical innovation. Innovation 1: Trying to counter equalitarianism, China implemented performancebased distribution while allowing some people and areas to get rich first through hard work and by legal means and then help take others towards common prosperity. The Resolution of the Central Committee of the Communist Party of China on the Reform of the Economic System adopted at the Third Plenary Session of the 12th CPC Central Committee got out of the traditional theoretical frame and braved to address equalitarianism in distribution. Recognizing differences and committed to end the custom of “eating from the same pot”, China practised the Marxist principle of distribution according to work. First, in the past, the government and enterprises failed to separate their functions, government authorities and services were rigidly divided, the State exerted too much control over enterprises, and market rules were ignored, and to address these problems, China established an economic responsibility system that would take various forms to realize distribution according to work in the true sense. Second, China tried to address the problem of equalitarianism, making it clear that some people, some regions and some enterprises can become rich first through hard work and by legal means, which would be the first step to achieve common prosperity. Innovation 2: China implemented an income distribution regime based on distribution according to work which was supplemented by other methods of distribution, aiming at both efficiency and fairness.

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On the premise that distribution according to work played the key role, the report to the Thirteenth CPC National Congress suggested innovations to be achieved with the income distribution pattern in the primary stage of socialism, which represented a great breakthrough in China’s income distribution reform. First, the report proposed that distribution in the primary stage of socialism must not be based on a single model. Distribution according to work must play the dominant role, but other means of distribution must be adopted and they must play supplementary roles. In addition to income from work, including employee compensation and non-employment labor remuneration, various other forms of legal income should be encouraged. Enterprises which issued bonds should pay interests, dividends would also be paid to shareholders in the stock market that emerged and expanded, remunerations paid to enterprise managers would include risk compensation, and private enterprises which employ labor would generate non-labor remuneration for enterprise owners. Second, the distribution policy should not only benefit enterprises and individuals, allowing them to get rich first through honest operation and hard work, but also prevent the income gap from widening too much and ensure that common prosperity remains possible. This reflects the emphasis on fairness in the drive to achieve efficiency [8]. The resolution of the 14th CPC National Congress followed the line of 13th CPC National Congress, insisting that distribution according to work should be the predominant mode, while other distribution modes play supplementary roles. The new report, however, clearly stated that both efficiency and fairness must be considered. The report to the 14th CPC National Congress again pointed out that distribution according to work must play the dominant role, and other distribution modes should be used as supplements, so that both efficiency and fairness could be achieved. This policy line aimed to address the “market failure” to guarantee fairness amid the hype to increase efficiency, while China was shifting to market-oriented economy and the market was not yet mature. Innovation 3: Insisting on the combination of distribution according to work with various other methods of distribution, China valued both income from work and production factors, with priority given to efficiency based on guaranteeing fairness. The report to the 15th CPC National Congress proposed a new policy line for income distribution under the overarching goal of common prosperity and on the premise that distribution according to work would remain predominant. First, “various other distribution modes” which used to be treated as supplementary were redefined as parallel modes that should coexist, which highlighted the importance of all distribution modes in the overall income distribution regime. Second, in the past, the State allowed various other distribution modes to exist, but now the State not only allowed but also encouraged production factors like capital and technology to be included as the basis of distribution. Third, while addressing the problem whether production factors can be considered in income distribution, for the first time, the report had taken a bold step further to propose the term “distribution according to production factors”, and insisted that

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“distribution according to work” and “distribution according to production factors” should be combined in the new income distribution framework. Innovation 4: The Party established the principle that labor, capital, technology and management take part in the distribution according to their contributions, and clearly put forward that all legitimate labor remuneration and non-labor remuneration should be protected. The report to the 16th CPC National Congress expounded how to deepen the reform of China’s distribution system. These statements offered the direction for deepening the income distribution reform. First, the report asserted that labor, capital, technology and management are the sources of social wealth. It fully recognized the value of labor, and made clear that other factors of production play an important role in creating social wealth. Second, the report established the principle that labor, capital, technology and managerial expertise should have their rightful share according to their respective contribution. That was based on the principle of “allowing and encouraging capital, technology and other production factors to participate in the distribution of gains”, which was stated in the report to the 15th National Congress of the CPC. In fact, it was an innovation based on the previous statement, as it expanded the scope of production factors and clarified the basis of distribution [9]. Third, it stated clearly that all legitimate income, from work or not, should be protected. That was the first time since the founding of New China that “legitimate non-labor remuneration” had been recognized and put under protection, which was a major step towards recognizing the legitimacy of investment behavior and income at the levels of ideology, government policy and even law. Fourth, the report stated that “we should try to raise the proportion of the middleincome group and increase the income of the low-income group”, which drew the blueprint for the income distribution pattern in well-off society. Innovation 5: While continuing the policy to improve the distribution system to allow factors of production such as labor, capital, technology and managerial expertise to have a rightful share, the report to the 17th National Congress of CPC asserted that a proper balance should be struck between efficiency and equity in both primary distribution and redistribution, with particular emphasis on equity in redistribution; that China should gradually increase the share of personal income in the distribution of national income, and raise that of work-based income in primary distribution; and that China should also create conditions for more people to earn income from property ownership [10]. In comparison with the previous report, the report to the 17th National Congress further emphasized the need to adhere to and improve the system whereby distribution according to work remains the predominant mode and co-exists with various other modes, and to improve the system so that production factors such as labor, capital, technology, managerial expertise have a right share according to their contribution. First, the principle that a proper balance should be struck between efficiency and equity in both primary distribution and redistribution, means emphasis on equity in redistribution with an aim to address the widening income gap. It is an amendment

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to the distribution principle proposed in the report to the 16th National Congress of CPC. The change was an effective response to current social trends. Second, the report also stated that China should “gradually increase the share of personal income in the distribution of national income, and raise that of work-based income in primary distribution.” This is another major progress of the 17th National Congress of CPC in income distribution reform. Likewise, raising the proportion of work-based income in primary distribution is another important attempt to achieve the goals of reform. Third, the report proposed to “establish a mechanism of regular pay increases for enterprise employees and a mechanism for guaranteeing payment of their salaries.” Meanwhile, a collective bargaining mechanism for pay rise should be put in place to guarantee that workers’ income would grow in parallel with the development of enterprises. Last, it was proposed for the first time that China should create conditions for more people to earn property-based income, which was a new measure to increase people’s income amid the development of the capital markets in China. As the savings rate rose and the reform of the investment system and the financial system deepened, more and more people would become investors. The sustained growth of China’s economy and the improvement of companies’ profitability provided the basis for booming markets and increased investors’ gains [11]. Innovation 6: The report to the 18th National Congress of CPC insisted that, to ensure that the people share the fruits of development, China must deepen the income distribution reform: increasing personal income and labor remuneration in parallel with economic development and productivity gains, as well as raising the share of personal income in the distribution of national income and the share of labor remuneration in primary distribution. The emphasis rested on “parallel growth” and the “share” of personal income and work- based income. The report raised the clear goal of deepening the income distribution reform: people sharing the fruits of development, which was identified to prevent the income gap from getting wider. First, it was the first time to clearly call for a change to the current income distribution system, stressing that the benefits of development must be shared by the people. Second, also for the first time, the concept “parallel growth” was proposed: people’s income should grow in parallel with economic development, and workbased income should grow in parallel with productivity gains. The share of personal income in the distribution of national income, and the share of labor remuneration in primary distribution were also reiterated. They were the new goals of national income distribution reform. Third, the report considered the income distribution policy from the angle of primary distribution and redistribution, arguing that primary distribution and redistribution should try to achieve both efficiency and fairness, while redistribution should put emphasis on fairness. It highlighted the need to allow factors of production such as labor, capital, technology and managerial expertise to have their due share in initial income contribution, and the urgent need to improve the mechanism of redistribution

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to modulate income distribution mainly through taxation, social security, and transfer payments. Fourth, the report clearly stated that we should further reform the wage system in enterprises, government bodies and public institutions, promoting collective bargaining and protecting income earned through work. It is especially noteworthy that it emphasized the need to “increase property-based personal income through multiple channels” [12]. Last, for the first time, it proposed to improve the way in which income was distributed, protect lawful income, increase the income of low-income groups, readjust excessively high income, and ban illegal gains. Obviously, after the 18th National Congress of CPC, China paid more attention to practical innovations and reform in the field of income distribution, and the guideline was to move the weight from “national wealth” to “personal wealth” on the scale. The new policy aimed to narrow income gaps so that all the people could fairly share the benefits of development so that the goal of common prosperity could be realized. Innovation 7: As a top-down design, China insisted that the aim of income distribution reform and innovations was to build a rational and orderly system of income distribution. The strategic design was drawn up in the Decision on Major Issues Concerning Comprehensively Deepening Reform endorsed by the Third Plenary Session of the Eighteenth Chinese Communist Party’s Central Committee in November 2013. According to the design, income distribution reform in China should aim at building a reasonable and orderly income distribution system. First, this design made the goal of income distribution reform clearer, more progressive and relevant to the recent developments. It was more than simply equating income distribution reform with narrowing down the income gap, or balancing fairness and efficiency through primary distribution and redistribution. It aimed to define the boundary between government power and market dynamics regarding income distribution, and build a reasonable and reliable pattern of income distribution through bringing innovations to the system and mechanisms. The goal was to let development benefit all people more equitably. For the purpose of this goal, to be “reasonable” meant to remove the existing “unreasonable” restrictions in the distribution pattern, giving all production factors equal right to share in national income in order to mobilize all factors of development, including labor, capital, land, knowledge, technology and managerial expertise. It did not simply mean narrowing down the income gaps, which would not reflect the realities in the primary stage of socialism. It represented a rational understanding of the income level of farmers and migrant workers and the need to raise the level. Any attempt to “double their income” was unrealistic, and “short-cut promises” would be counterproductive. “Orderly” emphasized the standardization and institutionalization of the distribution process, established the fair and just distribution mechanism in accordance with the conditions of the primary stage of socialism and the socialist market economy, and makes all sources of social wealth fully flowing. “Orderly” emphasized the standardization and institutionalization of the distribution process. Fair and just distribution mechanisms must be

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put in place to align with the realities in the primary stage of socialism and market dynamics to mobilize all sources of wealth. Second, a reasonable and orderly income distribution system has six dimensions: ➀ a market- oriented and efficiency-oriented primary distribution pattern; ➁ a government-modulated redistribution pattern that pursues fairness and justice; ➂ coordination of income distribution between urban and rural areas to drive integrated development; ➃ standardized and transparent distribution process; ➄ scientific and efficient administration; and ➅ a distribution system that offers incentives [13]. Third, about the goal of income distribution reform, the strategic design expounded for the first time the importance of income distribution reform in China, as well as its goals, initiatives and measures, which were stated in the State Council’s “Opinions on Deepening the Reform of the Income Distribution System” (the “Opinions”). Based on the new normal state of economic development and the shift towards innovation-driven development, recognizing the urgent need of reforming the current income distribution regime, as well as the goals of reform, the document gave 35 “Opinions” to deepen the income distribution reform, covering: the improvement of primary distribution and redistribution mechanisms; the measures to increase farmers’ income; the need to rationalize and standardize the distribution process; and strengthening leadership over the reform. The Opinions pointed out that, to deepen the income distribution reform was an urgent need, as it would be a means to stimulate and sustain consumption in the long run and to accelerate the economic transformation. Likewise, it was a fundamental initiative to address inequity in distribution, to narrow down the income gaps, to standardize the distribution process, and to maintain social fairness, justice, harmony and stability. It was also an important move to further improve the socialist market economy system. In a sense, it was an inevitable move to realize the goal of common prosperity. The Opinions also asserted that the income distribution reform should serve economic development, and adjust the distribution structure in alignment with economic development, give equal weight to primary distribution and redistribution, focus on increasing the income of urban and rural residents, narrowing down the income gaps and standardizing the distribution process, and gradually form a reasonable and orderly income distribution system. At the same time, efforts should be made to realize four goals: doubling the income of urban and rural residents, gradually narrowing down the income gaps, obviously improving the income distribution order, and making the income distribution pattern reasonable. Under these guidelines and goals, the Opinions considered the issues of China’s income distribution system, especially the key and most pressing problems, and put the focus on primary distribution, redistribution, farmers’ income, and the order of distribution. Innovation 8: The new concept of “inclusive development” was raised to ensure fairness and justice, which was the goal of innovations with the income distribution regime of China. The new idea was raised in the report to the 19th National Congress of CPC to support the goal of income distribution reform and innovation.

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First, inclusive development would make income distribution more reasonable and more orderly on the basis that distribution according to work played the predominant role and the mechanisms of distribution according to production factors were improved. People should be encouraged to get rich through hard work and legal business operations, the middle- income group should be enlarged, the income of low-income earners should be increased, excessively high incomes should be curbed, and illegal gains should be banned. Second, the new concept called for paralleled growth of national economy and people’s income, and paralleled growth of productivity and labor remuneration. In other words, both the link between economic development and income increase and the link between productivity gains and payment rise should be maintained in order to achieve both fairness and efficiency. Third, measures were proposed to improve redistribution and ensure equitable access to public services, so that public policy and government transfer payments would help address the income gaps. The report to the 19th National Congress of CPC insisted that government should play its role in adjusting redistribution, move faster to ensure equitable access to basic public services and narrow the gaps in incomes, partly through accelerating the targeted poverty reduction program. China also promised to act to help those most in need and build a sustainable and tightly woven multilevel social security net that covers both urban and rural populations. The net would embrace institutions that have clearly defined rights and responsibilities, and deliver the right support that reached the defined targets.

1.4 40 Years of Income Distribution Reform in China: Experience and Lessons China’s income distribution reform has proceeded amid China’s phenomenal economic growth. On one hand, the income distribution reform and the shift of interests relations provide an internal motivation for the market-oriented reform and high-speed economic growth in China. On the other hand, the widening of income gaps, the duality between urban and rural areas, and the problems of the current industrial structure and employment structure have prompted people to think about how Chinese economy should grow in the future, leading to a consensus about the necessity of innovation-driven development and economic transformation. China’s income distribution reform over 40 years has offered a lot of lessons and insights, which would inform more reforms in the new normal state of economy.

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1.4.1 Basic Experience (1) The income distribution reform entails an awareness shift and continuous innovation in theory and practice. Income distribution reform is the most sensitive part of China’s overall reform program, as it directly involves people’s economic interests. The innovative theory of socialist income distribution with Chinese characteristics and a series of new concepts under or associated with this theory are derived from the innovative practices of many major reforms and reflect the general direction of China’s reform. The key concepts, including the “primary stage of socialism”, the “change of ownership”, the “economic transformation”, the impact of “market-oriented reforms” on the distribution pattern and its evolution, reflect the progress of China’s income distribution reform, both in theory and practice in the primary stage of socialism. This is a process of generating new ideas and new theories based on new practices. (2) The income distribution reform is an early step of economic system reform. The income distribution reform in China was first intended to address the realistic issues in the primary stage of socialism. Gradually, the distribution regime shifted from a singular mode of distribution according to work, and to a composite system in which distribution according to work played the predominant role and coexisted with various other modes. While it realigned economic interests, the reform also drove the redistribution of resources. Now there is a common understanding that, if we want to deepen reform and establish a perfect socialist market economy system, we must continue to advance the income distribution reform. To some extent, the income distribution reform determines the prospect of economic system reform in China, because the internal motivation created by the economic reform will show up through the income distribution system in the end. (3) The income distribution reform has fueled the China’s globalization. The income distribution reform has helped realign economic relations and will mobilize all domestic and international factors of production and promote the growth of productivity to boost the development of socialism with Chinese characteristics, thus creating necessary market conditions for China’s globalization and laying a solid foundation for attracting foreign investment. (4) The reform powers and guarantees a rapid economic growth in China. The income distribution reform has ended the egalitarian practice of eating from the same pot and stimulated the initiative for wealth creation. It has also improved the economic efficiency at the micro level. By allowing some people to get rich first, it has created role models to stimulate enthusiasm and laid a solid material foundation for realizing the goal of common prosperity. Differentiated income distribution improves economic performance and efficiency. (5) The income distribution reform follows the principle of progressive change. As part of China’s overall reform, income distribution reform is a gradual process like other reforms. China’s income distribution regime has gone from mere work-based distribution, to work-based distribution supplemented by other

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distribution methods, and finally work- based distribution is going parallel with other modes of distribution like production factors- based distribution. The income distribution system has kept pace with the evolution of social realities, with the ideological awareness and theoretical perspective refreshed once and again. One example is the role of production factors in income distribution. At first, production factors were not considered in distribution, and later the State allowed and then encouraged production factors to share in. It embodies the principle of progressive reform. (6) The income distribution reform has created mutual benefits for the government, enterprises and households. Thanks to the establishment and gradual perfection of the socialist market economic system, the income distribution reform has continued to deepen, and the distribution relationships have become more reasonable. The incomes of urban and rural residents have increased steadily, and diversified income distribution has increased their bank savings and financial assets. The share of personal income has increased significantly, government revenues have continued to grow in absolute terms, and the share of corporate income has also risen slightly. The primary distribution relationship among the State, individuals and enterprises has become more reasonable. In the past, the interests of the State had been overemphasized, and the individuals and enterprises were ignored. Now this tendency has been corrected, with the government, enterprises and households having an appropriate share of the fruits of development. (7) The income distribution reform has promoted the shift of China’s economic system toward socialist market economy. The reform has revoked administrative centralization in distribution which belonged to the planned economy system, and realized the transition toward market-based distribution according to production factors. Meanwhile, resources allocation has been optimized, which has motivated enterprises, improved the living conditions of people, and accelerated the transition to the socialist market economy. (8) The reform has struck a balance between fairness and efficiency, which has helped create China’s economic miracle over the last 40 years. However, a rapid economic growth alone cannot be called a miracle, but China’s miracle is a rapid economic growth that offers fair benefits to all parties. China’s economic reform, beginning with distribution reform, has done a great job in rationalizing the income distribution relationship and thus creating strong incentives and an external guarantee for the reform to deepen in an all-round way. This is one of the biggest achievements of China’s income distribution reform [7].

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1.4.2 Basic Laws and Principles Over the past 40 years, China’s income distribution reform has not only shaped a socialist income distribution regime with Chinese characteristics, but also reflected the basic laws and principles of income distribution. Income distribution is based on productivity and productive relations. Income distribution reform is an opportunity to create an internal motivation and nurture the motive force for maximizing productive forces. Productivity determines productive relations. A productive relationship corresponds to a certain level of productivity. At the beginning of reform and opening-up, China admitted that we were still in the primary stage of socialism, and our fundamental task was to raise the productivity level, which needed incentives to drive the development of productivity. In order to fulfill this task, China proposed to reform the traditional equalitarian income distribution regime and truly implement the principle of distribution according to work, or the principle of more pay for more work. Some people could get rich first through hard work and lawful business operations, which was regarded as a key step towards common prosperity. Both the household contract responsibility system in rural areas and contract-based administration of urban enterprises aimed to create differentiated benefit distribution mechanisms and therefore create incentives to drive productivity growth. The income distribution reform follows the laws of the socialist market economy, with a strong emphasis on market forces. It highlights both the desire for market efficiency (instrumental rationality) and the desire for fairness (value rationality), and aims to strike a balance between fairness and efficiency. China’s income distribution reform fits well into the socialist market economy, capturing the power of market competition and price competition mechanisms to optimize resources allocation and efficiency. Therefore, the income distribution reform did not only focus on distribution according to work, but also combined it with distribution according to production factors, giving a rightful share to production factors in primary distribution. Besides labor, it also allowed capital, technology and other factors to participate in income distribution. It has promoted the diversification of income distribution and income sources, aligning income distribution with allocation of resources, and thus laying a solid foundation for rapid and efficient development of the Chinese economy. China’s income distribution reform follows the tides of economic globalization. While supporting China’s opening-up efforts, the reform has been to a high degree conducted under international rules. In the past 40 years, China’s reform and opening-up program was also a process of playing by the rules of globalization, of active participation in globalization and the international division of labor, and of developing international trade and attracting foreign investment. In this process, the participation of capital flow and the international trade in income distribution has exerted a profound influence on the overall income distribution in China. At the same time, by joining the system of international trade and international division of labor along the global value chain, China has obtained huge comparative benefits

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through its comparative advantages. China’s domestic income distribution has also been gradually influenced by global income distribution regimes. Meanwhile, in order to attract foreign capital by means of preferential policies, including tax incentives, China has opened wider and wider to the outside world, and actively accelerated its participation in globalization by adjusting its income distribution policy. The combination of comparative advantages and policy incentives has helped China attract foreign investment. As a result, China has reaped great economic benefits, which in turn has accelerated China’s integration into the world. In this sense, income distribution reform in China has begun and proceeded based on globalization. Economic development, driven by participation in the international division of labor and competition in the international market, has laid the foundation for reshaping China’s income distribution system. China’s income distribution reform has always intertwined with economic growth, or in other words economic growth and income distribution have enhanced and driven each other in this process. From the very beginning, China’s income distribution reform has aimed to address the relationship between production or growth and distribution. Anyway, how to improve and rationalize income distribution based on promoting production and economic growth is a tricky issue that all countries must face and handle properly in the process of modernization. Many countries have valued growth more than distribution, while some other countries put distribution ahead of growth on the priority list. In fact, China’s income distribution reform has always to figure out a proper relationship between economic growth and income distribution. The first step was to address egalitarianism that severely inhibited the development of productivity and economic growth. Then, China followed the principle of allowing some regions and people to get rich first, and seeking for efficiency before fairness. Later, to address the widening income gaps and the constraints on consumption and growth, China made it clear that efficiency and fairness should be considered at the same time, with the emphasis put on common prosperity and fairness, and the aim is to build a rational and sustainable new regime of income distribution. The further goal is to promote economic growth and social development, by reducing the income gaps and synchronizing economic growth and income growth. The principle is that productivity and economic growth must be put at the center in the process of income distribution reform. Especially after the 18th CPC National Congress, the reform emphasized promoting economic growth while increasing people’s income, and raising productivity while raising labor remuneration. That indicates the alignment of economic growth and income distribution. The State wanted to build a good income distribution system that would support economic growth and a good economic growth model which would drive income growth and support income distribution reform. China’s income distribution reform has basically avoided the argument about whether fairness or efficiency should come first. The reform has embodied the Marxist doctrine that productivity determines production relations and that the economic base

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determines the superstructure. The reform is helpful for China to accelerate its productivity growth and correlate economic growth with income distribution. The income distribution reform in China is always trying to address the relationship between the government and market forces in modulating national income distribution. Economic research shows that the relationship between the primary distribution and redistribution is a key issue, because this relationship underlies the relationship between efficiency and fairness and reflects the relationship between the market and the government. In the days of planned economy, as we mechanically copied the Soviet theory and mode of economy, the mechanism of distribution according to work failed to achieve either fairness or efficiency. No one had the idea that the market could determine the allocation of resources. Obviously, it is not possible to recognize or handle the relationship between primary distribution and redistribution. In the course of reform, China has adhered to the Marxist principle of distribution according to work: more pay for more work, and also proposed and implemented the new idea of combining distribution according to work with distribution according to production factors, which not only embodies the law of socialist market economy, but also reflects the market principle that efficiency comes from competition and yet promises to guarantee fairness. In this way, the relationship between primary distribution and redistribution comes up again: primary distribution reveals the law that market determines resources allocation, and redistribution reflects the role of the government to ensure fairness and social justice. In a sense, China’s income distribution reform has always aimed to raise efficiency through primary distribution. Efforts included removing all institutional barriers that barred the market from playing a predominant role in resource allocation and encouraging fair competition and efficiency maximization. Meanwhile, China has also tried to clear up factors limiting government capabilities to fulfill its mandate, to build a social policy framework and improve the government transfer payment system, aiming to establish a more effective redistribution system. Through the reform and striking a proper balance between the primary distribution and the redistribution, China can handle the relationship between the government and the market in income distribution in the right way. China’s income distribution reform has aimed to enhance the rule of law, increase transparency and ensure compliance with regulatory rules, aiming to build a more reasonable and dependable new regime of income distribution. Over the 40 years of reform, China’s income distribution regime has progressed from the singular and closed mode under planned economy to a diversified mode exposed to market forces. The goal is open, fair and transparent income distribution, and then a pluralistic, rational and open income distribution system. In fact, China’s income distribution reform has always faced two challenges: One is to prevent from the widening income gaps in the process of economic development, and the other is to eliminate unfairness in income distribution. On the surface, widening income gaps and unfairness of distribution seem to be separate problems, but in the distribution regime of China, they are intrinsically interconnected and influence each other. Income gaps are not only a by-product of economic development

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and market-oriented reform, but also a consequence of institutional imperfection, especially the unfairness in distribution. Obviously, this is not merely about income gaps in the general sense, but involves unfairness in distribution. Therefore, China’s income distribution reform should not only try to address income gaps, but also explore how to increase fairness in distribution. To some extent, the second problem is more difficult, because it involves legal accountability, transparency and regulatory compliance regarding income distribution. Therefore, it is necessary to realize income and economic equity in a broad sense through reform. In fact, China income distribution reform over the 40 years has revealed two interconnected needs. First, the income distribution reform has sought to diversify income sources and generate incentives through improving the mechanism of distribution. Second, China has also considered how to exert regulatory supervision over income distribution. Through promoting income and asset transparency and regulation, the income distribution regime can be made more reasonable and dependable, and gradually the institutional factors that affect fairness in distribution can be eliminated. Obviously, over the past 40 years, China has been trying to rationalize and optimize income distribution, partly through regulating the income structure and enacting laws to enhance regulation. Through innovative measures, China has also tried to give the income distribution regime more accountability, transparency, and compliance with law. These efforts have driven the progress of income distribution in China.

1.5 Theory of Socialist Income Distribution with Chinese Characteristics: Framework and Methodology After 40 years of income distribution reform and innovation, China has gradually developed a mature concept system, advanced theoretical perspectives and a unique methodology concerning income distribution. It is not only helpful to enrich and develop Marxism and socialism political economics with Chinese characteristics, but also to advance the reform and innovation of China’s income distribution system. It represents China’s contribution to international economics and developmental economics.

1.5.1 Key Concepts In an introduction to Karl Marx’s Capital: A Critique of Political Economy, Friedrich Engels said, “Every new view proposed by a science represents the revolution of terminology in that subject area [14].” The “revolution of terminology” is equivalent to the theoretical innovation. When we claim that the socialist political economics with Chinese characteristics represents an innovation of the Marxist political economics, we must assert that there is a “revolution of terminology”, and the

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revolutionary terminology is now a very important component of the Chinese philosophy and social sciences. The theory of income distribution with Chinese characteristics is marked by a concept system with a revolutionary terminology derived from China’s income distribution in practice. 1.

Letting some people get rich first The concept of “letting some people get rich first and help others to get rich later” was put forward by Deng Xiaoping in the early years of China’s reform and opening-up. The idea is that some people and some areas should be encouraged to get rich first, and they would help others and their success would motivate more and more people and areas to get rich, so the country may realize common prosperity step by step. This idea was an antidote to equalitarianism which was deeply rooted at that time. It also cleared up the theoretical barriers for the income distribution reform. The idea was proposed as the foundation and the shortcut towards common prosperity. The goal is to achieve common prosperity, with no one left behind. It is an important concept in the Chinese income distribution theory.

2.

Common prosperity The idea of “common prosperity” is interconnected with “letting some people get rich first”. The underlying belief is that the people who get rich first would help and push others to get rich as well, which would gradually lead to common prosperity. Deng Xiaoping stressed the idea of common prosperity in many occasions. In 1992, Deng Xiaoping argued that the goal of socialism was to liberate and develop productive forces, eliminate exploitation, eliminate polarization and finally reach common prosperity. Common prosperity means that all the people reach a certain standard of wellbeing by working hard and helping each other. In other words, common prosperity should be realized based on eliminating polarization and poverty. It is a step-by-step process, with partial prosperity realized before common prosperity. Common prosperity, as the goal of socialism, defines our task in the primary stage of socialism and the direction of income distribution reform.

3.

Two overarching demands In the early years of reform and opening-up, Deng Xiaoping stressed “two overarching demands”: One was to speed up the opening-up of the eastern coastal areas, which should develop ahead of other areas so they would be able to fuel the development of the hinterland. The other demand was, when the country reached a certain level of development, like moderate prosperity at the end of the 20th century, the coastal areas must help speed up the development of the central and western regions. This principle of focused and step-by-step development has exerted a profound and positive impact on the development of China’s regional economy and ultimately the overall prosperity of China.

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4.

Predominance of distribution according to work and co-existence of various other distribution modes In November 1993, the Third Plenary Session of the 14th CPC Central Committee laid out the important principle that distributing according to work shall be dominant and various other modes of distribution shall coexist. China’s income distribution would no long be single- modal. Distribution according to work should play the predominant role, while distribution according to production factors, public welfare and social security should also exist and play their own roles in the income distribution system of China. This concept defines the status and importance of all distribution modes, and acknowledges the legitimacy of “other” distribution modes, which would help mobilize the enthusiasm and creativity of all people. This concept embodies the essence of the socialist system of income distribution with Chinese characteristics.

5.

Combination of distribution according to work and distribution according to production factors In September 1997, the 15th CPC National Congress put forward the principle of combining distribution according to work with distribution according to production factors. To implement distribution according to work in the socialist market economy, it is necessary to utilize market mechanisms and the advantages of distribution according to production factors. On the other hand, distribution according to production factors must absorb some elements of distribution according to work. Embodying the law of socialist market economy, this principle is necessary and helpful to mobilize the enthusiasm of both workers and investors, gather domestic and international resources of all kinds and allocate them according to market rules, which is a prerequisite for improving productivity. This concept stresses the need to adapt income distribution to the law and development of socialist market economy.

6.

Giving priority to efficiency and due consideration to fairness The 3rd Plenary Session of the 14th CPC Central Committee put forward the principle of giving priority to efficiency and due consideration to fairness. In the development of socialist market economy, efficiency should come first and yet opportunities should be made equitably available to all, while fairness should be achieved in income distribution. This new concept aimed primarily to boost the development of market economy and raise the level of productivity in the primary stage of socialism through striking a balance between efficiency and fairness.

7.

Focus on efficiency in primary distribution and fairness in redistribution The 16th CPC National Congress in 2006 pointed out that, through giving priority to efficiency and giving due consideration to fairness, we should highlight efficiency in primary distribution and ensure fairness through redistribution. In other words, we should utilize market mechanisms to encourage some people to get rich first through honest work and lawful business operations, and at the same time try to achieve fairness in distribution and strengthen the

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government’s capabilities to adjust income levels and prevent income gaps from widening. This concept provides the principle to handle the relationship between fairness and efficiency in China’s economic development, and defines the roles of the government and the market in income distribution. 8.

Enabling more people to earn property-based income This idea was raised at the 17th CPC National Congress in October 2007. People were encouraged to own property and earn income through property ownership. This was an innovative policy to increase the income of urban and rural residents, given the rapid growth of capital markets and the reform of land ownership in rural areas. This policy was intended to improve the efficiency of resource allocation, stimulate domestic demand, and finally achieve sound and rapid development of the national economy. It embodies the strategic goal of “enriching the people” through income distribution reform.

9.

Harmonious labor relations This concept was raised at the 18th CPC National Congress in 2012. This concept defines scientifically the relationship between labor and capital in socialist market economy with Chinese characteristics in the new era, and stresses the necessity to regulate labor employment, raise workers’ wage reasonably, improve workplace conditions, guarantee workers’ safety and health, realize full coverage of social insurance, strengthen care for people, and prevent and solve labor disputes effectively. The final aim was to promote reasonable, mutually beneficial, harmonious and stable labor relations. Harmonious labor relations with Chinese characteristics are crucial to strengthen and update social administration, enhance social security, and improve people’s wellbeing. They would create a ground for building a harmonious socialist society, and offer a strong guarantee for the sustainable and healthy development of economy.

10. A rational and orderly income distribution pattern The 17th and the 18th CPC National Congress emphasized the need to “improve the way in which income is distributed, protect lawful income, adjust excessively high income, expose hidden income, ban illegal income, increase the income of low-income groups, raise the proportion of middle-income groups, and narrow down the income gaps between urban and rural areas as well as between regions and sectors”, and gradually form an olive-shape distribution pattern. This concept contains the goal of the income distribution reform: not only to narrow down income gaps, but also to form a rational and orderly income distribution pattern. The. practical significance of this concept is that it helps promote fairness and justice, improve people’s wellbeing, address the immediate and realistic interests of the people, so that the fruits of development are shared more equitably by all people. 11. Two “shares” and two “parallels” In October 2007, the 17th CPC National Congress proposed to increase personal income as a share of national income, and raise the share of labor remuneration in primary distribution. The increase of these two “shares” is crucial

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to address the distribution relations among the government, enterprises and households, increase the income of workers, safeguard the rights and interests of workers, adjust the relationship between investment and consumption, and promote healthy economic and social development. In November 2012, the 18th CPC National Congress proposed to increase personal income in parallel with economic development and increase labor remuneration in parallel with the improvement of productivity. That means China’s income distribution reform began to cover the pattern of national income distribution, taking the task to address two problems: personal income had remained lower than economic growth for a long time, and the increase of labor remuneration had stayed below labor productivity. It is worth noting that the 19th CPC National Congress reiterated the proposal and explained the conditions more accurately and scientifically. 12. Development benefits reaching the people In November 2012, the 18th CPC National Congress proposed that economic development should be closely relevant to the people’s wellbeing and all people should be able to benefit from national reform and development. This is a peoplecentric concept of development, and the overarching goal is to promote overall human development and achieve common prosperity. To realize this goal, it is also necessary to establish a basic social service and security system and a fair and reasonable income distribution system, and to provide a huge development space for every member of the community. 13. Proportion of the middle-income group and an “Olive-Shaped” wealth pattern The 3rd Plenary Session of the 18th CPC Central Committee in 2015 proposed to improve the mechanisms and a policy system for adjusting income distribution, to establish an information system of personal income and property ownership, to protect lawful income, to adjust excessive incomes, to expose hidden income, to ban illegal income, to increase the income of the low-income groups, to expand the proportion of the middle-income group, to narrow down the income gaps between urban and rural areas, between regions and between sectors of economy, and finally to form an olive-shaped wealth distribution pattern. The final goal entails the establishment of a proper income distribution order, checking irrational distribution behaviors that may cause income gaps to widen, and enhancing the fairness of income distribution. The goal clearly points to the middle-income group (not the middle class) and the wealth distribution structure in China. 14. Equal access to basic public services In November 2012, the 18th CPC National Congress mentioned “equal access to basic public services” under the goal of building a moderately prosperous society, and insisted that the government should provide basic public goods and public services, with different standards at different stages and equal access to be realized in the end. To realize this goal, it is crucial to ensure rational,

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efficient and fair allocation of public resources, which is a way to make sure that all people share the fruits of reform and development. Creating equal access to basic public services is a new endeavor of China’s income distribution reform. 15. Inclusive development Inclusive development is one of the new development ideas proposed by President Xi Jinping at the 5th Plenary Session of the 18th CPC Central Committee in 2015. The idea is that development should involve all people, be realized by the people, and the fruits should be shared by the people. In inclusive development, people would feel satisfied and more strongly motivated to develop together and march towards common prosperity. As a new development concept in the new era, inclusive development aims to address the contradiction between imbalanced and inadequate development and the ever-growing needs of the people in economic, political, cultural, social and ecological fields. Ultimately, it aims to promote all-round human development and all-round social progress.

1.5.2 Basic Theories of Income Distribution with Chinese Characteristics Over the past 40 years of income distribution reform, China has adhered to the Marxist principle of distribution according to work, but also fully considered the realities of socialism with Chinese characteristics and international practices of income distribution. In the process of reform, China has developed a theory framework with its own characteristics. 1. The primary stage of socialism Given that China is still at the primary stage of socialism, income distribution in China should first embody the essence of socialism, following the principle that public ownership is fundamental, and that the mode of production determines the mode of distribution. Second, it should also follow the law of productivity development at the primary stage of socialism, and the distribution regime should be shaped in such a way as to promote the improvement of productivity and to embrace the reality that various forms of ownership co-exist. The income distribution reform is also an effort to adapt to the law of productive development and production relations. In short, the income distribution regime with Chinese characteristics should not only follow the basic principle of socialist distribution according to work, but also the law of productivity development at the primary stage of socialism. Therefore, the income distribution system with Chinese characteristics must be pluralistic, diversified and differentiated, which is determined by the imbalanced and multi-layered productivity development in the primary stage of socialism. The belief that China is still at the primary stage of socialism is a premise and key proposition of income distribution theories with Chinese characteristics.

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2. Socialist market economy The concept of socialist market economy plays a key role in the theory of socialism with Chinese characteristics, so it is another important basis of income distribution theories with Chinese characteristics. Theories of income distribution with Chinese characteristics must reflect the essence and laws of socialist market economy. Socialist market economy seeks to strike a balance between fairness and social justice on one side, and improvement of efficiency through market competition on the other. Therefore, income distribution with Chinese characteristics must highlight the coordination between fairness and efficiency; it is not an exclusive choice between efficiency and fairness. Market competition mechanisms of socialist market economy and its commitment to efficiency decide that the income distribution regime should widen the gap appropriately, but must at the same time support social justice, especially fair competition and equal opportunity. The development of socialist market economy will certainly reshape the income distribution system, which must highlight the combination of fairness and efficiency, fully embody market mechanisms, and follow the laws of the market. Therefore, the income distribution regime with Chinese characteristics must embrace market competition as a means to boost efficiency. There may be the risk of income disparity caused by market failure or unfair competition, and of unequal access to opportunities or unreasonable income distribution caused by incomplete or insufficient market competition or inadequate regulation. Therefore, theories of income distribution with Chinese characteristics must reflect market mechanisms and the laws of market economy, but the concept of socialist market economy must be the cornerstone. 3. Centrality of distribution according to work and the combination of distribution according to work and distribution according to production factors In the primary stage of socialism and in socialist market economy, distribution according to work inevitably plays the central part, and the combination of distribution according to work and distribution according to production factors underlies and is the substance of the regime of income distribution with Chinese characteristics. On one hand, at the primary stage of socialism where the public ownership was predominant while multiple forms of ownership coexisted, distribution according to the work plays the central role in the economic system, while various other distribution modes coexist. On the other hand, in socialist market economy, market forces instead of the government would play a decisive role in the allocation of resources. In this context, distribution according to contribution in terms of production factors is a matter of course. Therefore, the combination of distribution according to work and distribution according to production factors is not only a theoretical innovation of Marxism, but also a realistic form of distribution according to work in market economy. Therefore, the income distribution system with Chinese characteristics is defined as a system in which distribution according to work plays the central role while various other distribution modes coexist, which advocates the combination of distribution according to work and

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distribution according to the contribution of production factors. This distribution system embodies not only the essence and principles of socialism, but also the laws of productivity development in the primary stage of socialism and the laws of socialist market economy. In some sense, the theoretical substance of income distribution with Chinese characteristics consists in the centrality of distribution according to work and the combination of distribution according to work and distribution according to production factors. 4. Common prosperity The regime of income distribution with Chinese characteristics should embody the goals of socialism: liberating productive forces, developing productivity, eliminating exploitation, eliminating polarization, and finally realizing common prosperity. Common prosperity is not only a goal of Marxism, but also an equivalence of the commitment to people-centered development in a socialist society with Chinese characteristics. The goal of China’s income distribution reform is common prosperity. Therefore, theories of income distribution with Chinese characteristics must embody the commitment to common prosperity. Over the past 40 years, the theory development and practical reform of income distribution have indeed advanced towards realizing common prosperity, which will remain the goal and the guiding principle of income distribution reform in the future. 5. Coordination between economic growth and income distribution Income distribution with Chinese characteristics follows the laws of productivity development and socialist market economy, so fairness and efficiency are both essential. In the practice of income distribution reform, China has aimed at both driving economic growth and promoting social progress, so theoretical innovation has focused on how to correlate income distribution with economic growth. As we can see, in either primary distribution or redistribution, in either functional distribution or regular model distribution, there is never an exclusive choice or any black-or-white division; instead, China has always taken economic growth and income distribution into consideration and tried to link them up in the income distribution reform. China has not only aimed at fairer income distribution based on economic growth, but also stronger economic development through reasonable income distribution. Therefore, through the combination of primary distribution that emphasizes efficiency and redistribution that stresses fairness, China has strived to realize equal opportunity and shape a reasonable and supportive pattern of income distribution. In strategic statements concerning income distribution, China has clearly pointed out that the income distribution reform should increase personal income while promoting economic growth, and increase the share of labor remuneration while boosting productivity. In short, coordination between income distribution and economic growth through the combination of primary distribution and redistribution is a key element of the theory and principle of income distribution with Chinese characteristics.

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1.5.3 Innovative Methodologies China’s income distribution reform, or the adjustment of interests relationships, has created a strong motivation for China’s economic reform and rapid economic growth. In a sense, it is an indispensable part of China’s overall economic reform. In this process, a system of terms, concepts, categories and theories of income distribution with Chinese characteristics has taken shape, and a system of methodology for theoretical innovation has been established. The methodology of theory innovation has the following characteristics: (1) Coordination between theoretical and practical innovations. The formation and growth of theories of income distribution with Chinese characteristics have followed the fundamental law that theoretical innovation comes from practice and its changes. This is in line with the Marxist principle of practice and problem orientation. The income distribution regime with Chinese characteristics should adhere to the basic principle of Marxist distribution according to work, but at the same time should closely align with the realities of socialism with Chinese characteristics and follow the laws of productivity development and socialist market economy at the primary stage of socialism. Theories should aim at practical problems and address practical needs in the primary stage of socialism and in the development of socialist market economy. Seeking truth from facts, such theories should combine the basic Marxist distribution theory and the actual development of socialism with Chinese characteristics to stay updated and relevant. Theory innovations should be applied in distribution reform. At the same time, theoretical innovation and practical exploration should follow an open path to draw lessons from international income distribution theories and policies. In short, the theories of distribution with Chinese characteristics embody the Marxist methodological principle of seeking truth from facts, integrate the basic ideas of Marxism and the development of China and the West, and create a paradigm of enriching and renewing Marxism. (2) Combination of top-level design with practical innovations at the base level. For the theory of income distribution with Chinese characteristics, an important source of innovation is the top-level design, such as the proposal to stop the equalitarian tradition of eating from the same pot, the strategy to let some people and some regions get rich first. Every major theoretical innovation has derived from the renewal and progress of the guiding ideology of income distribution, and then in turn directed the practice of distribution reform. At the same time, income distribution reform has spurred innovation and experiment at the base level and the creativity of the people. Through the combination of top-level design with innovation of base-level practices, the reform is differentiated and targeted, which has maintained the vitality and relevance of the reform of the distribution system with Chinese characteristics. (3) Combination of progressive income distribution reform with provision of incentives for economic growth. Income distribution reform in China has always focused on adjusting interests relations, followed the path of progressive reform,

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and combined reform with the growth of endogenous drive coming from economic development. Income distribution reform has generated a strong motivation for reforms in other fields and driven social and economic development. The progressive principle of income distribution reform has proved effective in reducing social disruptions that could have been caused by adjusting the interest relationship, which has made it possible for the reform to be implemented. The combination of income distribution reform with generation of incentives has created a substantial meaning for the income distribution reform, so the reform would not be carried out for reform’s own sake. Instead, the reform would address the relationship between income distribution and economic development. (4) Application of historical materialism and dialectical materialism. China’s income distribution reform is always people-centric. While the basic concepts, like productivity development versus production relations and economic base versus superstructure, are utilized to direct and drive the income distribution reform and innovation, people have remained at the center of every effort or consideration and their practices are the basis of reform. Some people can get rich first through honest work and lawful business operations, and then they are supposed to help take other people towards common prosperity. In this process, applying materialist dialectics, China cares about the growth of personal income along with the development of economy, and insists on the growth of labor remuneration in step with productivity improvement. This is a scientific understanding of the relationship between economic growth and income distribution.

1.5.4 Theoretical Contribution of Income Distribution with Chinese Characteristics to Economics Theory (1) The income distribution theory with Chinese characteristics not only enriches the Marxist theory of distribution, but also the theoretical system of political economy with Chinese characteristics. The distribution theory with Chinese characteristics expands the Marxist theory of distribution according to work and puts the basic principle of distribution according to work in the real context of socialism with Chinese characteristics, so the Marxist theory is freed from the Soviet Union dogmas of political economy and gains real meaning and practical relevance. The theory has evolved from a singular model of distribution according to work, to a new model in which distribution according to work plays the dominant role and various other distribution methods coexist. The new model not only embodies the underlying Marxist theory of distribution that “the ownership of the means of production determines the production process and the ownership of production results”, but also proposes “the combination of distribution according to work and distribution according to production factors”,

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so that the principle of distribution according to work is implemented in a creative way. Therefore, the theory of distribution with Chinese characteristics enriches and updates the Marxist theory and principle of distribution according to work. On the other hand, in line with the economic system in which “public ownership of the means of production was predominant, and other forms of ownership developed together”, the income distribution system is established where “distribution according to work plays the predominant role and various other distribution modes co-exist”. By diversifying the modes of development on the premise of public ownership, building harmonious and win–win production relations, working to realize the goal of common prosperity and continuously updating the policy of government-led redistribution, we will be able to understand and address the issues concerning alienated labor, exploitation, and distribution of surplus value. Obviously, the income distribution theory with Chinese characteristics is an important part of socialist political economics with Chinese characteristics, and will be deepened and enriched by the progress of reform and economic development to ensure that socialist political economics will remain creative and dynamic. (2) The income distribution theory with Chinese characteristics provides an important reference for updating the theory of neoclassical economics, and offers a Chinese solution to the problem of income distribution inequality in the world. The income distribution theory with Chinese characteristics offers a special perspective when we reexamine the income distribution theory of Western economies. For a long time, income distribution theories in the West have been based on the theory of marginal productivity claiming that marginal output of production factors determines the compensation, and the concept of equilibrium price being based on the relationship between supply and demand of factors. A range of theories have been proposed, like the labor-wage theory, the capital-interest theory, the land-rent theory and the entrepreneur-profit theory. The fundamental logic is that market competition determines factor price, based on the assumption that the market will automatically guarantee the balance of compensation for all factors of production and that income gaps will not widen in this process but will disappear in the short term as a result of the automatic equilibrium of the market. These mainstream income distribution theories also propose that the primary distribution should be solved by the market, and the secondary distribution should be solved by the government through redistribution. These mainstream theories, however, propose that the primary distribution should be accomplished through the market, and the government is responsible for redistribution. In fact, we’ve found that income gaps in major Western countries, except for a few, are widening, especially the gaps of primary distribution determined by the market. The conflicts between labor and capital are getting harsh in many developed countries where extreme events have taken place such as “Occupying Wall Street” and “1% versus 99%”. Inequality has given rise to anti- globalization trends in many parts of the world. Developments around the world have proved that the hypothesis of automatic market equilibrium, and

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the hypothesis of convergence in income distribution, which are supported by neoclassical economics, are purely theoretical hypotheses which will not happen in real life. Redistribution in the West also relies on lengthened lobbying and gaming among politicians, political parties and interest groups. Western mainstream economics also tries to describe the changes of laborers’ share of income based on Kaldor’s “stylized facts”. Reviewing the changes in the pattern of initial income distribution in the development process of the Western industrialized countries, Nicholas Kaldor argued that wage as a share of GDP is relatively stable in the long run, and that it is a major feature of economic development. According to this “fact”, work remuneration as a percentage of income would reach a condition of equilibrium in a certain stage of social development. But the problem is that Kaldor had considered structural changes, especially industrial upgrading and transformation, in the process of economic development. In addition, mainstream Western economic theories can’t explain scientifically the issues of labor alienation, capital-labor conflicts sand polarization, which Karl Marx had studied and tried to address. The income distribution theory with Chinese characteristics is based on the predominance of public ownership, which transforms the labor-capital relationship or interest conflicts between antagonistic classes, to simple income sharing between labor and capital. As far as income gaps are concerned, the distribution theory with Chinese characteristics advocates the growth of income in step with economic development, which addresses properly the shares of labor and capital in total income and the growth of personal income. In addition, the distribution theory with Chinese characteristics does not rely on the hypothesis of remuneration equilibrium. Instead, it develops based on unbalanced income, and realizes the coordinated growth of all constituents and their benefits. It is unbalanced and yet coordinated development, or inclusive development. The theory with Chinese characteristics emphasizes that the market determines the allocation of resources but at the same time enables the government to play its role better. Distribution is subject to dual adjustment by both the government and the market, which is different from the mode of secondary adjustment proposed by the mainstream economics. In a word, the income distribution theory with Chinese characteristics combines the pricing capacity of the market and the special model of socialist market economy, so it realizes the goal of increasing efficiency through primary distribution and fairness through redistribution. Obviously, the distribution theory with Chinese characteristics is an important input for reexamining the distribution theory of neoclassical economics and the relationship between government and market in terms of income distribution. The propositions of the income distribution theory with Chinese characteristics also offer valuable clues for efforts to address the issues of income distribution in Western countries and the growing global inequality. It is one of China’s major contributions to global development. (3) The distribution theory with Chinese characteristics offers a better way of thinking for promoting the innovation of development economics, and a new perspective for reexamining the Kuznets hypothesis about the relationship

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between economic growth and income distribution. In development economics, the relationship between income distribution and economic growth is one of the key issues. However, for a long time, the Western development economics has maintained the belief in the so-called “trickle-down effect” and the Kuznets hypothesis. “Trickle-down effect” means that, if appropriate economic growth is maintained, benefits will trickle down to the middle- and low-income groups, and even the poor people at the bottom. Kuznets hypothesis holds that the relationship between economic development and the change of income distribution takes an “inverted U curve”. In other words, in the early development of an economy, economic inequality will increase along with the increase of per capita income, and the income gap will decrease after the per capita income reaches a certain level. Whether the “trickle-down effect” or the “Kuznets inverted U curve”, the basic assumption is that the market forces will create income equilibrium and narrow down the income gaps. However, while economy develops and income per capita grows in many countries and regions, no “trickle-down effect” has taken place, and the income gaps have not narrowed down. In fact, it is worth noting that economic growth must be the basis of poverty eradication and income generation; without economic growth, income distribution would be groundless. However, whether economic growth can alleviate poverty and narrow down income gaps automatically is still questionable. Moreover, the trickle- down effect and Kuznets’s hypothesis are based on industrialization, and now the economic focus rests on services. In the era of service economy, it is necessary to reconsider and study how income gaps evolve and how they can be narrowed. The distribution theory with Chinese characteristics jumps out of singular commitment to fairness or efficiency, defying the Western belief that we can’t get both. Innovatively, China insists that both efficiency and fairness must be considered and achieved. At the same time, income distribution reform and economic development move on side by side to create synergy, creating a solid basis for building an income distribution system which facilitates economic growth and an economic growth mode which can optimize income distribution. China has adopted a set of policies to secure economic growth while raising the share of personal income and people’s absolute income based on productivity improvement. The analytical framework of fairness and efficiency is corrected, which is helpful to enrich and update the system of economic theories. (4) The distribution theory with Chinese characteristics provides a new perspective for understanding the Chinese economic miracle, and offers an important basis for deepening reform in the new era. No doubt, as a major subject of economic studies, China’s economic growth must be understood in close connection with income distribution. Economic growth and income distribution must be put in a unified framework, or otherwise China’s rapid economic growth and its transformation in the new era cannot be understood properly. For a long time, Chinese economic miracle has been studied closely by Chinese and international scholars who have already produced a lot of theoretical explanations. It should be noted that most of the explanations focus on China’s economic growth as such. In terms of methodology, most studies depend on theories of economic growth,

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the theory of production function, and institutional economics to analyze the decisive factors of China’s economic growth. However, most studies have failed to examine China’s rapid economic growth or anticipate its future innovation and transformation from the angle of income distribution. One of the key contributions of the distribution theory with Chinese characteristics is that we must take income distribution into account in order to truly understand the rapid growth of Chinese economy. The reform of China’s income distribution system has created a strong internal drive for the Chinese economic miracle. People always react positively to incentives, which is probably the secret of China’s rapid economic growth and a key to the transition from high-speed growth to high-quality development. Undoubtedly, high-quality economic development in the new era depends very much on innovation and transformation, while innovation and transformation need a strong internal motive force. Therefore, we must accelerate the income distribution reform which would create the motive force. This is the most important lesson we can draw from the 40 years of income distribution reform in China.

References 1. Weihong, L., Xiaolin, L., & Yun-hong, W. (2008). An overview of the evolution of china’s income distribution policies. Business Age, 01, 8–10. 2. Shunping, H. (2010). Marxist distribution theory and its development in contemporary China. A doctoral dissertation submitted to Wuhan Universit 3. Xinghua, C. (2008) Institutional changes and mechanism adjustment of personal income distribution. China Audit, 5, 12–15. 4. Xinghua, C., & Yanlin, Y. (2000). Evaluation of the effects of major distribution policy adjustments since the 1990s. Review of Economic Research, 39, 35–39. 5. Shangquan, G. (2017) Reform as a great practice of socialism with Chinese characteristics: a review and considerations of China’s reform over the past 40 years. Globalization, 9, 8–28, 134. 6. Guoyou, W. (2011). Jiang Zemin’s “three steps” strategic thought on development and its theoretical value. Journal of Beijing Jiaotong University (Social Sciences Edition), 10(03), 1–5. 7. Heng, Q. (2017). The new normal state and income distribution: mechanisms, trends and solutions. Journal of the Party School of the CPC Central Committee, 21(05), 39–47. 8. Jinyong, C. (2013). Research on the interpretation and changes of china’s income distribution policies. A Master’s thesis submitted to China University of Political Science and Law 9. Deepening the Income Distribution Reform. (2003). An interview with Wang Dongjin, Deputy Minister of MOHRSS. Labor Security Newsletter, 8, 14–18. 10. Chunhui, Y. (2009). The evolution of China’s distribution system and its effect on social harmony. Productivity Research, 02, 82–85. 11. Xinli, Z. (2007). Establishing a system of income distribution that embodies social justice: inspirations from the report to the 17th CPC national congress. Macro-Economic Management, 11, 4–7. 12. Xiaojing, L. (2014). A research on Rawls’s difference principle. A Master’s thesis submitted to Taiyuan University of Technology

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13. Heng, Q., Ling, L., Zhan, W. (2014). A study on the income distribution reform from the perspective of the third plenary session of the 18th central committee. Wenhui Daily, 10, 01–06. 14. The Central Compilation and Translation Bureau. (2009). The complete works of Karl Marx and Friedrich Engels (vol. 5) (pp. 3–2). Beijing: People’s Publishing House.

Chapter 2

Practices and Changes in China’s Income Distribution over the Last 40 Years

Over four decades, the Chinese government has tried to update the theory of income distribution, starting with addressing equalitarianism. Gradually, an income distribution system suited to the primary stage of socialism has been established, which combines distribution according to work with distribution according to production factors. It was a creative extension of the socialist theory of income distribution of Karl Marx. It must be noted that this process was underpinned by people’s ideological awareness and its shift. Considering the social realities at the primary stage of socialism, we gradually replaced the singular system of distribution according to work with the pluralistic one that guarantees the redistribution of economic benefits among all members of the society. In the new system, distribution according to work is predominant and it is combined with distribution according to production factors. The change has mobilized all productive forces to participate in economic development, and fueled the growth of productivity.

2.1 Income Distribution from 1949 to the Reform and Opening-up: System, Experience and Problems The period from the founding of the People’s Republic of China to the start of reform and opening-up in 1978, China’s income distribution regime went through several stages: coexistence of multiple forms, preliminary form of distribution according to work, and equalitarian distribution. Many lessons can be learned from the change during this period, but there are also many problems.

© Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_2

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2.1.1 China’s Income Distribution Regime from 1949 to 1978 From 1949 to 1956, China transformed from a semi-colonial and semi-feudal society to a “New Democracy”, and then to a socialist society. The income distribution regime witnessed a corresponding shift, from a mixture of diverse modes to a unified system of distribution according to work. Before reform and opening-up, while building a socialist economy that would suit the Chinese reality, China laid down the framework of distribution according to work, but this process was full of twists and turns. 1. Establishment of distribution according to work: 1949–1956 Stage 1: Coexistence of diverse modes of distribution (1949–1952). From 1949 to late 1952, China was working to revitalize its national economy and transform from a semi-colonial and semi-feudal society to a New Democracy. After the revolution ended, China began its economic endeavors under a New Democracy. It established a new economic system with special characteristics of a New Democracy in which diverse ownerships co-existed, and market and planning approaches were adopted side by side. During this period, there was no unified distribution system in China, as different distribution modes were applied in urban and rural areas. (1) Distribution in towns In this period, various economic components co-existed in rural and urban China, including State-run economy, self-employed economy, cooperative economy, capitalist economy and state capitalism. Accordingly, diverse modes of distribution also co-existed, including material supply and wage payment. In 1949, some areas such as Revolution Base areas (Red Areas) and Early Liberated areas, also known as Communist Areas which were typically poor and remote, implemented the material supply system for employees in State-run enterprises and public institutions, as well as revolutionary cadres and soldiers. After 1950, the material supply system was gradually replaced by a new system in which food and clothing supplies and other allowances were calculated in terms of cash and the sum was paid in the form of wage. In fear of the lingering impact of inflation in Old China, this creative measure was implemented for determining the wage of workers, to safeguard people from price fluctuations. The same wage offered for the same position also existed in this period. In the early years of New China, to guarantee successful transition, China did not abolish the old regime of income distribution despite its defects. State-run enterprises implemented the policy of keeping the promise to pay the same wage for the same position, but the wage was paid in goods. This system did a good job in maintaining the working force and social stability. There existed the wage system reflecting the principle of distribution according to work at the same time. Disadvantages of the diversified distribution regime appeared as the socialist State-run economy grew. There were huge gaps between wage levels and the distribution system was irrational and chaotic, which hampered the economic

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recovery in New China. As a result, in 1950, the first wage reform was rolled out across the country. The policy of “wage score” was established, and the unit of measuring wage in the whole country has been unified as “wage point”. Under this new policy and the principle of distribution according to work, a new remuneration grading system was established for workers and officials. State-run enterprises offered eight levels of wage, while some other enterprises paid different salaries for different positions. This had greatly aroused workers’ enthusiasm, and people’s income increased steadily and their material life improved obviously. (2) Distribution in rural areas By 1952, the land ownership reform had been basically completed, and farmers had gained private ownership of land. After farmers got land, their economic conditions improved significantly, and production increased rapidly. However, due to the lack of production materials and the low level of productivity, farmers met with difficulties in carrying out their own production activities. To overcome the difficulties, cooperative economy arose in various forms. In the early agricultural cooperatives, farmers could invest their land ownership and become shareholders, and their income was paid according to their work and investment. Distribution according to work which meant distribution according to the quantity and quality of work performed by workers coexisted with distribution according to capital which meant distribution according to the land ownership they invested in the cooperative, as well as other production materials. Stage 2: Implementation of distribution according to work (1953–1956). In 1953, China launched the “socialist transformation” campaign, which covered agriculture, the handicraft industry, capitalist industry and commerce. By the end of 1956, China had basically completed the campaign, creating a socialist economic system in which public ownership was predominant and mainstreaming planned economy in China. In the new situation, the income distribution system in which diverse distribution modes coexisted changed gradually into the one in which distribution according to work was predominant. In urban areas, the wage system was reformed in an all-round way. During the transition period, there was no unified wage standard. In 1956, the central government decided to implement a unified wage system around the country. The changes include: ➀ replacing wage score with direct monetary payment; ➁ designing new wage standards, raising each wage level by different degrees and adjusting the differences among industries, sectors, regions, enterprises and demographic groups; ➂ reforming the pay grading system of workers and employees; and ➃ offering position-based salaries to the personnel of government organs by three classes each of which had several levels. The wage reform extended the application of distribution according to work, and significantly raised workers’ income and improved their living conditions. However, the government determined the wage standards and hence dominated the distribution practice, but the government was not well informed enough to correlate wage payment with efficiency. Meanwhile, enterprises which had the information

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had no right to adjust wage, which led to equalitarianism. This unified and rigid system had all the problems of distribution according to work based on sole public ownership. In rural areas, after the agriculture sector completed socialist transformation, land ownership became public, and income distribution in rural areas shifted to the singular mode of distribution according to work. As land and other production materials were nationalized and people were engaged in collective labor, distribution was unified and distribution according to work became the predominant mode. However, since products could only meet basic needs of the commune members, the unified distribution system gradually became equalitarian. It’s also called “eating from the same pot”. This kind of distribution hampered the enthusiasm of farmers, so people generally worked without energy, and labor efficiency was low. 2. Equalitarian distribution: 1957–1978 From 1957 to 1966, China developed the socialist economy in an all-round way, putting great emphasis on China’s own “national conditions”. A series of movements like “Great Leap Forward”, “People’s Commune” and “Communism” were launched during this period which all advocated equalitarianism, so income distribution at that time was equalitarian. In the subsequent period of economic recovery, this mistake was partially corrected and the regime of distribution according to work was restored to some extent. However, the “Cultural Revolution” (1966–1976) broke out and the system of income distribution suffered serious disruption. (1) Wage system in urban areas In August 1958, Mao Zedong spoke against the “Bourgeois Right”, and proposed to eliminate the wage system and restore the material supply system. Since then, piecework wage, incentives and wage came under fire. Many units offered a combination of material supply and wage payment to their people. The hybrid system finally failed, and many enterprises went back to the wage system. In 1960, as the government tried to rebuild the national economy, the hybrid distribution system was officially abandoned, and piecework wage and incentives were restored, with wage for seniority added. Besides, the principle of distribution according to work was reconfirmed, which was intended as an antidote to equalitarianism and excessive income gaps. This correction gave the national economy a big boost. (2) Distribution by material supply in rural areas As socialist transformation was completed overall, and the first Five-year Plan achieved splendid success, the State leaders thought that communism was within reach, and the people’s commune was a transitional social form between socialism and communism. The material supply system was implemented in people’s communes to meet the needs of this transition period and reflect the communist principle of distribution according to need. Under the material supply system, necessities were supplied on a free and equalitarian basis. However, this system could

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not last, as it lacked productivity and material support. Therefore, while the national economy was recovering, the material supply system was replaced again by the system of distribution according to work which took the form of work points. The work-point system, however, was obviously equalitarian because there is no reward for overwork and no penalty for laziness. After the “Cultural Revolution” broke out in 1966, the national economy virtually collapsed, and the system of distribution according to work was again abolished. The Gang of Four regarded distribution according to work as a “capitalist factor”, so equalitarianism became rampant across the country during the “Cultural Revolution”. Workers were negative and lazy in work, as they would get the same amount of income no matter how much or how little they did, how well or how bad they performed. Thus, the morale suffered seriously.

2.1.2 Lessons from the Twists and Turns of the Income Distribution Regime from 1949 to 1978 Much can be learned from the repeated changes of the income distribution regime during this period. Given the low productivity level and the shortage of material supply, income distribution had mainly served to maintain social stability and safeguard people’s survival. The highly concentrated system of income distribution gathered all surplus labor, which provided a strong guarantee for the fast recovery of the heavy industry and played a role in China’s industrialization. The key problem was that the highly concentrated and equalitarian system of income distribution deviated from the law that production decides distribution, so the distribution regime at that time was unlikely to drive production. In some sense, the regime was inevitable while the productivity level was low in the early years of New China, but as socialist economy recovered and gained momentum, the disadvantages of equalitarianism showed up and dampened people’s enthusiasm [1].

2.2 Income Distribution Policies and Practices Since Reform and Opening-up Since the reform and opening-up program began, China has made exploratory attempts to adapt the income distribution system to new realities, and each session of the CPC national congress suggested new revisions. In short, China’s income distribution reform has made a considerable progress. The table below (see Table 2.1) shows the evolution of the income distribution regime, including the policies and theoretical innovations in each period.

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Table 2.1 China’s income distribution policies since reform and opening-up CPC meetings

Income distribution policy: changes and innovations

Third Plenary Session of the 11th CPC Central Emancipating the mind and seeking truth from Committee, 1978 facts; shifting the focus of work to economic development; launching reform and opening-up; focusing on rural areas; emphasizing the socialist principle of distribution according to work, overcoming equalitarianism Third Plenary Session of the 12th CPC Central Shifting the focus back to cities; developing Committee, 1984 commodity economy; breaking equalitarianism and allowing some people get rich first Thirteenth CPC National Congress, 1987

Adopting distribution according to work as the predominant while other forms of distribution played supplementary roles, putting emphasis on fairness to achieve efficiency

Fourteenth CPC National Congress, 1992

Defining the goal of China’s economic reform was to build a socialist market economy; giving equal consideration to efficiency and fairness

Fifteenth CPC National Congress, 1997

Making it clear for the first time that distribution according to work should be combined with distribution according to production factors

Sixteenth CPC National Congress, 2002

Establishing the principle that: Labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their respective contributions; and In primary distribution, more attention should be paid to efficiency, to mobilize the market forces and encourage some people to get rich first through honest labor and lawful operations; In redistribution, we should pay more attention to fairness and strengthen the function of the government in regulating income distribution to narrow the gap if it is too wide

Seventeenth CPC National Congress, 2007

Improving the distribution system so that it would allow factors of production such as labor, capital, technology and managerial expertise to have their due share of income according to their respective contribution; Formulating for the first time that a proper balance will be struck between efficiency and equity in both primary distribution and redistribution, with particular emphasis put on equity in redistribution, gradually increasing the share of personal income in the distribution of national income, and raising that of work remuneration in primary distribution (continued)

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Table 2.1 (continued) CPC meetings

Income distribution policy: changes and innovations

Eighteenth CPC National Congress, 2012

Allowing factors of production such as labor, capital, technology and managerial expertise to have their due share of income according to their respective contribution; Taking speedy steps to improve the mechanism of redistribution regulating income distribution mainly through taxation, social security, and transfer payments; Proposing for the first time to increase individual income in step with economic development and increase work remuneration in tandem with improvement in labor productivity

Nineteenth CPC National Congress, 2017

Making income distribution fairer and more orderly; ensuring that personal income grows in step with economic development; pay rises in tandem with increases in labor productivity

Source Based on reports to CPC National Congresses

2.2.1 Implementing Distribution According to Work and Opposing Equalitarianism The Third Plenary Session of the 11th CPC Central Committee in December 1978 reconfirmed the ideological principle of emancipating the mind and seeking truth from facts. The resolution of the plenum demanded to stop putting excessive emphasis on class struggle and shift the focus to economic development. The ideological change culminated in the reform and opening-up program. About income distribution, the same plenum reiterated the guideline of “emancipating the mind, and seeking truth from facts”, and demanded respect for economic laws. Accordingly, the meeting formulated economic policies that would support economic growth, and created a favorable political and economic environment for the income distribution reform. Second, the Party decided to give priority to economic development and implement reform and opening-up with the hope of laying down a solid material foundation for the income distribution reform. Third, the reform first targeted rural areas, remedying mistakes that had begun in the later period of agricultural cooperatives and trying to motivate hundreds of millions of farmers. Finally, the Party demanded to overcome equalitarianism in income distribution, which was a policy cornerstone for the income distribution reform. Equalitarianism has been deeply rooted in China. Before the Third Plenary Session of the 11th CPC Central Committee, equalitarianism was deep in the mind of most people, which led to widespread “laziness”. As individual effort was irrelevant in income distribution, motivation was very weak and efficiency was very low. The

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plenum recognized that equalitarianism, or “eating from the same pot”, was equal to sharing poverty, so the reform should first address equalitarianism. The plenum went beyond the traditional theoretical framework and its decisions followed exactly Karl Marx’s theory of distribution according to work. As an outcome of the plenum, the household contract responsibility system in which one could keep whatever’s left after paying contributions to the country and the collective was put into effect step by step. The new system aimed to correct the equalitarian tendency and increase the efficiency of labor and production, and as a result, agricultural production recovered quickly and reached new levels. In fact, the household responsibility system had spread around the country very soon, and as expected, the system had created a direct link between farmer’s labor and distribution of products. In the winter of 1979, the household responsibility system was implemented on a trial basis in some areas of Sichuan Province and Anhui Province. In the spring next year, the pilot program was rolled out around the country and household responsibility system became a national system. Soon, the new system stimulated farmers’ enthusiasm, and agricultural productivity recovered. As a result, farmers’ income increased rapidly. While promoting the rapid development of agriculture, the new system created a solid basis for China’s national economic development. In some way, it also drove the reform of China’s urban economic system. In October 1984, the Third Plenary Session of the 12th CPC Central Committee adopted the “Decision on the Reform of the Economic System”. The Decision insisted that the basic experience of implementing the household responsibility system in rural areas was also applicable in cities. In order to improve the efficiency and productivity of enterprises in towns, to mobilize workers, to stimulate their enthusiasm and creativity, it would be necessary to define the duties of every position, and establish an economic responsibility system in different forms, mainly based on contract. The decision particularly emphasized the need to develop the socialist commodity economy: “Commodity economy is an inevitable stage of economic development and its prosperity is a precondition to realize economic modernization in China. Only by fully developing the commodity economy can the economy truly grow, enterprises improve their efficiency and flexibility, and the changeable social demands be met. All this is impossible when there is only administrative planning and enforcement.” The decision also pointed out that “the equalitarian mindset is a serious obstacle to implementing distribution according to work, and the spread of equalitarianism will damage productivity. Only by allowing and encouraging some regions, enterprises and people to become rich first through hard work, can most people be mobilized, so more and more people will get rich as well.” Based on this judgment, the plenum insisted that the focus of income distribution reform should shift from rural areas to urban areas, as the economic reform accelerated with the urban economy taking the central position. It proposed to balance the relationship between the State and State-run enterprises and expand the autonomy of enterprises. In the same fashion, we should “balance the relationship between workers and enterprises and guarantee the ownership of workers” to increase the vitality of enterprises and stimulate the enthusiasm of workers. The plenum also

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corrected misunderstandings about the commodity economy and the law of value, lifting the Leftist ideological restrictions. It clearly pointed out that socialist economy should be synonymous with planned commodity economy, which was a great ideological change and a major theoretical innovation with Marxist political economy. In addition, it insisted that China must try to address the problem of equalitarianism, pointing out that “equalitarianism is a serious obstacle to implementing distribution according to work.” For the first time, the plenum proposed that “we should encourage some people to get rich through honest work and lawful business operations, which is a prerequisite to achieving common prosperity.” This proposal further cleared up theoretical obstacles against the income distribution reform. The idea of common prosperity shares a lot of common ground with the traditional belief in equality. The proposal was therefore widely applauded, as the goal of equality and common prosperity would be possible only when some get rich first and create a material basis for more widespread development. In short, some people getting rich first is a precondition for common prosperity. The plenum gave the whole country a clear message that they could seize opportunities to get rich first or later. After this plenum, the economic reform that focused on the urban economy swept across the country. As the income distribution reform in urban areas moved on, more and more enterprises restored and improved the use of incentives to encourage good performance, and at the same time the wage policy of State-owned Enterprises began to change. In January 1985, the State Council issued “the Circular on the Wage Reform of State-owned Enterprises”, which mainly focused on decentralization and the linkage between wage payment and work performance. The Circular emphasized that large and medium-sized State-owned Enterprises were allowed and even encouraged to correlate their total wage payment to workers with their overall profitability, while the State would no longer dictate over wage payment and adjustment. As wage levels differed according to the economic performance of enterprises, the new policy institutionalized performance-based wage. Implementing performance-based wage was a big step in China’s income distribution reform. Although there were still many problems in the implementation process, the new wage policy had played a very important role in the development of China’s enterprises. In June 1986, China started to reform the wage system for its government departments and public institutions. Aiming to offer incentives, the income distribution reform marked the start of the broader economic system in China [1].

2.2.2 Establishment of a New Income Distribution System In October 1987, the 13th CPC National Congress heard a report entitled “Advance Along the Road of Socialism with Chinese Characteristics”. The report stated that “public ownership system must be central and mainstream, and planned commodity economy should be vigorously developed. Absolute equalitarianism is not a goal of socialism, either in terms of ownership or income distribution. At the primary

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stage of socialism, China needs diverse forms of ownership with public ownership taking the central position. We should run a composite system in which distribution according to work must play the dominant role, and other distribution modes should exist and be effective as supplements. We should encourage some people to get rich first through honest work and lawful business operations.” The report proposed that “income distribution at the primary stage of socialism must not be based on a single model. Distribution according to work must play the dominant role, but other modes of distribution must be adopted and they must play supplementary roles. In addition to income from work, including labor remuneration and non-labor remuneration, various legal incomes should be encouraged, like interests of corporate bonds, stock dividends, profit sharing by enterprise managers (including risk compensations), and operational income of business owners who hire workers. Any income which is lawful should be accepted and protected. The distribution policy would benefit enterprises and individuals, allowing them to get rich first through hard work and lawful business operations, and prevent the income gap from widening too much and ensure that we’re on the right track towards common prosperity. This reflects the emphasis on both fairness and efficiency.” The major theoretical innovations are as follows. First, distribution according to work played the dominant role but it was not the only mode of income distribution. In the new system, “other modes of income distribution” were recognized as necessary supplements, which means that distribution according to production factors was included in the new system. Second, distribution according to production factors included mainly capital income like interests, dividends, and profits. Third, income obtained through production factors was non-labor remuneration, but it was permitted if it was legal. The income distribution system proposed by the 13th CPC National Congress was a great innovation in theory and practice, especially the shift from equalitarian distribution to a new system in which distribution according to work would remain the predominant mode and coexist with various other modes. The new system broke away from the singular regime, acknowledged the legitimacy of other distribution modes, and offered protection to other legal incomes in addition to labor remuneration, such as labor remuneration, capital income and business profits. The Congress insisted that “we should promote fairness on the basis of efficiency.” In October 1992, the 14th CPC National Congress proposed that “China’s economic reform should aim at building a socialist market economy.” The Congress reconfirmed that “distribution according to work must play the dominant role, and other modes should be used as supplements, so that both efficiency and fairness could be achieved. We should use tools and means, including market forces, to encourage efficiency. We should allow income gaps to exist while preventing the gaps from widening too much, and realize common prosperity step by step.” Concerning income distribution, the 14th CPC National Congress followed the line of 13th CPC National Congress, insisting that distribution according to work should be the predominant mode while other modes play supplementary roles. The 14th CPC National Congress, however, clearly stated that both efficiency and fairness

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must be considered and achieved at the same time. This policy line aimed to address the “market failure” to guarantee fairness amid the hype to increase efficiency, while China was shifting to market-oriented economy and the market has not been mature yet.

2.2.3 Combination of Distribution According to Work and Distribution According to Production Factors In September 1997, the 15th CPC National Congress renewed the policy of income distribution. The highlights included: ➀ Maintaining the system in which distribution according to work must play the dominant role, and other distribution modes should co-exist and be effective as supplements; ➁ Valuing both income from work and returns of production factors, with priority given to efficiency on the basis of guaranteeing fairness; ➂ Protecting lawful incomes, allowing and encouraging some people to get rich first through honest labor and lawful business operations, and allowing and encouraging the participation of capital, technology and other factors of production in income distribution; ➃ Banning illegal incomes and punishing those who embezzle public property, seek gains by such illegal means as tax evasion or use public power in exchange for money; ➄ Correcting irrational incomes and the malpractice of obtaining extra income by taking advantage f monopoly and special privileges; ➅ Checking excessively high incomes, improving the personal income tax regime, and introducing new taxes such as inheritance tax; and ➆ Standardizing income distribution so as to rationalize income gaps and prevent polarization. The major innovations of the 15th CPC National Congress are as follows. First, “various other modes of income distribution” which used to be defined as supplementary were redefined as parallel modes that should coexist, which recognized the importance of all distribution modes in the overall income distribution regime. Second, the State had previously allowed various other distribution modes to exist, but now the State even encouraged production factors like capital and technology to be included in the basis of income distribution. Third, in addition to addressing the problem whether production factors can be considered in income distribution, the Congress had taken a bold step forward to propose the term “distribution according to production factors”, and insisted that distribution according to work and distribution according to production factors should be combined under the new income distribution framework.

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2.2.4 Establishment of a Distribution System That Allows Factors of Production Such as Labor, Capital, Technology and Managerial Expertise to Have a Rightful Share According to Their Respective Contribution In November 2002, the 16th CPC National Congress deliberated on how to deepen the income distribution reform. The key proposals included: ➀ Adjusting and regulating the relations among the government, enterprises and households regarding income distribution; ➁ Establishing the principle that labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their respective contributions, so that in the new system distribution according to work would be dominant and a variety of modes of income distribution coexist; ➂ “Giving priority to efficiency with due consideration to fairness, advocating the spirit of devotion, guarding against excessive income gaps while opposing equalitarianism: In primary distribution, we should pay more attention to efficiency, bringing the market forces into play and encouraging some people to become rich first through honest labor and lawful business operations. In redistribution, we should pay more attention to fairness and strengthen the function of the government in regulating income distribution to narrow the gap if it is too wide.” ➃ Regulating the order of income distribution, checking excessively high incomes in some monopoly industries and banning illegal gains; ➄ Bearing in mind the goal of common prosperity, and trying to raise the proportion of the middle-income group and increase the income of the low-income earners. The major theoretical innovations are as follows. First, the 16th CPC Congress asserted that labor, capital, technology and management were the sources of social wealth, fully recognizing the value of labor, and making clear that other factors of production than labor should play important roles in creating social wealth. Second, the Congress established the principle that labor, capital, technology and managerial expertise should have their due share according to their respective contribution. That was based on the principle stated in the report to the 15th National Congress of the CPC that we should allow and encourage capital, technology and other production factors to participate in the distribution of national income. This principle expanded the scope of production factors and clarified the basis of distribution [2]. Third, the Congress proposed that all lawful incomes, from work or not, should be protected. That was the first time the CPC had officially recognized “legitimate non-labor remunerations” and put them under protection, which was a major step towards recognizing the legitimacy of investment behavior and gains in ideology, government policy and even law. Fourth, the Congress stated that “we should try to raise the proportion of the middle-income group and increase the income of the low-income group”, which drew the blueprint for income distribution in a well-off society. These statements offered the direction for deepening the income distribution reform. In October 2007, the 17th CPC National Congress was held. In his report to the Congress, General Secretary Hu Jintao made the following statements about the

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income distribution reform. ➀ “We will adhere to and improve the system whereby distribution according to work remains the predominant mode and coexists with various other modes.” ➁ “We will improve 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.” ➂ “A proper balance will be struck between efficiency and equity in both primary distribution and redistribution, with particular emphasis on equity in redistribution.” (This was a new statement compared with previous reports to CPC National Congresses.) ➃ “We will gradually increase personal income as a share of the national income, and raise the share of labor remuneration in primary distribution.” (This was also an unprecedented statement, declaring that the fruits of development should be shared by all people.) ➄ “Vigorous efforts will be made to raise the income of low-income groups, gradually increase poverty-alleviation aid and the minimum wage, and set up a regular pay rise mechanism for enterprise employees and a mechanism for guaranteeing payment of their salaries.” ➅ “We will create conditions for more people to earn income from property.” ➆ “We will protect legitimate income; regulate excessively high income; ban illegal income; and resolutely reverse the widening income gap.” The Congress confirmed the principle that a proper balance should be struck between efficiency and fairness in both primary distribution and redistribution with an aim to address the widening income gap. That was a step forward from the proposal by the 16th CPC National Congress that we should pay more attention to efficiency in primary distribution and fairness in redistribution. The major theoretical innovations are as follows. First, the Congress insisted that it was an important aspect of income distribution reform to increase personal income as a share of national income, and raise the share of work-based income in primary distribution. Since the reform and openingup program started, enterprises had been able to decide their employees’ income. As no reasonable system was in place to protect workers’ rights and there was a large amount of rural surplus labor, enterprises chose to put tight control on wages, which hindered the increase in labor remuneration. Meanwhile, some sectors found it difficult to maintain the size of their workforce. All these must be addressed through income distribution reform. Second, to realize fairness, the State would make vigorous efforts to raise the income of low-income earners, subsidies to help poverty reduction, and the minimum wage. The low-income earners were living in rural areas and they had trouble getting out of poverty because of the bad natural environment and poor labor skills. It is necessary to increase the income of the poor and protect their legitimate rights and interests by increasing subsidies and raise the minimum wage standards. One effective and crucial solution was to improve their skills through technical and vocational training. In this way, some low-income people would get better off and the proportion of the low-income population would drop [3]. Third, for the first time, the Congress proposed that China would create conditions for more people to earn income from property ownership. Many people were investing in financial markets as the economy grew, enterprises were more profitable, financial markets were blooming, and people’s savings were rather high. Therefore, the move

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to create conditions for more people to earn property-based income would be helpful to increase their income.

2.2.5 Improvement of Primary Distribution and Redistribution to Make Development Inclusive In November 2012, the 18th CPC National Congress was held. In the report to the Congress, General Secretary Hu Jintao made the following statements about the income distribution reform. ➀ “We must strive for common prosperity. This is a fundamental principle of socialism with Chinese characteristics. We should adhere to the basic socialist economic system and the socialist income distribution system. We should adjust the pattern of national income distribution, tighten its regulation by redistribution and work hard to narrow income gaps so that all the people can share in more fruits of development in a fair way and move steadily toward common prosperity.” ➁ “To ensure that the people share the fruits of development, we must deepen reform of the income distribution system, and increase personal income in step with economic development and labor remuneration in step with improvement in labor productivity, and we should raise the share of personal income in the distribution of national income and increase the share of labor remuneration in primary distribution.” ➂ “A proper balance should be struck between efficiency and fairness in both primary and redistribution, with particular emphasis on fairness in redistribution.” ➃ “We should improve the primary distribution system to allow factors of production such as labor, capital, technology and managerial expertise to have their due share of income according to their respective contribution; and we should take speedy steps to improve the role of redistribution in regulating income distribution through taxation, social security, and transfer payment.” ➄ “We should deepen the reform of the wage and wage system in enterprises, government bodies and public institutions, promote collective bargaining on wages in enterprises, and protect income earned through work.” ➅ “We should increase property-based personal income through multiple channels. We should improve the way in which income is distributed, protect lawful income, increase the income of low-income earners, adjust excessively high income, and prohibit illegal income.” The major theoretical innovations are as follows. First, the Congress called for adjusting the pattern of national income distribution, enhancing moderation through redistribution, and working hard to narrow income gaps so that all the people can share the fruits of development in a fair way and move steadily toward common prosperity. That means more emphasis should be placed on fairness, and China was shifting from pursuing “national wealth” to “people’s economic wellbeing”. It will also provide guidelines and important principles for China to formulate and implement the concrete plans of income distribution reform. Second, “we should increase personal income in step with economic development and labor remuneration in step with improvement in labor productivity.” China’s

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macro income distribution policy, which had advocated that the increase of remuneration should be lower than the increase of labor productivity in the 1980s, focused more on the coordination between two “increases”. It will bring more wealth to Chinese people and increase people’s income. Third, “we should improve the primary distribution system to allow factors of production such as labor, capital, technology and managerial expertise to have their due share of income according to their respective contribution; and we should take speedy steps to improve secondary income distribution mechanism mainly through taxation, social security, and transfer payment.” China has further improved the relationship between distribution according to one’s contribution and distribution according to other factors of production. That means to optimize distribution according to one’s contribution and other factors of production in the primary distribution, and use various modes of distribution to improve redistribution. In October 2017, the 19th CPC National Congress was held. During the congress, General Secretary Xi Jinping proposed the following lines of the income distribution reform. ➀ “We should mainly implement distribution according to work while improving our distribution mechanisms based on factors of production to make income distribution fairer and more orderly.” ➁ “We should encourage people to make their money through hard work and legal means. We will expand the size of the middle-income group, increase the income of low- income earners, adjust excessive incomes, and prohibit illegal income.” ➂ “We will work to see that personal income grows in step with economic development, and pay rises in tandem with increases in labor productivity.” ➃ “We should expand the channels for people to make workbased income and property-based income.” ➄ “We will see that the government plays its function of adjusting redistribution, moves faster to ensure equitable access to basic public services and narrows income gaps.” The major theoretical innovations are as follows. First, the Congress emphasized that income distribution should be more reasonable and more orderly. Innovative adjustments were made to the relationship between fairness and efficiency, and the relationship was not considered within the distribution system alone [4]. Second, new economy was rising fast in China, and new technologies, new modes and new industries have popped up, which brought a new momentum to China’s economy. In this context, the 19th CPC National Congress did not make a list of the factors to participate in national income distribution as previous Congresses had done. That means “all factors of value, not only labor, capital, knowledge, technology and management, can participate in distribution”. It would mobilize various factors of production and drive innovation and entrepreneurship all over the country. Third, the 19th National Congress proposed that “we will work to see that personal income grows in step with economic development, and pay rises in tandem with increases in labor productivity” to align economic growth with the level of personal income and to let workers benefit from their increased efficiency [5].

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2.3 Evolution of Several Major Relationships in the Field of Income Distribution in China over the Past 40 Years When we review the progress of China’s income distribution reform, we should not simply summarize the practices, concepts and institutional innovations. More importantly, we must analyze the profound changes in the major relationships of interests caused by the reform. These changes have fueled China’s economic and social development over the past decades.

2.3.1 The Relationship Between the Central and Local Governments The public financial system underlies the economic interest relationship between China’s central and local departments. Changes in the financial system have shaped this relationship in some sense [6]. Therefore, we will examine the evolution of the relationship between central and local government interests from the perspective of the public financial system. 1. 1980–1993: Dividing revenues and expenditures between central and local governments To support “adjustment, reform, correction and improvement”, and to enable central and local governments to realize “four modernizations”, the State Council decided to implement a new government finance system that would divide revenues and expenditures between the central and local governments, which would be held responsible for balancing their budgets since 1980. The new tiered public finance system marked the beginning of financial decentralization in China. The new system divided budgetary revenues into fixed central government revenues, fixed local government revenues, transfer of central government revenues to local governments, and revenue sharing between the central and local governments at fixed proportions. Likewise, budgetary expenditures were divided into central and local government expenditures according to their responsibility division. Meanwhile, both the central and local governments were responsible for balancing their own budgets. This new system eased the centralized State control over government revenues and expenditures, and guaranteed the match between financial power and administrative duties at both the national and local levels, spurring a host of new reforms and breaking the tradition of “eating rice cooked on the same stove” in planned economy [7]. One of the disadvantages of this system, however, was that the central government’s capacity of macro control was weakened due to the decrease of its revenues as a share of the total. Another disadvantage was that local protectionism arose in the form of blind investment, repeated construction, and regional economic isolation, barring the formation of a unified market in China.

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2. 1994 up to now: Tax sharing After the central government decided to shift to market economy, the national financial and taxation system also took a significant historical turn, making way for the market to play a fundamental role in resource allocation. The tax-sharing system piloted in 1994 caused a huge change in the ratios of central and local government revenues. Beginning with redefining and redistributing fiscal revenues, the reform significantly increased the overall fiscal strength of China and improved the central government’s macro-control capacity, greatly easing the pressure on the central government budgets and increased the fiscal revenues of local governments. It laid down the foundation for reshaping the financial relations between the central government and local governments during the economic transition, strengthened the central government’s capability to implement macro control over economic operations, and drove the market-oriented reform and the process of industrialization. However, the tax-sharing system also created an imbalance between fiscal power and administrative duties, as the proportion of local government revenues declined while local governments still assumed the primary responsibility for providing public goods. Figure 2.1 shows the change in revenues and expenditures of the central government as a proportion of the total since 1978. As we can see, between 1984 and 1994, the share of central government revenues declined steadily. In the early 1990s, it fell below the share of expenditures. After 1994, the central government’s revenues leveled off at about 50% of the total, while the share of expenditures declined year by year. Figure 2.2 shows the change in the revenues and expenditures of the local governments since 1979. After 1994, the proportion of local government revenues dropped to about 50%, while their expenditures increased steadily, from 70% to nearly 90%. The evolution of China’s public finance system has the following characteristics.

Fig. 2.1 Central government revenues and expenditures as proportions of the total since 1978. Source China Statistical Yearbooks

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Fig. 2.2 Local government revenues and expenditures as percentages of the total since 1978. Source China Statistical Yearbooks

First, as the interest relationship between the central and local governments changed, the administrative capacities and motivation levels of the central and local governments also changed. Under the tax-sharing system, the central government shared its financial resources with the local governments and empowered them with financial autonomy, which weakened the capacity of the central government in macro control. The tax-sharing system reshaped the interest relationship between the central government and local governments. While the central government still had the lion’s share of the national financial resources, local governments enjoyed a certain level of autonomy to stimulate their own local economy, which promised in turn to improve the total financial strength of the central government [8]. In other words, the tax-sharing system motivated both the central and local governments. Second, administrative decentralization and fiscal decentralization took place in parallel in China. The period from 1978 to 1992 was the period of transition from planned economy to market economy. During this period, the relationship between the central government and local governments was characterized by administrative decentralization and the local governments were empowered. Since 1992, China had continued to improve its socialist market economy. During this period, the central government and local governments tried to redefine their relationship. Not only were measures taken to prevent the central government from interfering with local economic development, but also prevent the expansion of local government power from undermining centralized governance [9]. This trend coincided with public finance decentralization.

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2.3.2 The Relationship Between the State and Enterprises The interest relationship between the State and enterprises is mainly reflected in the profit sharing of SOEs. Since reform and opening-up, this relationship has mainly gone through five stages as follow. 1. 1979—1982: Setup of enterprise funds and profit retention After the Third Plenary Session of the 11th CPC Central Committee, the reform of the income distribution system of SOEs entered a new period. In order to empower enterprises, stimulate their enthusiasm, strengthen accounting and improve production performance, China tentatively allowed economically and administratively independent SOEs to set up enterprise funds and retain a certain share of their profits from 1978 to 1982. Although SOEs paid a smaller share of their profits to the State, many problems popped up. There were too many assessment indicators, extra profits (profits above the plan) were grabbed by the government authorities, enterprises invested in unreasonable projects, and enterprise funds were wasted. These problems deterred the development of SOEs, so this exploration failed. As Fig. 2.3 shows, from 1979 to 1982, the annual retained profits of SOEs increased from 23.66 billion RMB yuan in 1979 to 31.16 billion RMB yuan in 1982, up 31.7%. Meanwhile, the annual profits paid to the government decreased from 40.23 billion RMB yuan in 1979 to 21.75 billion RMB yuan in 1982, down 45.9%. Although the government wanted to decentralize power and interests, the rigid administrative system was restricting the improvement of SOE operations, and decentralization alone could not motivate China’s SOEs [10].

Fig. 2.3 Performance of State-owned enterprises from 1979 to 1993 [10]. Source Qi and Xiao [10]

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2. 1983–1986: Tax-for-profit reform In March 1981, the Ministry of Finance promulgated the “Provisions on the Pilot Substitution of Taxes for Profits for State-owned Enterprises”. Literally, it meant SOEs which had originally submitted its profits to the government would pay taxes at a certain rate, and they could keep the profits after tax. There were two steps to carry out the tax-for-profit reform. At the first step, profitable enterprises were taxed at a 55% rate, and then paid some of the profits after tax to the State. At the second step, SOEs only paid taxes, and kept all the profits after tax. The implementation of profit tax enhanced the autonomy of SOEs, and strengthened the awareness of economic accounting within SOEs. As shown in Fig. 2.3, from 1983 to 1986, the retained profits of SOEs decreased, while the profits submitted to the State increased. The tax-for-profit reform fixed the distribution relationship between the State and SOEs by the tax law, creating a critical condition for further reforms in the entire economic system [11]. 3. 1987–1993: Contract responsibility system However, the tax-for-profit reform had not realized the purpose of increasing income, as there were problems in system design and the tax rates were too high. To further deepen the reform of SOEs and stimulate their motivation, China continued to cut mandatory plans for SOEs. Between 1987 and 1993, China implemented a contract responsibility system in SOEs, which was an innovative step to improve enterprise performance and a major step in the economic system reform [12]. In terms of profits distribution, the enterprise income tax (profit tax) was replaced by payment of a promised amount of profit under management contracts (contract profit). As Fig. 2.3 shows, from 1987 to 1993, the annual profit of SOEs increased significantly, so did the annual payment of profit to the State. The contract responsibility system helped further enhance the ability of enterprises to develop and improve themselves. However, management contracts did not give enterprises enough autonomy [13]. To let enterprises compete independently in the market, the first task was to redefine the ownership of assets and hence the control over their output [14]. 4. 1994–2006: Tax-profit separation In November 1993, the Third Plenary Session of the 14th CPC Central Committee adopted the “Decision of the CPC Central Committee on Several Issues Concerning the Strengthening of the Socialist Market Economy System”. The Decision proposed to rationalize the profit-sharing relationship between the State and SOEs and to separate government budgets from SOEs operating budgets, which marked a critical transformation to free SOEs from government control and enabled them to develop their own administration system [10]. In 1994, tax-profit separation was fully implemented. China uniformly levied a 33% income tax on profitable enterprises, and then established an SOE profit distribution system based on share dividends, returns on used capital, and after-tax profit contribution to the State. In this period, in order to

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Fig. 2.4 Performance of SOEs from 1994 to 2006 [10]. Source Qi and Xiao [10]

relieve the burden on SOEs, the government didn’t demand enterprises to contribute their profits after tax. However, as the operation performance of SOEs improved, especially after 2002, the profit tax paid to the government increased significantly, like the total after-tax profits. As Fig. 2.4 shows, from 1994 to 2006, both the total profits after tax of SOEs and their profit tax payment rose sharply. Tax payment by SOEs as a percentage of total government revenues increased from less than 15% to nearly 40%, which was an important contribution to maintaining the national fiscal strength. 5. 2007 up to now: Classified payment To further improve the socialist market economic system, deepen the reform of the administration of State-owned assets, and realize the equity rights of State-owned capital, the State Council issued the “Interim Measures for the Collection and Administration of Gains of State-owned Capital in SOEs under the Central Government” in 2007. The Interim Measures divided wholly State-owned enterprises into three classes and determined their profit contribution rates accordingly: resource-based monopoly enterprises (10%), competitive companies (5%), and defense and R&D units (with 3-year holdover or exempted). This marked the end of a period of 13 years when SOEs only paid taxes without having to share their profits with the government. In 2008, China enacted the Corporate Income Tax Law, imposing a unified corporate income tax rate of 25%. Therefore, SOEs must pay corporate income tax at 25% and then contribute their after-tax profits based on their classification. As shown in Fig. 2.5, from 2010 to 2015, after-tax profit contribution by SOEs rose year by year as a percentage of their total profits, and its share in the total government revenues has remained stable at around 30%.

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Fig. 2.5 Performance of SOEs from 2007 to 2015 [10]. Source Qi and Xiao [10]

During the first three periods, China attempted to decentralize fiscal and administrative powers to improve the autonomy of SOEs. The fourth stage is the transitional phase, with the tax-sharing system implemented to strengthen the development capacity of SOEs. As the total profits of SOEs increased, classified profit contribution was made compulsory to realize the equity rights of State-own capital at the fifth stage [10]. Overall, the income distribution system of SOEs in China has rationalized step by step, by separating profits from tax and classifying enterprise types. It is the result of an “interest game” between the government and SOEs.

2.3.3 The Relationship Between Urban and Rural Areas Before reform and opening-up, there was already a development gap between urban and rural areas. In 1953, to promote industrialization, China implemented State purchase and distribution of agricultural products, such as grain and cotton, putting industry before agriculture. In addition, the system of household registration and People’s Communes broke the connection between urban and rural areas, stopping the movement of factors of production between them. An urban–rural duality characterized by relative mutual isolation took shape in this way. The national policy of “agriculture supporting industry” fueled the uneven development between industry and agriculture, and between urban and rural areas. The relationship between urban and rural areas was distorted [15].

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Since reform and opening-up, the relationship between urban and rural areas has experienced many changes. Roughly speaking, it has gone through three stages as follows. 1. 1979–1984: Loosening of the urban–rural duality China’s grand reform program began in rural areas. In 1978, the household contract responsibility system was first implemented in Xiaogang Village, Fengyang County, Anhui Province. The bold move greatly stimulated farmers’ enthusiasm and released the productive forces in rural areas. Farmers were no longer subject to, or limited by, People’s Commune. They were free to work, participate in the market economy, and move around China in a large scale [16]. In the summer of 1979 after summer grain was harvested, the Chinese government offered much higher prices to purchase agricultural by-products, which improved the distribution relationships between farmers, the State and urban residents and reduced the outflow of agricultural value to the industry sector and urban areas [17]. In 1985, China revoked unified State purchase and distribution of agricultural products. Instead, it implemented contract-based orders and market-based purchase under different situations. The main distribution channel of grain gradually shifted from planned supply to free circulation in the market. Thanks to the household contract responsibility system and the rise of unified purchase prices of agricultural by-products, agricultural production increased significantly. As Fig. 2.6 shows, farmers’ income increased and the income gap between urban and rural areas narrowed down. The urban–rural income ratio dropped from 2.52 : 1 in 1979 to 1.86 : 1 in 1984. To some extent, the urban–rural duality began to loosen.

Fig. 2.6 Per capita income of urban and rural residents from 1978 to 1985. Source China Statistical Yearbooks

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2. 1985–2002: Dramatic change in the urban–rural relationship After the Third Plenary Session of the 12th CPC Central Committee in 1984, the focus of economic system reform shifted from rural to urban areas, and resource allocation favored urban residents as well. Urban residents’ income increased rapidly, while the income of farmers grew slower. Thus, the income gap between urban and rural areas widened considerably. As Fig. 2.7 shows, the urban–rural income ratio rose from 1.86 : 1 in 1985 to 2.2 : 1 in 1990, and further to 2.71 : 1 in 1995. In 2002, the per capita disposable income of urban residents reached 7,703 RMB yuan, while the per capita net income of farmers was only 2,476 RMB yuan. The income ratio reached 3.11 : 1. At the same time, the household registration system loosened a bit, and its role weakened in the rural–urban relationship. As the reform rolled out in rural areas, the rural economy developed, production efficiency rose, and labor surplus appeared in rural areas. Meanwhile, urban development boosted the demand for cheap surplus rural labor and China implemented a series of policies to ease the restriction of household registration system. As a result, the urban–rural duality changed significantly. 3. 2003 up to now: Coordinated urban–rural development Many industrialized countries had adopted the policy of “developing agriculture to boost industry and lay the foundation for industry” in the early stage of industrialization. As industrialization advanced, industry would boost the growth of agriculture, and urban and rural areas should develop coordinately. In 2002, the 16th CPC National Congress stated that, as a major step in building a well-off society in

Fig. 2.7 Per capita income of urban and rural residents from 1985 to 2002. Source China Statistical Yearbooks

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Fig. 2.8 Per capita income of urban and rural residents from 2003 to 2015. Source China Statistical Yearbooks

an all-round way, we must make an overall planning for urban and rural economic and social development, build modern agriculture, develop the rural economy and increase farmers’ income. This formed a new understanding of the urban–rural relationship: industry should support the growth of agriculture, and China’s urban areas should bring rural areas along in the development program. Therefore, during this period, China made great efforts to strengthen agriculture and improve the wellbeing of farmers, laying down a solid foundation for agricultural and rural development. Great progress was made in modernizing agriculture and improving farmers’ living standards, and urban and rural areas developed with better coordination socially and economically. As shown in Fig. 2.8, the urban–rural income ratio dropped from 3.23 : 1 in 2003 to 3.13 : 1 in 2011, and to 3.03 : 1 in 2013. In 2015, the per capita disposable income of urban residents was 31,790 RMB yuan, while the per capita net income of rural residents was 10,772 RMB yuan. The income ratio reduced to 2.96 : 1. The evolution of the urban–rural relationship in China has the following characteristics. First, national policies were the main driver, as national policies and measures reshaped the rural–urban relationships. The urban–rural duality created by the one-sided support mechanism of “agriculture supporting industrial growth” and “rural areas supporting urban development”, dramatic change in the urban–rural relationship in the second stage, and the coordinated urban–rural development in the third stage are all good examples. Second, the urban–rural duality has not changed fundamentally and resource allocation remained uneven between urban and rural areas. Since the launch of reform and opening-up, although the duality had loosened a bit, the movement of resources and production factors between urban and rural areas was still subject to many restrictions. For example, farmers faced many policy restrictions in obtaining urban residence permits, and were not entitled to equal

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employment, equal pay, social security and public services as their urban counterparts. Third, there was an obvious development gap between urban and rural areas. In terms of disposable income, infrastructure and public services, rural areas were left far behind. Farms were far less educated than urban residents.

2.3.4 The Relationship Between SOEs and Private Enterprises Both SOEs and private enterprises are important participants of the Chinese economy. China’s income distribution reform also has profound implications for the interest relationship between SOEs and private enterprises. 1. 1979–1993: Differentiated taxation During this period, China implemented differentiated profit distribution or taxation policies for SOEs and private enterprises. The taxation policy for SOEs underwent the following changes. From 1978 to 1982, relatively independent SOEs could set up enterprise funds and retain a certain share of their profits. Although SOEs contributed a smaller proportion of their profits to the State than before, many problems popped up. From 1983 to 1987, the Chinese government substituted profit taxes for profit contribution in two steps. At the first step, profitable enterprises were taxed at a 55% rate, and then paid some of the profits after tax to the State. At the second step, SOEs only paid taxes and kept all the profits after tax. From 1988 to 1993, China implemented the contract management responsibility system for SOEs, under which SOEs could just pay a promised amount of profits to the State instead of a profit tax. For private enterprises, the Provisional Regulations of the People’s Republic of China Concerning Income Tax on Private Enterprises issued in 1988 stipulated that private enterprises must pay an income tax of 35%. 2. 1994 up to now: Unified taxation From 1994 to 2006, China promulgated the “Provisional Regulations of the People’s Republic of China on Enterprise Income Tax”, and levied a unified 33% income tax on all profitable enterprises, covering both private and SOEs. During this period, to relieve their burden, SOEs didn’t have to pay their profits after tax to the State. In 2007, China issued the “Interim Measures for the Collection and Administration of Gains of State-owned Capital in SOEs under the Central Government”, which imposed different tax rates on three classes of SOEs: 10% for resource-based monopoly enterprises, 5% for competitive companies, and defense and R&D units were given a 3-year holdover or eventually exempted from taxation. Since then, SOEs had to pay both profit tax and profit contributions to the State. In 2008, China enacted the “Corporate Income Tax Law”, imposing a unified corporate income tax rate of 25%. Therefore, SOEs must pay a corporate income tax at 25% and then contribute

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their after-tax profits based on their classification. Meanwhile, private enterprises were subject to a corporate income tax of 25%. Since SOEs are owned by the State, the demand for SOEs to contribute profits to the State levels the playing field for both SOEs and private enterprises.

2.3.5 The Relationship Between Domestic and Foreign Capital Changes in the relationship between domestic and foreign capital are reflected in the changes of taxation policies. Since the launch of reform and opening-up, China’s taxation policy has experienced three stages as follows. 1. 1978–1993: Differentiated tax policies for enterprises of different kinds After reform and opening-up, in order to attract foreign capital and advanced foreign technologies and talent, China had enacted two corporate income tax laws that covered foreign capital in 1980 and 1981: Income Tax Law of the People’s Republic of China for Sino-Foreign Equity Joint Ventures, and Income Tax Law of the People’s Republic of China for Foreign Enterprises. The former stipulated that joint ventures were subject to a 30% corporate income tax and a local income tax surcharge of 10%, while the latter stipulated that foreign enterprises were subject to five progressive rates from 20 to 40% and must also pay a local income tax of 10%. After that, China issued new policies and regulations to adjust the taxes imposed on domestic enterprises. For example, SOEs were demanded to pay an income tax instead of contributing profits to the State. Large and medium-sized SOEs were subject to an income tax of 55%; small SOEs and collectively owned enterprises were taxed at eight progressive tax rates; individual businesses were taxed at 10 progressive tax rates; private enterprises were taxed at a proportional rate of 35%. During this period, domestic and foreign enterprises were subject to different taxation policies, and different types of enterprises were subject to different corporate income tax rates. This was not in line with the goal of deepening reform and further opening-up, and impeded fair competition among all market participants. 2. 1994–2007: Differentiated income tax regimes for domestic enterprises and foreign enterprises In 1994, China’s taxation system witnessed a big change. The Provisional Regulations of the People’s Republic of China on Enterprise Income Tax provided a unified income taxation regime for domestic enterprises, while the newly enacted Law of the People’s Republic of China on Income Tax of Enterprises with Foreign Investment and Foreign Enterprises laid down a different income tax regime for foreign enterprises. Two independent tax regimes were applied to domestic and foreign enterprises. Domestic enterprises were subject to a unified proportionate rate of 33%, a

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uniform tax base and uniform preferential policies. On the other hand, foreign enterprises were subject to an income tax of 30% and a local income tax of 3%. To attract foreign capital, China also rolled out a series of favorable policies for foreign-invested enterprises, such as tax exemption for the first two years and 50% reduction for the next three years or tax exemption for the first five years and 50% reduction for the next five years for foreign-invested enterprises of different kinds; and the application of 15% or 24% tax rates for foreign-invested enterprises based in Special Economic Zones. 3. 2008 up to now: Unified income taxation for both domestic and foreign enterprises Before 2008, to attract more foreign investment, foreign-invested enterprises were entitled to many tax incentives, including preferential rates and a favorable tax base calculation. In the early stage of reform and opening-up, however, super-preferential tax policies had not obviously promoted China’s economic development. Furthermore, these policies violated the principle of equal taxation, thus impeding the growth of domestic enterprises. The Corporate Income Tax Law of the People’s Republic of China, which came into force on January 1, 2008, imposed the same tax burden on both domestic and foreign-invested enterprises. The income tax law was unified; corporate income tax rates were unified and reduced; pre-tax deduction rules and standards and tax incentives were unified. The new tax law has created an enabling taxation environment for both domestic and foreign-invested enterprises in China to compete on a level playing field under market economy. It has exerted a significant and far-reaching influence on China’s national economic and social development.

2.3.6 The Relationship Between Eastern Coastal and Hinterland Regions Regional economic development is an important driver for China’s national economic growth. However, differences in income distribution between regions have exerted a profound influence on China’s regional development. 1. 1979–1994: Unbalanced development between coastal and hinterland regions In April 1979, Deng Xiaoping proposed to set up “export special zones”. In July 1979, the CPC Central Committee and the State Council agreed to build pilot export special zones in Shenzhen, Zhuhai, Shantou and Xiamen. The national strategy to build special export zones (later renamed “Special Economic Zones”) stimulated the development of the coastal areas. As pointed out in the Sixth Five-year Plan (1981–1985), a series of measures would be taken to boost the development of

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coastal areas by making use of the available resources there. In the Seventh Fiveyear Plan (1986–1990), China was divided into three economic regions: East, Middle and West, and accordingly a differentiated strategy was formulated. To implement this strategy, the Chinese government adopted many policies favorable to the East. For example, the opening-up program would mainly open up the East to the outside world, foreign capital would be mainly invested in the East; and factors of production in the Middle and Western regions, including capital and high-caliber talent, would be encouraged to flow to the developed Eastern coastal areas, which drained the limited talent and capital reserve in the Middle and Western regions, wasted natural resources, deteriorated the conditions for development in the hinterland regions [18], and worsened the income gaps between coastal Eastern and hinterland regions. 2. 1995 up to now: Aiming at balanced development between the coastal and hinterland regions In 1995, recognizing the growing gaps in regional development, the CPC Central Committee stated, “Starting from the Ninth Five-year Plan, we should gradually narrow the gaps between regions and implement the strategy of balanced development across regions.” Since then, the central government has taken effective measures to support the Middle and Western regions, including giving them priority in resources development and infrastructure projects, implementing a central government transfer payment system that favored the hinterland, and implementing favorable policies to attract domestic and foreign capital to invest in the hinterland regions. During this period, major regional development policies included the West Development Program, the Revitalization of Northeast China and the Rise of Middle China. The main goals were to promote balanced regional development, narrow down regional gaps, realize appropriate division of work across regions, and encourage regional cooperation and free movement of production factors.

2.3.7 The Relationship Between Capital Gains and Labor Remuneration The relationship between labor remuneration and capital gains is one of the most important aspects of China’s income distribution. As China’s income distribution reform advances, the relationship between labor remuneration and capital gains has changed profoundly. 1. 1979–1986: Reform of planned economy and improvement of the laborcapital relationship During this period, the income distribution reform was carried out under the principle that “practice is the sole criterion of truth”, which meant to free people’s mind long constrained by planned economy. In 1979, the Third Plenary Session of the 11th CPC Central Committee started to seek breakthroughs in rural areas, where distribution

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according to work was implemented and household responsibility system was piloted and then promoted. The bold reforms aroused people’s enthusiasm for work. In 1984, the Third Plenary Session of the 12th CPC Central Committee noted, however, that the focus of economic system reform should shift from rural areas to urban areas, and the main task of reform was to mobilize the growth of enterprises. A comprehensive wage reform started in 1985, and had played a role in raising the income level of the people. These policies liberated Chinese people from the restrictions of planned economy, motivated labor, capital and other resources, and contributed to the growth of productivity. 2. 1987–1991: Labor remuneration mainstreamed and capital gains on the rise In 1986, Deng Xiaoping proposed that China should encourage some people and regions to get rich first and then help the poorer people and backward regions get out of poverty. This policy, after it was put into effect, has aroused people’s enthusiasm to work hard. Guided by this ideology, the 13th CPC National Congress pointed out that, in addition to distribution according to work and income from individual labor, lawful incomes should be permitted, including interests of corporate bonds, share dividends, and risk compensation for enterprise managers. This move diversified China’s income distribution system which had been based on work. For the first time, non-labor remuneration had been accepted as legitimate, which enabled people to diversify their sources of income. At the same time, other incomes, such as bond interests, dividends, bonuses and profits, are capital gains, which meant that capital gains were also legitimate. In short, during this period, the relationship between labor remuneration and capital gains took an exciting twist. 3. 1992–1997: Fair competition between labor and capital factors In October 1992, the 14th CPC National Congress declared that the goal of China’s economic system reform was to establish a socialist market economy. The Third Plenary Session of the 14th CPC Central Committee passed the “Decision on Several Issues of Improving Socialist Market Economy System”, stating that, in the distribution of personal income, we should “give priority to efficiency and due consideration to fairness”. This statement pointed out the direction for improving the labor-capital relationship: labor and capital as resources and production factors must be allocated under the efficiency principle, and they should generate benefits and gains under the principle of fair competition in market economy. This also meant that labor and capital had equal status in market competition. The 3rd Plenary Session of the 14th CPC Central Committee in 1993 established the system under which distribution according to work should play a dominant role and various other modes of distribution should coexist. The coexistence of various modes of distribution diversified the sources of income and guaranteed the rights of labor and capital, giving both labor and capital further motivation and efficiency. From the perspective of the gaming relationship between labor and capital, institutionalizing the coexistence of distribution according to work with other modes of distribution meant an equilibrium between labor and capital.

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4. 1997 up to now: Equilibrium and dynamic balance between labor and capital The 15th CPC National Congress in 1997 answered the question whether production factors could participate in income distribution. The Party explicitly stated that, in China’s income distribution system, distribution according to work should be combined with distribution according to production factors, providing an institutional and ideological guarantee for distribution according to production factors which include mainly capital. In 2002, the 16th CPC National Congress established the principle that labor, capital, technology, managerial expertise and other production factors should participate in the distribution of national income in accordance with their respective contributions. The Congress further specified what “other production factors” meant, and how they could participate in income distribution. It not only extended the scope of production factors, but also clarified the basis of distribution [19]. Besides, the report to the Congress stated that all legitimate incomes, from work or not, should be protected, which provided the legal basis for protecting capital gains. The reform at this stage not only protected the legal rights and interests of investors, but also gave them a legitimate position and share in income distribution. The 17th CPC National Congress in 2007 proposed for the first time that conditions should be created to enable more people to earn property-based income, which extended the meaning of labor and removed the wage-only restriction on income. Regarding the relationship between labor and capital, this statement was a clear signal that labor and capital had again improved their importance in income distribution since reform and opening-up, and was also a symbol that labor and capital would again function as elements of the market economy. The 18th CPC National Congress in 2012 suggested that we should ensure “all the people can share in the fruits of development in a fair way” and “personal income increases in step with economic development and labor remuneration grows in step with improvement in labor productivity”. It fully embodied the idea that development should benefit all people. It would help restore balance between labor and capital, and help China’s economy realize fair and high-speed growth. The 19th CPC National Congress in 2017 stated that the Party would work to see that personal income grew in parallel with economic development, and wage rose in parallel with labor productivity. The use of two “parallels” aligned economic development withthe growth of personal income, and promised to let the improvement of labor productivity benefit laborers, to balance the relationship between labor and capital, and eventually to create a win–win situation for labor and capital.

2.3.8 The Relationship Between Those Who Get Rich First and Those Who Get Rich Later Encouraging some people and some regions to get rich first was one of the most important policies that have driven China’s income distribution reform. The final goal is to realize common prosperity.

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1. 1979—2001: Proposing to let some people get rich first Income distribution was equalitarian before reform and opening-up, partly due to material shortage during that period. As China’s economy grew, equalitarian distribution was outdated and a shift was inevitable. The strategy of encouraging some people to get rich first was a natural choice and it was gradually implemented through the following steps. The first step was implementing distribution according to work and opposing equalitarianism. In 1979, the household contract responsibility system, or the distribution mode under which people can keep whatever’s left after contributing to the country and the collective, was rolled out around the country gradually. As a result, workers were highly motivated. The third Plenary Session of the 12th CPC Central Committee in 1984 proposed that some people and some regions should be allowed to get rich first through hard work, which would be a major step towards common prosperity. As the reform moved on, incentives were again given in enterprises as a distribution measure, and this approach gradually matured. In January 1985, the State Council issued the Circular on the Wage Reform of State-owned Enterprises, which allowed large and medium-sized SOEs to correlate the total wage with their profitability. In June 1986, China started to reform the wage policy for civil servants and personnel of public institutions, which put an end to the traditional equalitarian distribution system and improved the economic efficiency. The second step was the establishment of a distribution system in which distribution according to work played the dominant role, and other distribution modes are used as supplements. This system was proposed at the 13th CPC National Congress. Non-labor remunerations, such as interests from bank savings and corporate bonds, share dividends and risk compensation, should be allowed if they are legal. On the premise that distribution according to work played the dominant role, the proposal to let other income distribution modes coexist and supplement the dominant mode cleared the ideological obstacles for advancing the strategy of encouraging some people to get rich first. The resolution of the 14th CPC National Congress followed the line of the 13th CPC National Congress, insisting that distribution according to work must play the dominant role, and other distribution modes should coexist as supplementary modes, so that both efficiency and fairness could be achieved. The third step was combining distribution according to work, which would play the dominant role, with distribution according to production factors. Over time, however, some people did get rich first, but some others were discontented and disconcerted by the increasing income gap and wealth gap. They were frustrated especially by some people who were earning illegal gains. The society began to care about how those who have got rich first could really help others get rich later. The 15th CPC National Congress in 1997 proposed a new strategy for income distribution to realize common prosperity, and distribution according to work would still play the predominant role in the new strategy. The Congress reaffirmed some key ideas and proposed some new concepts, such as “keeping the system in which distribution according to work will play the dominant role and various other modes of distribution coexist”, “giving priority to efficiency and due consideration to equity”, “protecting legal incomes

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according to law, banning illegal incomes, and check unreasonable incomes”, which all aimed to regulate income distribution and prevent income polarization. 2. 2002–2011: Rolling out the strategy to let some people get rich first During this period, the strategy to let some people get rich first was rolled out as a step to realize common prosperity. The report to the 16th CPC National Congress in 2002 expounded how to deepen China’s income distribution reform, pointing out that we should “adjust and regulate the relationships of distribution between the government, enterprises and households”, and “establish the principle that labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their respective contributions, thereby improving the system under which distribution according to work plays a dominant role and various other modes of distribution coexist.” The report to the 17th CPC National Congress further emphasized the need to adhere to the system under which distribution according to work would play the predominant mode and co-exist with various other modes, and to improve the system so that production factors such as labor, capital, technology, managerial expertise would gain a right share in distribution according to their contributions. China’s Gini coefficient, as shown in Fig. 2.9, went up from 2004 to 2008, as the income gap widened. The implementation of this strategy has exerted a strong influence on the income gap in the following ways. First, it allowed Chinese people to stop relying solely on wage income, and their income has grown fast since then. Second, as a reform and opening-up policy, encouraging some people to get rich first fueled the economic growth in urban and coastal Eastern areas. Meanwhile, the income growth in rural areas and less developed areas was much slower, which led to the widening income gap between urban and rural areas and between regions. Third, urban and rural areas in China grew at different speeds and the levels of development have remained uneven. Fourth, various economic sectors have seized the opportunities of reform

Fig. 2.9 China’s Gini coefficient from 2003 to 2016. Source NBS

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2 Practices and Changes in China’s Income Distribution over the Last 40 Years

and opening-up to develop, and new industries have been developing much faster than traditional industries. The income gap between industries and economic sector has widened as a result of this tendency. 3. 2012 up to now: Marching toward common prosperity Up to now, China’s economic size has grown large enough (the cake is big enough), but there is still the problem of cutting the cake more equitably. The 18th CPC National Congress in 2012 pointed out that the current stage would be the last stage in building a well-off society. At this stage, we should double the gross domestic product and the average income per capita from the 2010 levels, and synchronize income growth and economic development. The Congress also pointed out that common prosperity is an essential aspect of socialism with Chinese characteristics. To build a well-off society, we should emphasize the need to realize common prosperity and adjust the personal income gap. China’s Gini coefficient, as shown in Fig. 2.9, declined from 2012 to 2015. The 19th CPC National Congress noted that the principal contradiction Chinese society facing is “the contradiction between unbalanced and inadequate development and the people’s ever-growing needs for a better life.” This statement indicated a historical change, showing that the country was determined to solve the problem of unbalanced development. The Congress also noted, “When socialist modernization is basically realized in 2035, solid progress will be made toward prosperity for everyone, and China will develop into a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious, and beautiful in the middle of the century. Common prosperity for everyone will be basically achieved.” This was the first time in the Party’s history to clearly define common prosperity as a goal for all people, and draw up a road map to reach the goal, which had a great significance in advancing the socialism with Chinese characteristics in the new era [2]. Through the above research on the evolution of China’s income distribution policy, and the analysis of the development and evolution of some major relationships in the area of income distribution, we can find that the income distribution reform in China has evolved remarkably over the last 40 years, from distribution solely according to work, to a mixed system under which distribution according to work plays the dominant role while other distribution modes should be used as supplements, to the combination of distribution according to work and distribution according to production factors. The course of this evolution reflects the following drivers of China’s growth: ➀ Those who get rich first helping others get rich later; ➁ Market orientation; ➂ Motivation and incentives; ➃ Efficiency orientation; ➄ Pursuit of economic growth; and ➅ Pursuit of fairness and justice. The relationships between economic growth and income distribution, between fairness and efficiency and between government and market are always the central concerns of the entire society.

References

73

References 1. Institute of Economics of Shanghai Academy of Social Sciences. (2009). The reform of income distribution system in China: Theory and realization approaches (pp. 2–10). Shanghai: Shanghai Academy of Social Sciences. 2. Zuo, P. (2020). We will gradually achieve common prosperity. Retrieved March 11, 2020, from https://www.qstheory.cn/wp/2017-10/21/c_1121836422.htm. 3. Zheng, X. (2007). Establishing a system of income distribution that embodies social justice: Inspirations from the report to the 17th CPC national congress. Macro-Economic Management, 11, 4–7. 4. Wei, X. An interpretation of the report to the 19th CPC national congress: Innovation and development of socialist political economy with Chinese characteristics. 5. An, B., & Qi, Z. (2020). Two synchronous to deliver new signals of income distribution reform. Retrieved March 11, 2020, from https://www.xinhuanet.com//2017-10/23/c_1121845092.htm. 6. Yin, Z. (2006). Relationships between the central and local governments from the perspectives of changes in the financial system . China National Conditions and Strength, 9, 11–12. 7. Liu, S. (2012). Pros and cons of the tax sharing system. Review of Economic Research, 7, 20–28. 8. Liu, H. (2009). Rational restoration of china’s local government functions: A perspective on the interests relationship between the central and local governments. Journal of Wuhan University (Philosophy and Social Science Edition), 4, 502–507. 9. Wen, H., & Xing, D. (2010). Changes in the economic system and relationships between the central and local governments since reform and opening-up . Contemporary World and Socialism, 6, 102–106. 10. Qi, Y., & Xiao, X. (2017). Institutional changes in profit distribution of state-owned enterprises: 1979–2015. Research on Economics and Management, 38(7), 35–44. 11. Li, J. (1984). Principles, measures and significance of the second step in profit-to-tax reform. Modern Finance and Economics: Journal of Tianjin University of Finance and Economics, 4, 10–13. 12. Shao, N. (1987). Significance of the contract responsibility system in China’s reform. China Industrial Economics, 6, 19–25. 13. Tian, D. (1988). Correct understanding and evaluation of the contract responsibility system and suggestions on the further reform of state-owned enterprises. Finance and Trade Economics, 4, 55–58. 14. Wang, F. (1992). Institutional innovations of state-run enterprises and theoretical reflections on further deepening enterprise reform. Public Finance Research, 9, 10–14. 15. Han, J. (2009). Sixty years of china’s urban-rural relations: Review and prospects. Reform, 11, 5–14. 16. Zhang, R. (2003). China’s urban-rural relations and social changes. Social Science Front, 3, 241–244. 17. Xia, Y. (2008). Evolution and considerations of China’s urban-rural relations during the 30 years of reform and opening-up. Journal of Soochow University (Philosophy and Social Sciences Edition), 29(6), 18–20. 18. Guo, L. (2012). Impact of policy changes on regional economic differences. China National Conditions and Strength, 11, 58–60. 19. Editorial Office of Labor Security Newsletter. (2003). Deepening the income distribution reform: An interview with Wang Dongjin, deputy minister of MOHRSS. Labor Security Newslette, 2003(8), 14—18.

Chapter 3

Total Size and Pattern of China’s Income Distribution over the Last 40 Years

Since the launch of reform and opening-up, China has made remarkable economic achievements, which laid a solid foundation for realizing a well-off society in all respects. But as the downside of rapid economic growth, China is now facing widening income gaps and imbalances in its income distribution pattern. As we can see through international comparisons and from various indicators including the Gini coefficient and the proportion of labor remuneration, China is having a relatively high level of economic inequality. The widening income gaps have hindered China’s economic development, causing a series of problems such as insufficient domestic demand, reduced social stability and stunted social mobility. At present, China’s economic development has entered a phase known as the “new normal state”. In order to maintain long-term and sustained economic growth, it is necessary to fully address the urban-rural duality, regional differences in access to public services and other issues. The widening income gaps can be addressed through redistribution practices and mobilizing market forces.

3.1 China’s Overall Income Distribution: Changes over the Last 40 Years This section sums up China’s income distribution practices over the last 40 years from several perspectives including the duality between urban and rural areas, regional differences, differences between economic sectors, and poverty reduction. Based on a study of the primary distribution and redistribution patterns, it delves into the historical changes in the national income distribution structure. Through an empirical analysis of China’s income distribution regime and practices, this chapter makes a comprehensive survey of the different stages of income distribution and further analyzes relevant influencing factors.

© Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_3

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3 Total Size and Pattern of China’s Income Distribution …

Fig. 3.1 Gini coefficient of China from 1981 to 2016. Source Ravallion and Chen [2], Cheng [3]; and NBS

3.1.1 Changes in China’s Gini Coefficient At the micro level, the inequality of disposable income among a country’s citizens can be measured by the Gini coefficient which is often represented graphically through the Lorenz curve. The curve shows income (or wealth) distribution by plotting the population percentile by income on the horizontal axis and cumulative income on the vertical axis. The Gini coefficient is equal to the area below the line of perfect equality minus the area below the Lorenz curve, divided by the area below the line of perfect equality. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. The higher the value, the higher the level of income inequality within a population. A coefficient above 0.4 or 0.45, normally regarded as a critical value, indicates a severe income gap in the country or region. Worldwide, only 17 of the 111 countries had their Gini coefficients above 0.5 in 2011, accounting for 15% of the total [1]. China has not developed our own authoritative or long-standing income equality index yet. Considering that the Gini coefficient varies greatly across sampling and calculation methods, we’ve chosen unified data sources to ensure the comparability. We mainly use three sets of data to measure China’s income inequality: ➀ The Gini coefficients from 1981 to 2003 came from the World Bank [2] and Cheng [3]. The curves roughly overlap. Except for two short-term declines in 1981–1983 and 1995– 1998, the curves show that China’s income gap has been widening since reform and opening-up, up from 0.283 in 1983 to 0.447 in 2001 [2], above the warning level of 0.4.1 ➁ The data of 2003–2016 were published by China National Bureau of Statistics (NBS). As Figure 3.1 shows, China’s Gini coefficients ranged from 0.46 to 0.50 between 2003 and 2016. The index dropped slightly after peaking (0.491) in 2018, but remained as high as 0.465 in 2016. The World Bank’s Gini coefficients for 1 Based on the data of Cheng [3], the Gini coefficient of personal income of Chinese residents will rise from 0.271 in 1983 to 0.442 in 2004, and then the increase may appear fast.

3.1 China’s Overall Income Distribution: Changes over the Last 40 Years

77

China were 0.428 in 2008 and 0.422 in 2012, which are close to the figures released by NBS. Therefore, it can be safely concluded that China’s Gini index is somewhere between 0.4 and 0.5. Arguably, along with the rapid economic growth since reform and opening-up, China has gradually slipped from a country where national income distribution was perfectly equal to one with worrying disparity and still widening gaps.

3.1.2 International Gini Coefficient: A Global Perspective Internationally speaking, China’s Gini coefficient has remained relatively high, and has been growing fast over the past few years. To improve comparability, we’ve used the Gini coefficients released in the World Development Indicators (WDI) database of the World Bank for our discussion in this chapter (Fig. 3.2). In 2012, according to the cross-sectional data, China’s Gini coefficient was 0.422, ranking the 25th among 38 selected countries, and meanwhile China’s GDP per capita was about 6,265 US dollars (conversion by exchange rate), ranking the 29th. The Gini coefficients of developed countries were generally low, ranging between 0.2 and 0.4. For example, it was 0.326 for the UK, 0.301 for Germany, 0.331 for France, 0.280 for the Netherlands, 0.273 for Sweden and 0.321 for Japan, indicating that high-income countries have sound social security systems and relatively small income gaps. The Gini coefficient for USA was 0.411, which was relatively high among developed countries. The Gini index varied greatly among the emerging economies. In some countries, the gap between the rich and the poor was too big, with the Gini coefficient exceeding 0.5. For example, it was 0.505 for Chile, 0.527 for Brazil, 0.634 for South Africa and 0.481 for Mexico, while some other countries have managed to keep it low, such as Thailand and Indonesia, both below 0.4. China, Russia and Argentina averaged around 0.4, which was a moderate level among emerging economies. Overall, China’s Gini coefficient is above the median level in the world, near the levels of the USA, Russia and Argentina (Table 3.1). Our income inequality index in 2012 was much higher than high-income countries such as Europe and Japan. It was also higher than some developing countries (such as Indonesia and Thailand) with similar GDP per capita levels. This comparison indicates that the income gap between rich and poor has become a social problem in China. It is worth noting, however, that China’s Gini coefficient remains in a reasonable range, compared with some South American and African countries where the index is above 0.5.

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3 Total Size and Pattern of China’s Income Distribution …

Fig. 3.2 Gini coefficients of the world in 2012. Source WDI database of the World Bank. Gini coefficient is expressed as a percentage, and the GDP per capita is expressed in the U.S. dollar (conversion by exchange rate). Some countries’ Gini coefficients in 2012 are lacking, so we use the data of the nearest year as replacements

Table 3.1 Gini coefficients of major countries Country

China

United States

Germany

Japan

Brazil

India*

Mexico

2002

0.434

0.462

0.342

0.327

0.585

0.327

0.453

2009

0.511

0.471

0.344

0.357

0.569

0.357

0.464

Note India’s Gini coefficient is based on consumption, and the consumption index is usually smaller than the income index for the same period Source World Consumer Income and Expenditure Patterns (2011); Euro-monitor International

3.2 China’s Income Distribution Between Urban and Rural Areas As the economy develops since reform and opening-up, the per capita incomes of urban and rural residents have both seen a big surge. The sampling data collected by NBS show that, from 1978 to 2015, the per capita disposable income of Chinese urban households increased from 343 RMB yuan to 28,844 RMB yuan, and the per capita net income of rural households rose from 133 RMB yuan to 10,489 RMB yuan. Before adjustment for inflation, the average annual growth rate of urban and rural per capita income during this period was 13.0% and the rural per capita income grew by 12.8% annually. In other words, the income of urban and rural residents had basically grown in parallel, but there was no sign of rural-urban convergence in

3.2 China’s Income Distribution Between Urban and Rural Areas

79

terms of per capita income. Urban per capita income in 1978 was already 2.5 times higher than rural income, and the income gap has widened in the following years.

3.2.1 Changes in the Income Gap Between Urban and Rural Residents over the Past 40 Years Since the launch of reform and opening-up, the income disparity between urban and rural areas has been growing while the per capita disposable income has surged in both parts of the country. The urban-rural income ratio spiraled up from 2.57 to 2.73 between 1978 and 2015 (Fig. 3.3). The development of the urban-rural income pattern in China can be divided into five stages. (1) 1978–1983: China’s economic reform focused on rural areas during this period. The reform began in rural areas, and agricultural productivity greatly improved after the implementation of the household responsibility system, so the rural personal income grew faster than urban personal income. The income gap between urban and rural areas dwindled: The urban-rural income ratio dropped from 2.6 to 1.8 from 1978 to 1983. (2) 1984–1994: The focus of economic reform shifted to the urban area, and the income distribution reform fueled the development of the Chinese economy. During this period, urban income grew faster than rural income. The net income of rural households per capita increased from 355 RMB yuan in 1984 to 1,221 RMB yuan in 1994, while the per capita disposable income of urban households rose from 652 RMB yuan to 3,496 RMB yuan. The income gap between urban and rural areas expanded, and the urban-rural income ratio increased from 1.84 to 2.86. (3) 1994–1997: Thanks to the blooming of rural enterprises and the price rise of agricultural products, the rural economy saw a rapid development, and the net income per capita of rural households increased from 1,221 RMB yuan in 1994 to 2,090 RMB yuan in 1997, up 23.1% annually. Meanwhile, the average per capita disposable income of urban households rose from 3,496 RMB yuan to 5,160 RMB yuan, up 19.4% annually. Both rural and urban incomes rose fast. Overall, the urban-rural income gap was narrowing, and the urban-rural income ratio shrunk from 2.86 to 2.47. (4) 1998–2007: In the 1990s, the focus of China’s economic reform shifted back to urban areas. Many economic policies were implemented to attract foreign capital and boost the reform of SOEs, which led to the rapid development of the urban economy. Urban residents’ income grew faster than farmers. The urban-rural income ratio exceeded 3 in 2002, remained above this level for several years and reached an all- time high of 3.33 in 2007–2009. The growth of urban and rural incomes began to slow down. The net per capita income of rural households increased from 2,162 RMB yuan in 1998 to 4,040 RMB yuan in 2007, up 7.2% annually, and the per capita disposable income of urban households rose from

80

3 Total Size and Pattern of China’s Income Distribution …

Fig. 3.3 Changes in the urban-rural income ratio in China (1978–2015). Note The numbers are the urban-rural ratios of per capita disposable income. The numbers for 2013–2015 are estimated using the data collected by NBS through the integrated urban and rural survey. Source Tables 6–16, China Statistical Yearbook 2017

5,425 RMB yuan to 13,786 RMB yuan, up 10.4% annually. At this stage, the income gap between urban and rural areas further widened, and the urban-rural income ratio increased from 2.51 to 3.33. (5) 2008 up to now: After the global financial crisis, the income gap between urban and rural areas in China has narrowed2 and the urban-rural income ratio dropped slightly from 3.31 in 2008 to 2.95 in 2015. Whether this has triggered a new round of long-term decline is debatable. Popular arguments include: rural income was growing fast as China has passed the “Lewis turning point,” and the slowdown of global economy hit global trade which impacted the income of urban residents. Wan [4] believed that declines in the income gap between urban and rural areas in recent years were due to the abolition of agricultural tax in 2006 and the short-term price fluctuations of agricultural products.

3.2.2 Influence of the Urban-Rural Income Gap on the Overall Income Pattern The urban-rural income gap is the most important variable to account for the national income distribution gap of China, more important than the income inequality within

2 The

statistical definition altered since the Statistics Bureau launched an urban-rural integration household survey in 2013. The urban and rural income data over 2013–2015 in this paper are calculated by using the urban-rural integration data and old statistical method, therefore the data are comparable.

3.2 China’s Income Distribution Between Urban and Rural Areas

81

Table 3.2 Contributors of China’s personal income disparity 2002 Group

Component Share of total population

Per capita income

Theil index

Absolute contribution

Relative contribution/%

Nationwide

1

4,586

0.35

0.35

100.00

Urban

0.39

7,794

0.18

0.12

34.70

Rural

0.61

2,560

0.23

0.08

22.30

Urban-rural

–

–

0.15

0.15

43.00

Nationwide

1

7,615

0.37

0.37

100.00

Urban

0.45

12,340.90

0.21

0.15

41.30

2006

Rural

0.55

3,796.90

0.22

0.06

16.50

Urban-rural

–

–

0.16

0.16

42.2

Source Zhu and Jin [5]. Data are based on the Chinese Urban and Rural Household Surveys in 2002 and 2006. The sampling method can be found in the Survey

urban residents or within rural residents. The contribution of the urban-rural income gap to the national income inequality has increased over time. (1) In the cross-sectional data, the contribution of the urban-rural income gap to the national income inequality is more prominent than the income gap within urban or rural areas. According to Zhu and Jin [5]’s estimates of China’s Theil Index in 2002 and 2006, the income gap within urban areas contributed 34.7% to the national income disparity in 2002, and the income gap within rural areas contributed 22.3%, while the contribution of the urban-rural income gap was 43%. The contributory components were very similar in 2006 (see Table 3.2). (2) Since the launch of reform and opening-up, income gaps have been widening within rural areas and within urban areas, but the differences increased even faster between rural and urban areas. Therefore, the rural-urban gap contributed more to the general disparity in China [6]. The contribution rates of the urbanrural difference to the national disparity were 36.5% in 1988, 41% in 1995, and 46.1% in 2002. According to Wan [4], the contribution rates were 24.1% in 1984, 40% in the 1990s and 53.6% in 2010. Luo [7] broke down the Gini coefficient. Using micro data from Chinese household income surveys, Luo found that the contribution rates of the urban-rural gap were 62.9, 59.8, 60.6, 62.4 and 54.0% in 1988, 1995, 2002, 2007 and 2013, all above 50% and far exceeding the internal gaps (see Table 3.3).

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3 Total Size and Pattern of China’s Income Distribution …

Table 3.3 Urban-rural decomposition of China’s Gini coefficient Year

Urban Gini coefficient

Rural Gini coefficient

Overall Gini coefficient

Contribution of income gap between urban-rural area

Contribution of income gap within urban or rural areas Income gap within urban areas

Income gap within rural areas

A

B

C=D+E D +R

E=F+ F G

G

1988

0.224

0.332

0.390

0.245 (62.9%)

0.130 (33.4%)

0.054 (13.8%)

0.076 (19.6%)

1995

0.282

0.381

0.436

0.261 (59.8%)

0.153 (35.1%)

0.070 (16.0%)

0.083 (19.1%)

2002

0.320

0.367

0.457

0.277 (60.6%)

0.159 (34.8%)

0.071 (15.9%)

0.088 (19.3%)

2007

0.334

0.355

0.477

0.298 (62.4%)

0.161 (33.9%)

0.089 (18.7%)

0.072 (15.1%)

2013

0.376

0.410

0.462

0.250 (54.0%)

0.181 (39.1%)

0.121 (26.2%)

0.060 (12.9%)

Source Luo [7]. The Gini coefficient in the table was calculated by using the micro data collected by the Chinese Household Income Project (CHIP). They are slightly different from the data published by NBS, but the trend is consistent. Columns D, E, F and G show the decomposition of the overall Gini index of China and the percentages in parentheses are contribution rates

3.2.3 Changes in Income Gaps Within Urban and Rural Areas In addition to the urban-rural income gap, we also need to consider the changes in the disparity within urban areas and within rural areas. Both urban and rural per capita disposable incomes have enjoyed rapid growth by the mean value, but how great is the contribution of the higher-income population in each group? Have the low-income earners experienced the same growth? (1) The income of high-income earners grew much faster than the low-income earners in both urban areas and rural areas. We calculated the median-to-mean ratio by using CHNS data.3 The results indicate that the difference between median and mean values widened from 1991 to 2006, and narrowed down slightly after the global financial crisis in 2008, as Fig. 3.4 shows. The medianto-mean ratio in rural areas was lower than the ratio in urban areas, indicating that income inequality was worse in rural areas than urban areas. The disparity had not been improved by the rapid economic increase after the 1990s. This means the income of those who got rich first grew much faster than others, 3 The data were taken from Chinese Health Nutrition Survey (CHNS). The median and mean values

were the author’s own calculations.

3.2 China’s Income Distribution Between Urban and Rural Areas

83

Fig. 3.4 Median and mean values of urban and rural personal incomes in China (1991–2011). Source Author’s own calculation based on CHNS data

Fig. 3.5 Change in urban and rural Gini coefficients in China (1981–2011). Source The 1981–2001 Gini coefficients are from Ravallion and Chen [2]; the 2002–2011 data are from Zhang [8]

and the income growth of those who got rich first did not exert any significant catalyst effect on the poorer population. (2) Since the launch of reform and opening-up, the income gaps within urban areas and rural areas have widened. The Gini index of the rural population increased from 0.257 in 1981 to 0.358 in 2000, and further to 0.390 in 2009. By contrast, the index of the urban population increased from 0.185 in 1981 to 0.319 in 2000, and reached 0.340 in 2009. After 2009, the Gini coefficients of both demographic groups declined slightly. (3) Income disparity has been worse in rural areas than urban areas, which is contrary to the situations in many other countries.4 As Fig. 3.5 shows, the Gini coefficient of Chinese urban population has remained lower than that of the rural 4 Due

to the inadequate coverage of the high-income group, the Gini coefficient in the urban area could be higher.

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3 Total Size and Pattern of China’s Income Distribution …

population for a long time. The Gini coefficients of rural and urban populations were 0.25 and 0.18 in 1981, and rose to 0.37 and 0.33 in 2011. The difference was getting smaller. Wan [4] drew the same conclusion from his Theil Index calculation between 1978 and 2010. In 1978, the Theil Indexes for China’s rural areas and urban areas were 0.15 and 0.05. By 2010, the two indexes got very close to each other, both near 0.165, with rural areas slightly higher than urban areas.

3.3 China’s Income Distribution Between Regions Following decades of rapid economic growth, the gap between low-income and highincome regions has widened, which has worsened the income disparity in China. In the early years of reform and opening-up, a series of bold measures to attract foreign capital and ease market access were implemented in the coastal Eastern region, which caused uneven development and widened the income gap. To address this issue, Chinese government rolled out many regional development policies, such as the West Development Program, the Revitalization of Northeast China and the Rise of Middle China. This section will focus on the evolution of regional disparity since reform and opening-up, presenting the bigger picture of regional disparity in China and evaluating the outcomes of regional development policies.

3.3.1 Income Disparity Between Eastern, Middle and Western China Currently, the regional imbalance in China is largely the income gap between the Eastern region and the Middle and Western regions. In terms of GDP per capita, the income gap had already existed before reform and opening-up. In 1978, the per capita GDP in the East was 756 yuan, 353 yuan in the Middle, and 299 yuan in the Western region, with a ratio of 2.5:1.2:1 (Table 3.4). Later, the GDP of the coastal Eastern areas grew rapidly, and the income gap between the East and the West became bigger and bigger. In 2008, the difference peaked at the ratio of 3.4:1.4:1. From 1990 to 2000, the annual growth of GDP per capita in the East was about 10.9%, compared to about 8–9% in the Middle and Western regions. During that period, the rapid income increase in the Eastern region was mainly responsible for the widening income gap between the East and the Middle and Western regions. After 2008, GDP growth dropped in the Eastern, Middle, and Western regions, while the Middle and Western regions were relatively fast and catching up a bit. In 2016, the ratio was 2.7 :1.4:1. As it is difficult to obtain personal data of each region, we use the highest and the lowest mean per capita incomes of provinces (including provinces, municipalities and autonomous regions) in the Eastern, Middle and Western regions to measure the income gap (ratio of the highest to the lowest) within each region (Table 3.5). The

Annual per capita GDP growth rate (%)

Region

7.32

8.38

Middle

West

5.14

4.91

5.52

1985–1990 (%)

676

1995

7.97

10.12

12.75

1990–1995 (%)

992

1 190

3 195

2000

8.40

8.88

9.02

1995–2000 (%)

1 484

1 821

4 920

Middle/West

1.1

2.55

1985

1.09

2.59

1990 1.2

3.22

1995 1.23

3.31

2000

2005

1.32

3.35

2005

10.26

11.87

10.51

2000–2005 (%)

2 418

3 192

8 109

2010

1.42

3.05

2010

11.99

13.65

9.87

2005–2010 (%)

4 259

6 051

12 980

2016

1.37

2.71

2016

9.63

8.94

7.51

2010–2016 (%)

7 394

10 116

20 038

Source Chinese Statistical Yearbooks. The mean value of GDP per capita in Eastern provinces, rather than gross GDP, was calculated to represent the Eastern region. The same calculation method was used for the Middle and Western regions. In the table, “East/West” is GDP per capita of the Eastern region divided by that of the Western region; “Middle/ West” is GDP per capita of the Middle region divided by that of the Western region

2.53

1.18

East/West

1978

Per capita GDP gap between Eastern, Middle and Western regions

8.52

East

1978–1985 (%)

526

735

299

578

353

West

1990

1 753

Middle

1985

1 340

756

1978

GDP per capita (constant 1978 price)

East

Region

Table 3.4 Per capital GDP growth rates in China’s Eastern, Middle and Western regions (1978–2016)

3.3 China’s Income Distribution Between Regions 85

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3 Total Size and Pattern of China’s Income Distribution …

Table 3.5 Per capita GDP growth in the Eastern, Middle and Western regions (1978–2016) Region

Income ratio between the richest and the poorest provinces 1978

1985

1990

2000

2005

2010

2016

East

9.18

7.10

6.13

5.64

5.12

4.71

3.97

Middle

2.92

2.55

2.67

1.91

2.00

2.13

2.40

Western

2.45

2.29

2.16

2.43

2.27

2.09

2.08

Source Based on the real GDP per capita of provinces. The income gap ratio is GDP per capita of the richest province divided by that of the poorest in each region

results show that the East had the highest income disparity while the Middle region had the lowest. In 2016, in the East, the annual income of Shanghai was 38,580 RMB yuan (constant 1978 price), while Hebei province was only 10,299 RMB yuan. The gap was huge. The main reason is that the growth of per capita GDP in high-income provinces was far above the mean value. The income difference was much smaller in the Middle and Western regions. In the Middle region, Inner Mongolia had the highest per capita income (about 15,336 RMB yuan), and Guangxi province had the lowest income per capita (6,235 RMB yuan). The difference was relatively small. The income gap was even smaller in the Western region. As historical data show, the income gap in the East has been narrowing down, with the income ratio between the richest province (with the highest per capita GDP) and the poorest province declining from 9.2 times to 4.0 times. In the Middle region, the ratio first dropped and then rose again. In the Western region, the ratio has stayed stable, with a slight drop after 2005.

3.3.2 Income Disparity Between Provinces In terms of income differences between provinces, China has had a long period of Matthew Effect after the launch of reform and opening-up. The rich regions became richer, while the poor became poorer, which has worsened the income gap between regions in China. However, thanks to the regional development policies, the income gap between provinces has narrowed over the last decade, especially after 2005. The provincial GDP Theil Index dropped from 0.143 to 0.071 (see Fig. 3.6). It is worth noting that inequality between Chinese provinces has remained at a high level, which must be addressed through further economic transformation. Table 3.6 provides clearer indexes of incomes at a provincial level. In terms of per capita GDP ranking, the relative differences of provinces have not changed much, particularly between provinces with the highest income and those with the lowest income. During 1978–2016, Shanghai, Beijing and Tianjin were the top three,5 and 5 From

1978 to 2010, Shanghai held the highest GDP per capita in China; From 2011 to 2015, Tianjin had the highest GDP per capita in China; In 2016, Beijing surpassed Tianjin and Shanghai, having the highest GDP per capita in China.

3.3 China’s Income Distribution Between Regions

87

Fig. 3.6 Income gap between provinces by the Theil Index (1978–2016). Source Author’s own calculation based  on the per capita GDP of China’s provinces. In the Theil Index formula   Pi Yi Yi , Pi and P represent the population of province i and the total population; i P Y log Y Yi is the per capita GDP of each province, and Y is the mean value of the variable Yi. The higher the Theil Index, the bigger the income gap

Gansu and Guizhou were at the bottom by per capita GDP.6 From 1978 to 2016, Fujian, Chongqing, Zhejiang and Inner Mongolia were the fastest-growing provincial regions,7 distributed rather evenly in the East, the Middle and the West of China. Judging by the growth rates and the Theil Index, the income gap between provinces in China continued to expand from 1978 to 2000. It was largely due to the regional advantages of the Eastern provinces. They benefited more from the reform and opening-up and the market-oriented reform. From 1978 to 2000, GDP per capita increased by more than 10% in five provinces which were all in the East. Among them, Zhejiang, Fujian and Guangdong grew by 12.1, 11.7 and 12.0%. Their GDP per capita levels were below China’s average level when reform and opening-up began to rise (86, 71 and 96% of the mean value), but in 2000 they were well above average (169, 141 and 160%). Traditional rich areas, such as Beijing, Shanghai and Tianjin, had maintained relatively fast growth. In contrast, the Middle and Western regions were relatively slow. Five provinces that had grown by less than 7.2% in per capita GDP were all Middle or Western provinces.

6 From

1978 to 2013, Guizhou had the lowest GDP per capita in China; From 2014 to 2016, Gansu had the lowest GDP per capita in China. 7 From 1978 to 2016, the GDP per capita of Fujian, Chongqing, Zhejiang and Inner Mongolia Autonomous Region went up 19, 12, 11 and 9 places.

88

3 Total Size and Pattern of China’s Income Distribution …

Table 3.6 Changes in regional and provincial income of China (GDP per capita)

Regions and provinces

China overall

Nominal GDP per capita (yuan)

Ranking by GDP per capita

Provincial GDP per capital/ China GDP per capita (%)

Annual growth of real GDP per capita (%)

1978

2016

1978

2016

1978

2000

2016

1978 – 2000

2000 – 2016

385

53 980

–

–

100

100

100

8.3

8.9

East Beijing

1 257

118 198

2

1

326

304

219

7.6

6.9

Tianjin

1 133

115 053

3

3

294

218

213

7.8

10.7

Hebei

364

43 062

13

19

95

96

80

9.0

9.4

Liaoning

680

50 791

4

14

177

141

94

8.2

9.8

Shanghai

2 485

116 562

1

2

645

374

216

7.6

7.3

Jiangsu

430

96 887

6

4

112

148

179

11.3

11.1

Zhejiang

331

84 916

16

5

86

169

157

12.1

9.4

Fujian

273

74 707

25

6

71

141

138

11.7

10.7

1978

2016

1978

2016

1978

2000

2016

1978 – 2000

2000 – 2016

Shandong

317

68 733

18

9

82

117

127

10.4

10.9

Guangdong

370

74 016

10

7

96

160

137

12.0

8.7

Hainan

314

44 347

19

17

82

86

82

9.1

9.7

Middle Shanxi

365

35 532

12

27

95

72

66

7.3

9.5

Inner Mongolia

317

72 064

17

8

82

82

134

5.0

13.9

(continued)

3.3 China’s Income Distribution Between Regions

89

Table 3.6 (continued) Jilin

381

53 868

8

12

99

93

100

9.2

11.2

Heilongjiang

564

40 432

5

22

146

104

75

6.9

10.0

Anhui

244

39 561

27

25

63

60

73

9.2

11.4

Jiangxi

276

40 400

24

23

72

61

75

8.9

10.9

Henan

232

42 575

28

20

60

69

79

9.3

11.1

Hubei

332

55 665

15

11

86

79

103

9.2

11.5

Hunan

286

46 382

23

16

74

68

86

7.8

11.1

Guangxi

225

38 027

30

26

58

59

70

7.7

11.2

West Chongqing

287

58 502

22

10

75

71

108

9.1

12.9

Sichuan

261

40 003

26

24

68

62

74

9.9

11.9

Guizhou

175

33 246

31

29

45

35

62

7.3

12.1

Yunnan

226

31 093

29

30

59

60

58

8.0

9.7

Xizang

375

35 184

9

28

97

58

65

7.2

10.3

Shaanxi

291

51 015

21

13

76

63

95

8.0

11.9

Gansu

348

27 643

14

31

90

52

51

7.2

10.5

Qinghai

428

43 531

7

18

111

65

81

5.5

10.8

1978

2016

1978

2016

1978

2000

2016

1978 – 2000

2000 – 2016

Ningxia

370

47 194

11

15

96

68

87

7.2

9.6

Xinjiang

313

40 564

20

21

81

93

75

8.4

8.5

Source China Statistical Yearbooks. In the first and second columns, the GDP per capita of each province is a nominal value calculated by the permanent resident population. The third and the fourth columns are arranged in a descending order with the first place being the highest. The growth rates in the eighth column are calculated based on the real GDP of each province (1978 as the base year), and the results are different from the nominal values shown in the first and the second columns. The GDP index and resident population of Chongqing between 1978–1996 and Hainan Province between 1978 and 1990 are from Wind Economic Database. In Column 8, the gray boxes represent the provinces where GDP per capita grew faster than the median, while the rest are below the median level

90

3 Total Size and Pattern of China’s Income Distribution …

From 2000 to 2016, the income gap between provinces narrowed, largely because of the faster economic growth in the Middle and Western provinces. Among the 15 provinces that had the highest growth in GDP per capita during this period, the ratio between the Eastern, Middle and Western regions was 2 :8:5. From 1978 to 2000, the ratio was 7:5:3. That means the Middle and Western regions were catching up with Eastern region.

3.4 China’s Distribution Inequality Between Economic Sectors Since the launch of reform and opening-up, the market has been mobilized. A huge amount of labor force has flowed from state-owned and collective enterprises to other enterprises with different forms of ownership. Therefore, the original senioritybased wage system under planned economy was replaced by an efficiency-based wage system, which widened the income inequality between industries and economic sectors in China. In recent years, as the income of rural and urban residents continued to rise, the growing inter-industry income disparity has become a prominent problem. However, the income differences due to differences in education, work experience and labor intensity should not be considered as part of the income inequality. In China, the income inequality between industries was mainly created by imperfect competition in the market, since monopoly industries were able to offer higher wages than the rest.

3.4.1 Changes in the Overall Inter-sectoral Income Gap Based on the data from China Statistical Yearbooks, we measured the income levels of urban workers in various industries, identifying the highest-paying and lowest-paying industries supported by actual wage levels. In 2016, for example, the highest-paying sector was information, software and IT services (122,478 RMB yuan), while the lowest-paying sector was farming, forestry, animal husbandry and fishery (33,612 yuan). Then, we calculated the deviation of the highest and lowest pays from the national average. We also calculated the ratio of the highest wage to the lowest in each industry to gain insights into changes in the overall wage payment. All the indicators show that, from 1978 to 2016, the inter-sector wage gap narrowed first, then expanded, and then narrowed down again (Fig. 3.7). ➀ From 1978 to 1988, the wage gap between economic sectors had a slight reduction, with both the lowest wage and the highest wage getting closer to the average, and the trend stayed for a while. ➁ After 1996, the inter-sectoral wage gap rapidly expanded, due to the reform of China’s labor market. Layoffs from SOEs and the influx of rural migrant workers into cities intensified the competition in the labor market, which affected the

3.4 China’s Distribution Inequality Between Economic Sectors

91

Fig. 3.7 Changes in the inter-sectoral wage gap (1978–2016). Source Author’s own calculation based on China Statistical Yearbooks. Industries are categorized into A, B, and C. The industry categorizing standard was adjusted in 1994, 2002 and 2011

wage level of many industries. There was a sudden jump in the highest and lowest wages in 2003, which was caused by the change in industry classification.8 ➂ After the financial crisis in 2008, the wage gap narrowed again, because the high-paying industries had a slowdown in wage growth.

3.4.2 Wage Gap and Wage Growth Rates Between Industries Between 2003 and 2016, monopoly sectors including finance, software and IT services, scientific research and geological exploration and public utilities (electric power, gas and water) offered much higher wages than the average level of all industries. In terms of growth rate, there was no obvious reduction in the wage gap (Table 3.7). If we classified wage payment in 2003 into three levels from low to high,9 their average growth rates were 12.2, 12.7 and 12.3% between 2003 and 2016, without many differences between them. Therefore, we believe that the wage 8 In 1994 and 2002, China revised Industrial Classification for National Economic Activities. Before

the revision, economic activities had been classified into 16 industries. As of 2003, they were further classified into 19 industries. Afterward, the lowest-paying industry had always been farming, forestry, animal husbandry, and fishery. From 1997 to 2002, the highest-paying industries were finance and insurance. Since the adjustment of the classification standard in 2003, the newly classified information transfer, computer services and software have become the highest-paying industry for urban workers. 9 According to the classification in 2003, the six industries with the highest average wage were farming, forestry, animal husbandry and fishery, wholesale and retail trade, lodging and food, water conservancy, environment and public institution management, neighborhood services and other service industry; the seven industries registering a middle-level of average wage were manufacturing, mining, education, public administration and social organization, traffic, storage and mail business, social welfare, leasehold and business service; the six industries with the lowest average wage were realty business, cultural, physical and entertainment, production and supply of electric power, gas and water, scientific research, technical service and geologic examination, finance, information transfer, computer services and software.

2003

13 969

6 884

10 894

11 198

11 328

11 774

12 665

12 671

13 627

14 189

15 355

15 753

16 185

17 020

17 085

17 098

18 574

20 442

20 780

Average wage (yuan)

Overall average wage

Agriculture, forestry, animal husbandry and fishing

Wholesale and retail

Hotel and catering

Construction

Water, environment and public facilities

Household service and other services

Manufacturing

Mining

Education

Public administration and social organizations

Transport, warehousing and postal services

Health, insurance and social welfare

Lease and business services

Real estate

Culture, sports and entertainment

Electricity, gas, water supply

Science and technology services and geological exploration

Finance

29 229

27 155

24 750

22 670

20 253

21 233

20 808

20 911

20 234

18 259

20 449

15 934

15 747

14 322

14 112

13 876

15 256

8 207

18 200

2005

44 011

38 432

33 470

30 430

26 085

27 807

27 892

27 903

27 731

25 908

28 185

21 144

20 370

18 383

18 482

17 046

21 074

10 847

24 721

2007

Table 3.7 Average wage and urban workers’ wage growth (2003–2016) 2009

60 398

50 143

41 869

37 755

32 242

35 494

35 662

35 315

35 326

34 543

38 038

26 810

25 172

23 159

24 161

20 860

29 139

14 356

32 244

2011

81 109

64 252

52 723

47 878

42 837

46 976

46 206

47 078

42 062

43 194

52 230

36 665

33 169

28 868

32 103

27 486

40 654

19 469

41 799

2013

99 653

76 602

67 085

59 336

51 048

62 538

57 979

57 993

49 259

51 950

60 138

46 431

38 429

36 123

42 072

34 044

50 308

25 820

51 483

2015

114 777

89 410

78 886

72 764

60 244

72 489

71 624

68 822

62 323

66 592

59 404

55 324

44 802

43 528

48 886

40 806

60 328

31 947

62 029

2016

117 418

96 638

83 863

79 875

65 497

76 782

80 026

73 650

70 959

74 498

60 544

59 470

47 577

47 750

52 082

43 382

65 061

33 612

67 569

14.2

12.7

12.3

12.6

10.9

12.3

13.1

12.6

12.5

13.6

12.2

12.6

10.7

11.4

12.5

11.0

14.7

13.0

(continued)

Average growth (%) 12.9

92 3 Total Size and Pattern of China’s Income Distribution …

30 897

Information, telecommunications and computing service

38 799

2005 47 700

2007 58 154

2009 70 918

2011 90 915

2013 112 042

2015 122 478

2016 11.2

Average growth (%)

Source Author’s own calculation based on China Statistical Yearbooks. In this table, the average wage growth rates are nominal. As industry classification was changed in 2003, this table does not present the industries as classified before 2003

2003

Average wage (yuan)

Table 3.7 (continued)

3.4 China’s Distribution Inequality Between Economic Sectors 93

94

3 Total Size and Pattern of China’s Income Distribution …

gap between industries will continue to widen. From 2003 to 2016, five industries grew by more than 13% including traditional low-paying industries such as farming, forestry, animal husbandry and fishery (13.0%) and wholesale and retail trade (14.7%), and high-paying industries such as finance (14.2%). On the other hand, five industries grew by less than 12%. It is worth noting that they included information, computer services and software (11.2%) which offered the highest average wage of all industries.

3.5 Changes in China’s National Income Distribution over the Past 40 Years Incomes from factors include labor remuneration, capital gains10 and net product tax. The primary distribution of national income is a process where companies, the government, and households obtain their due income according to their input of factors. On this basis, secondary distribution considers the changes in non-marketable transfer payments, such as social security expenses and income. The disposable income of the above three sectors is shaped in this process.11 As the major source of personal or household income, wage and personal income experience the same changes in their ratio to GDP. These changes reveal the structure of China’s national income distribution.

3.5.1 Changes in the Primary Distribution of China’s National Income Based on the aggregate data of regional GDP calculated by the income approach before adjustment (Fig. 3.8), labor remuneration as a proportion remained relatively stable in China from 1978 to 2000, and declined appreciably from 2000 to 2007. After 2008, it rose slightly and has remained relatively stable since then. Meanwhile, net product tax and capital gains have increased rapidly. It should be noted that there were two major adjustments to the statistical methods for calculating labor remuneration in China’s national economic accounts, mainly concerning the proportions of selfemployed workers’ income assigned to labor remuneration and operational profit.12 Thus, there were two sudden jumps in the data for 2004 and 2008. To ensure data 10 The

capital income should include operational surplus and the depreciation of fixed assets. disposable income of households (redistribution income) is equivalent to the primary distribution income of households plus current transfers. Current transfers include ordinary taxes such as income tax and property tax, social insurance contributions and benefits, and social subsidies. 12 If you need more information, please refer to the descriptions of Lyu and Li [9]. 11 The

3.5 Changes in China’s National Income Distribution over the Past 40 Years

95

Fig. 3.8 Changes in labor remuneration as a proportion in China (1978–2013). Source Labor remuneration as a proportion is based on the aggregate data of regional GDP measured by the income approach. The data from 1978 to 2006 are from Chong-en and Qian [10]; the data from 2007 to 2015 are the author’s own calculation. The statistical methods were adjusted twice in 2004 and 2008, so there is difficulty in comparing the data before and after adjustment. The data of labor remuneration indicated in the dashed line are from Lyu and Li [9]; the data from 2001 to 2015 are calculated based on the flow-of-funds accounts in China Statistical Yearbooks. The labor remuneration data from 1992 to 2000 have been adjusted to ensure comparability

comparability, we adopt the proportion of labor remuneration in the flow-of-funds table calculated after adjustment by Lyu and Li [9]. Since 1992, the proportion of labor remuneration has declined obviously, from 57.5% in 1992 to 46.8% in 2011. After a slight recovery, the proportion came back to around 52% in 2015.

3.5.2 Changes in the Redistribution of China’s National Income Disposable personal income as a share of GDP shows a similar decline, like labor remuneration. According to the flow-of-funds accounts revised after China’s Third National Economic Survey (Table 3.8), the share of personal income has fallen sharply since 1992 in both primary distribution and redistribution. From 1992 to 2008, in primary distribution, household income as a share of GDP dropped from

96

3 Total Size and Pattern of China’s Income Distribution …

Table 3.8 Proportions of three sectors in primary distribution and redistribution of national income (basedon the flow-of-funds table) Year

Sector Enterprises (%)

Government (%)

Households (%)

Primary Redistribution Primary Redistribution Primary Redistribution distribution distribution distribution 1992 18.0

13.4

15.9

17.9

66.1

68.7

1993 22.0

18.1

15.6

17.2

62.4

64.7

1994 21.8

18.6

13.3

14.5

64.9

66.9

1995 23.2

19.7

12.4

14.1

64.4

66.2

1996 20.0

16.4

12.8

14.6

67.2

69.0

1997 21.8

17.7

12.5

14.3

65.7

68.0

1998 20.5

17.5

12.8

14.2

66.6

68.3

1999 20.7

19.2

13.1

14.1

66.2

66.7

2000 21.2

19.4

13.1

14.5

65.7

66.1

2001 23.1

20.6

12.7

15.0

64.2

64.4

2002 23.4

21.1

14.0

16.3

62.6

62.6

2003 24.2

21.9

12.7

16.1

62.1

62.0

2004 26.9

24.3

13.9

16.6

59.2

59.1

2005 26.6

23.7

14.1

17.4

59.3

58.9

2006 26.9

23.7

14.3

17.9

58.8

58.4

2007 27.5

23.9

14.6

18.8

57.9

57.3

2008 28.3

24.5

14.1

18.3

57.6

57.2

2009 27.3

23.8

13.9

17.5

58.8

58.7

2010 26.9

23.6

14.6

18.0

58.5

58.4

2011 25.8

21.9

15.0

18.8

59.2

59.3

2012 24.7

20.6

15.5

19.2

59.8

60.2

2013 24.1

19.8

15.2

18.9

60.7

61.3

2014 24.7

20.5

15.2

18.9

60.1

60.6

2015 24.2

19.8

14.9

18.5

60.9

61.6

Source Data between 1992 and 2013 are from Table 3–25 and Table 3–26 in China Statistical Yearbooks, all based on the flow-of-funds accounts revised after the Third National Economic Survey. Data between 2014 and 2015 are author’s own calculation based on the flow-of-funds accounts (barter transaction) in China Statistical Yearbooks, in which the share of enterprises in primary distribution is the total income of financial and non-financial enterprises obtained through primary distribution divided by the total national income distributed through primary distribution, while their share in redistribution is the total disposable income of financial and non-financial enterprises divided by total national disposable income distributed through secondary distribution. The same method is used in the calculation of the shares of the government and households

3.5 Changes in China’s National Income Distribution over the Past 40 Years

97

66.1 to 57.6%, and the share of disposable personal income in GDP declined from 68.7 to 57.2%. During the same period, government revenues as a share of GDP did not rise obviously, while enterprises’ share witnessed a remarkable increase in both primary distribution and redistribution. After the global financial crisis in 2008, disposable personal income rose as a percentage of GDP. In 2015, the proportion was about 60.9% in primary distribution, and 61.6% in redistribution, which indicated the weakness of redistribution in moderating income distribution between these three sectors. The decline of labor remuneration and disposable personal income in national income distribution indicates that China’s national income distribution has favored the government and enterprises, and moved the weight from labor to capital. As a result, the higher-income earners, those who have become rich first, could become richer as they have more property- based incomes, while the lower-income groups, or labor remuneration earners, benefit less from the economic development. So, the income gap between the rich and the poor runs the risk of widening further. The slight rise of personal income as a share of GDP after the global financial crisis is not a long-term trend, although it did happen.

3.5.3 China’s National Income Distribution Pattern from the International Perspective Before making international income comparisons, we need to compare the statistical methods for calculating labor remuneration. The main difference is whether the income of individual business operators (the self-employed) could be counted as labor remuneration. The current international statistical method for measuring labor remuneration only covers employee income, while the income of the self-employed is recorded under operational profits. China’s calculation labor remuneration has a wider coverage [9]. Before 2004, the income of individual business operators was counted as labor remuneration. After the first National Economic Survey in 2004, it was put under operational profits. Then, in the second National Economic Survey in 2008, it was divided between labor remuneration and operational profits by a certain ratio. Therefore, if it is measured by the wider statistical method, China’s labor remuneration has a higher proportion in GDP. Take the 2008 data for example. In the original flow-of- funds accounts, China’s labor remuneration accounted for about 47.8% of GDP. According to Zhang [11], if it is measured by the narrower international statistical method, the share would be only 30.3%, with the remaining 17.5% going to operating profits. Our subsequent comparisons will be based on this division. Therefore, we can calculate the share of labor remuneration in GDP based on the United Nations GDP data (by the income approach). As Table 3.9 shows, labor remuneration as a share of GDP is generally higher in developed countries than emerging and developing countries. Among the developed economies, labor remuneration accounts for 56.0% of GDP in the United States, 56.5% in the United

98

3 Total Size and Pattern of China’s Income Distribution …

Table 3.9 Labor remuneration as a share of GDP by country Country

Year

Labour remuneration as a % of GDP

Operational surplus as a % of GDP

Net product tax as a % of GDP

GDP per capital (yuan)

USA

2008

56.0

37.1

6.9

48 401

Japan

2007

50.1

42.6

7.3

37 866

UK

2008

56.5

31.2

12.3

45 195

Germany

2008

54.7

44.0

1.3

45 699

France

2009

58.4

38.0

3.6

45 413

Russia

2010

58.5

36.5

5.0

11 635

South Korea

2008

51.6

46.9

1.5

20 475

South Africa

2010

49.8

48.7

1.5

5 817

Brazil

2008

49.1

49.3

1.6

8 707

Mexico

2007

29.0

65.4

5.6

9 579

India

2009

28.5

65.1

6.4

1 023

Philippines

2008

27.9

60.8

11.3

1 929

Egypt

2009

26.1

47.7

26.2

2 062

China

2008

46.5 (30.3)

38.8

14.8

3 441

Source The data of labor remuneration, operational surplus and net product tax (excluding China) are measured by Yu [12] (Yu Fangdong works for the International Statistical Information Center of NBS) based on United Nations GDP data, and GDP per capita is from WDI database of the World Bank (conversion into US dollars by exchange rate). China’s data are from the aggregate GDP data of Chinese provinces by income approach presented in China Statistical Yearbook 2009. It should be noted that labor remuneration is not comparable between China and other countries due to the difference in statistical methods. The bracketed numbers are data adjusted by Zhang [8]

Kingdom and 50.1% in Japan, and it is above 50% in other developed economies such as Germany and France. It differs, however, remarkably among emerging economies. For example, labor remuneration accounts for around 50% of GDP in Russia (58.5%), Brazil (49.1%) and South Africa (49.8%), close to the level in developed economies. The share is far below 30% in India, Mexico and the Philippines, showing an obvious positive correlation with GDP per capita. According to the adjusted data, the share is only 30.3% in China. It is a low level in the world, almost half below the level in Western developed countries, and only slightly higher than Mexico and India. The share of disposable personal income in GDP is another indicator to study the pattern of national income distribution. As Table 3.10 shows, in developed countries, the distribution of this share is relatively concentrated, generally between 65 and 70%. For example, it is 79.6% in the USA, 67.5% in the UK, 63.8% in Japan, and around 70% in Germany, France and Italy. In emerging economies, the distribution is scattered: around 60% in Russia, South Africa and Brazil, about 70% in Mexico and Philippines, and nearly 80% in India and Egypt which is far above the levels in Western developed countries. According to the flow-of-funds accounts, in 2009, this share was 58.7% in China, which is near the levels of South Korea (57.3%) and South

3.5 Changes in China’s National Income Distribution over the Past 40 Years

99

Table 3.10 Personal income as a share of GDP by country Country

Year

Disposable personal income as a % of GDP

Consumption rate (%)

Savings rate (%)

GDP per capita (yuan)

USA

2009

Japan

2008

79.6

89.5

10.5

48 401

63.8

91.0

9.0

37 866

UK

2009

67.5

94.0

6.0

45 195

Germany

2009

69.7

82.8

17.2

45 699

France

2009

70.1

84.0

16.0

45 413

Italy

2009

67.4

86.0

14.0

40 640

Russia

2009

62.9

85.7

14.3

11 635

South Korea

2010

57.3

91.3

8.7

20 475

South Africa

2010

58.3

97.4

2.6

5 817

Brazil

2006

61.9

92.6

7.4

8 707

Mexico

2009

72.4

88.1

11.9

9 579

India

2009

81.0

71.1

28.9

1 023

Philippines

2008

72.7

94.1

5.9

1 929

Egypt

2009

81.7

92.5

7.5

2 062

China

2009

58.7

49.4

50.6

3 441

Source The data of disposable personal income, consumption rate and savings rate (excluding China) are measured by Yu [12] (Yu Fangdong works for the International Statistical Information Center of NBS) based on United Nations GDP data, and GDP per capita is from WDI database of the World Bank (conversion into US dollars by exchange rate). China’s data are from the flow-of-funds accounts in China Statistical Yearbooks, in which disposable income is based on household income through redistribution

Africa (58.3%) in 2010, but much lower than the levels of other developed countries and some developing countries. Moreover, regarding the usage of disposable income, the consumption rate in China was also extremely low, which is less than 50%. Even compared with countries or regions at the same development level, personal income as a share of GDP in China is still very low. In terms of GDP per capita,13 the economic development level of China’s mainland in 2012 was close to the USA level in 1943, the Japanese level in 1970, the South Korean level in 1991, and the level of Taiwan in 1989 (Table 3.11). However, the share of workers’ income in GDP in primary distribution in China’s mainland (45.6%) was lower than that in the USA (48%), Japan (56%) and Taiwan (56%), but close to the share in South Korea (45%). On the other hand, the share of enterprise income in China’s mainland (38.5%) was higher than that in the USA (38%), Japan (36%) and Taiwan (33%), but lower than that in South Korea (45%). The share of government revenues was also higher in China’s mainland than that in other countries. From the international 13 Based

the economic history data compiled by Maddison. Each country’s per capita GDP at different development stages has remained at 9,000–9,500 international dollars.

100 Table 3.11 Shares of government, enterprise and household income in countries and regions at a comparable development level

3 Total Size and Pattern of China’s Income Distribution … Countries and regions

Labor remuneration (%)

Enterprise income (%)

Government revenues (%)

China’s mainland (2012)

45.6

38.5

15.9

USA (1943) 48

38

15

Japan (1970)

56

36

8

South Korea (1991)

45

45

10

Taiwan (1989)

56

33

11

Source The shares of the USA, Japan, South Korea and Taiwan are calculated using the data of United States Department of Commerce, Japan Statistical Yearbooks, National Economy Statistics of the Bank of Korea and Taiwan Economy Yearbook. The data of China’s mainland are based on the GRP data by income approach in China Statistical Yearbook 2014

perspective, labor remuneration as a share of GDP was very low in China, and a structural imbalance existed in the functional income distribution. In terms of Gini coefficient after redistribution, China’s redistribution mechanism has not played an obvious role in lowering the Gini coefficient. Developed countries have used redistribution policies such as taxation and social security to improve the wellbeing of their low-income population. As Table 3.12 shows, the Gini coefficient of the USA after redistribution is 11 percentage points lower than the index based on primary distribution. The German index is 20 percentage points lower and the Japanese index is 13 percentage points lower after redistribution. However, the Gini coefficient of China increases after redistribution. It means that China’s redistribution policy has a negative effect on the income gap. Taxation, social security and transfer payments have not played an active role in bridging the gap between the rich and the poor.

3.6 China’s Poverty Problem and Poverty Reduction Strategy over the Past 40 Years Since the launch of reform and opening-up, China has made great achievements in reducing the poverty-stricken population and the poverty rate. In 2010, China was the first country to realize the UN Millennium Development Goal of reducing the population living in poverty by half. China has brought the largest number of people out of poverty in the global poverty reduction movement.

3.6 China’s Poverty Problem and Poverty Reduction Strategy … Table 3.12 Gini coefficients after primary income distribution and redistribution in developed countries (Gini coefficient × 100)

101

Country

Gini coefficient after primary distribution

Gini coefficient after redistribution

USA

49

38

UK

46

35

France

48

29

Germany

50

30

Switzerland

41

30

Sweden

43

26

Finland

47

26

Denmark

42

25

Norway

41

25

Belgium

47

26

Canada

44

32

Australia

47

34

Italy

53

34

Japan

46

33

South Korea

34

32

China

41

46

Source OECD statistics (excluding China) from 2008 to 2010, quoted from Zhang and Cheng [13]. China’s data are author’s own calculation

The main driver of China’s poverty reduction is the rapid economic growth in rural areas brought by reform and opening-up. Besides, a series poverty reduction strategies made and implemented by the Chinese government since 1980s also played important roles. From 2000 to 2010, China raised the official poverty line twice. The target of China’s poverty reduction movement became more and more precise, narrowing down from poverty-stricken areas, counties, villages to households. Special poverty alleviation funds set up by governments at all levels have played a big role in poverty reduction. By NBS’s poverty standard (2,300 RMB yuan per year14 ), about 43.35 million people in China’s rural areas are living in poverty. By the standard of the World Bank (one US dollar per day), in 2013, about 26 million people in China were living in poverty.15 More efforts should be made to reduce poverty in China.

14 The current poverty standard was 2,300 RMB yuan per year at the constant 2010 price. The nominal poverty standard in 2015 was 2,855 RMB yuan after inflation adjustment. 15 If the World Bank’s poverty standard of “1.9 US dollars per person a day” was used, China had 250 million people living below the poverty line in 2011.

102

3 Total Size and Pattern of China’s Income Distribution …

3.6.1 Poverty Reduction Measures in China Before reform and opening-up, China’s economic development level was very low. China implemented a long-term development strategy [14] that used agriculture to support industrialization and modernization, in part by controlling the prices of agricultural products. Poverty, including extreme poverty, was prevalent in rural areas. That means farmers’ income could not meet their daily needs. By China’s official poverty standard (100 RMB yuan per year in 1978), about 250 million people were living in poverty in rural areas in 1978, and the rural poverty rate was 30.7%. Under planned economy, China adopted the “blood transfusion” model of poverty alleviation. The main source to relieve poverty was government grant, but that was a temporary relief method. No “planned, organized and large-scale” poverty alleviation program was implemented until the launch of reform and opening-up. China’s poverty reduction movement has gone through many stages, with the concept, orientation and methods of poverty relief adapting to the conditions of economic growth and social development. It progressed from relief orientation to development orientation, from extensive poverty relief to targeted poverty reduction. According to documentation, China’s poverty reduction program since reform and opening-up went through four stages. 1. 1978–1985: Large-scale poverty relief driven by rural institutional reform From 1978, as part of the pilot reform program, the Chinese government began to roll out new policies in rural areas, including implementing the household responsibility system, loosening control over the prices of agricultural products, promoting the development of rural enterprises (also called township enterprises), and restoring the land use right transaction system. These policies stimulated the enthusiasm of farmers in production. The increased output and price rise of agricultural products drove the rapid growth of China’s agricultural sector. Farmers’ income rose rapidly through both agricultural and non-agricultural channels. Poverty went down sharply in China during this period. At the same time, the Chinese government took many poverty relief actions, including establishing the “development fund for supporting under-developed areas” in 1980, starting poverty-alleviating development in “Three West” areas in 1982, and organizing a “work-relief” movement in 1984.16 In addition, in 1984, the central government issued an important document: “Circular on Helping the Povertystricken Areas to Make a Difference as Soon as Possible”. The document insisted that the best way of “poverty relief” was “development”, and defined 18 key areas where relief was most needed.

16 See Zhang [14] for more policies implemented during this period. Here, “under-developed areas”

mainly included “old revolution base areas, ethnic minority areas, remote and border areas and other poverty-stricken areas”; “Three West areas” refer to Dingxi and Hexi areas of Gansu Province, Xihaigu of Ningxia Hui Autonomous Region.

3.6 China’s Poverty Problem and Poverty Reduction Strategy …

103

At this stage, China adopted the “1978 poverty standard” (100 RMB yuan every year per person).17 The standard aimed to ensure that each person should take in 2,100 calories through food consumption every day and spending on food would be about 85% of total expenditures [15]. In some sense, the “1978 poverty standard” was the minimum livelihood standard. People living under this standard could hardly survive. According to China Statistical Yearbooks, by the “1978 standard”, the number of people living in poverty in China’s rural areas decreased from 250 million to 125 million from 1978 to 1985 (Table 3.13), down 17.857 million per year.18 The rural poverty rate dropped from 30.7 to 14.8%, down 2.3 percentage points annually. 2. 1986–2000: Focusing on poverty-stricken counties From the launch of reform and opening-up to the mid-1980s, China’s rural economy witnessed a rapid growth. The rural poverty population was sharply reduced. However, at the same time, the imbalance of economic development between rural areas was getting worse. Limited by geographical conditions, some areas suffered from sluggish development. For example, poverty remained serious in Red Areas, ethnic minority areas, border areas and other under-developed areas. The income gap between Middle and Western regions and the Eastern coastal region further widened. The main problem in rural China changed from common poverty at the beginning of reform and opening-up to regional poverty. Therefore, more targeted policies were badly needed. In this context, the Chinese government launched a development-oriented poverty relief strategy. Poverty relief transformed from a loose departmental action into a routine and well- organized national program. In 1986, the State Council set up a Leading Group of Poverty Alleviation and Development19 to coordinate poverty alleviation actions between various departments and regions, which marked the beginning of China’s planned, organized and large-scale poverty alleviation program, which was in fact a development program [16]. Poverty relief became more institutionalized and professional. In 1986, the first official poverty standard was adopted, which is called the “1978 poverty standard”. Another development was that poverty alleviation shifted from decentralized actions to accelerated and focused regional development projects. Regional economic development was believed to be able to increase rural income and help the poverty-stricken people in poor areas to meet their survival needs. In March 1994, the Chinese government announced the “Seven-year Program to Lift 80 Million People Out of Poverty” (also called the “Seven-year 17 The poverty line was first proposed in 1986. Based on the historical data, NBS estimated that, if the poverty line was 206 yuan per person annually in 1985, the standard in 1978 must be 100 yuan per person to maintain the same living standard. So, the “1978 standard” is a retrospective standard. 18 Source: China Statistical Yearbook 2017 and Poverty Monitoring Report of Rural China 2016. 19 When it was established in 1986, it was called the Leading Group of Economic Development in the Poverty-stricken Areas of the State Council. It was renamed in 1993 and the new name has been used since then.

100

130

206

300

530

625

630

627

637

668

683

693

785

895

–

–

–

–

–

–

1980

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

–

–

–

–

1 274

1 196

1 196

1 067

958

944

924

882

869

872

865

–

–

–

–

–

yuan per capita every year

1978

2 800

2 736

2 625

2 536

2 300

–

2 172

1 742

–

–

–

–

1 528

1 511

807

482

403

366

–

–

–

–

–

–

1 004

1 479

2 148

2 365

2 610

2 900

2 820

2 927

3 209

6 540

8 500

12 500

22 000

25 000

10,000 persons

–

–

–

–

2 688

3 597

4 007

4 320

5 698

6 432

7 587

8 517

8 645

9 029

9 422

–

–

–

–

–

7 017

8 249

9 899

12 238

16 567

–

–

–

–

28 662

–

–

–

–

46 224

55 463

65 849

66 101

76 542

77 039

2010 standard

1978 standard

2008 standard

Rural poverty-stricken population

2010 standard

1978 standard

2008 standard

China’s official rural poverty standards

Unit

Year

Table 3.13 China’s rural poverty standards and number of people living in poverty

–

–

–

–

–

–

1.0

1.6

2.3

2.5

2.8

3.1

3.0

3.2

3.5

7.1

9.4

14.8

26.8

30.7

%

–

–

–

–

2.8

3.8

4.2

4.6

6.0

6.8

8.1

9.1

9.2

9.8

10.2

–

–

–

–

–

2008 standard

Rural poverty rates 1978 standard

7.2

8.5 (continued)

10.2

12.7

17.2

–

–

–

–

30.2

–

–

–

–

49.8

60.5

73.5

78.3

96.2

97.5

2010 standard

104 3 Total Size and Pattern of China’s Income Distribution …

–

–

2 855

–

–

5 575

2010 standard

1978 standard

2008 standard

Rural poverty-stricken population

2010 standard

1978 standard

2008 standard

China’s official rural poverty standards –

–

2008 standard

Rural poverty rates 1978 standard 5.7

2010 standard

Source 2016 Poverty Monitoring Report of Rural China. Three poverty standards can be found in Xian et al. [15]. This table only presents the poverty standards, poverty-stricken population and poverty rates in rural China (the denominator being the total rural population)

2015

Year

Table 3.13 (continued)

3.6 China’s Poverty Problem and Poverty Reduction Strategy … 105

106

3 Total Size and Pattern of China’s Income Distribution …

Priority Poverty Alleviation Program”). It was the first poverty reduction action plan with clearly defined objectives, measures and deadlines in China’s history [14]. During this period, the focus rested on 592 poverty-stricken counties.20 Under this Program, the central government set up a poverty alleviation fund and the total investment amounted to 124 billion RMB yuan [17]. During this period, China’s official poverty line was the “1978 standard”.21 In China Statistical Yearbooks, by the “1978 standard”, the number of people living in poverty in rural China decreased from 131 million to 21.09 million from 1986 to 2000, down 7.065 million per year (Table 3.13). The rural poverty rate dropped from 15.5% to 3.5%, down 0.86 percentage points annually. Driven by the Seven-year Program from 1994 to 2000, the net income per capita of farmers in poverty-stricken counties increased from 648 RMB yuan to 1,337 RMB yuan, about 2 percentage points higher than the national average growth rate [18]. 3. 2001–2010: Development-oriented poverty reduction focusing on povertystricken villages After entering the 21st century, thanks to the rapid economic growth in China, the income level in rural China rose further, and the poverty-stricken population shrank rapidly. However, China faced new challenges, one of which was serious imbalances in regional development. At this stage, poverty in rural areas changed from common and regional poverty to scattered poverty distributed in dots, from absolute poverty to relative poverty. The number of people living in poverty across China in 592 most poverty-stricken counties decreased to 55% of the local population.22 Even in the poorest counties, the poor population concentrated in some poor villages, so more targeted poverty-alleviation policies were needed. In 2001, the State Council issued the Outline for Poverty Alleviation and Development of China’s Rural Areas (2001–2010). According to the Outline, China’s poverty-alleviation plan from 2001 to 2010 would mainly “help people who cannot meet their food and clothing needs reach the minimum standard of livelihood as soon as possible”, and “consolidate the achievements in guaranteeing basic livelihood”. In the new policy, the focus shifted from poor counties to poor villages. The Outline identified 148,000 poorest villages in China, covering 80% of the rural povertystricken population23 [19]. The Outline emphasized participatory poverty reduction, mobilizing the poor people to play their own role in poverty reduction, instead of 20 In 1986, the government identified 258 poverty-stricken counties in the first round, and later the number rose to 331 in 1989. By 1994, the standard of a poverty-stricken county was the per capita net income in the base year of 1992 less than 400 RMB yuan, or it had been a poverty-stricken county before 1992 and the per capita net income in 1992 was less than 700 RMB yuan [14]. 21 To maintain the same living standard, the poverty line (1978 standard) was raised from 213 yuan per person per year in 1986 to 625 yuan per person per year in 2000. 22 Source: “Anti-poverty Battle 2020: China Poverty Alleviation Report” published by the Phoenix International Think Tank in 2016. 23 In 2002–2006, the growth of farmers’ per capita net income in key poverty-stricken villages exceeded the average growth rate of poverty-stricken counties and the country’s average by about 3 percentage points [18].

3.6 China’s Poverty Problem and Poverty Reduction Strategy …

107

merely issuing policies “from top to bottom”. The private sector was also encouraged to participate in this program. In 2008, China raised the official poverty line in the “2008 poverty standard”.24 The new standard reduced the proportion of spending on food to 60%25 but kept the calorie intake of 2,100 calories per person per day. In China Statistical Yearbooks, by the “2008 standard”,26 the population living in poverty in rural China dropped from 90.29 million to 26.88 million from 2001 to 2010,27 down 7.046 million per year; the rural poverty rate dropped from 9.8 to 2.8%, down 0.78 percentage points per year (Table 3.13). 4. 2011–2020: Targeted poverty-alleviation focusing on the poorest individuals Benefiting from the development in the first decade of the 21st century, the income level of rural residents in China increased steadily, and farmers gained the ability to meet their food and clothing needs. However, China still faced many new challenges. First, after the government upgraded its standard from “absolute poverty” to the more challenging “relative poverty”, China’s population living poverty is still huge and distributed in belts or patches, not in scattering dots as before. China still has a long way to go to eliminate poverty. Second, apart from basic clothing and food needs, the government also emphasizes basic housing and transportation guarantee to increase the resilience of rural poor people, prevent them from slipping back into poverty due to illness, and consolidate the achievements of poverty reduction. In 2011, the State Council issued the Outline for Poverty Alleviation and Development of China’s Rural Areas 2011–2020. In addition to meeting the basic food and clothing needs of the rural poor, the new Outline also promised to give them access to compulsory education, basic healthcare services, and housing (popularly known as “2+3 objectives”). In 2015, the State Council issued the Decision to Win the Antipoverty Battle, promising to lift all poverty-stricken counties out of poverty by 2020. China’s poverty alleviation endeavor at this stage had the following characteristics. ➀ The target was further specified, narrowing down to poor households. All poor households were registered and a dynamic monitoring system was implemented to keep track of all poverty reduction targets. ➁ The reasons of poverty were identified, so effective measures could be taken to provide social insurance for incapacitated

24 Judging by the standard which has been used since 2000 and was referred to as the “rural lowincome standard” between 2000 and 2007 (see China Statistical Yearbook 2017), the standard was officially declared as the poverty standard in 2008. 25 The “2008 standard” allowed for a much higher living standard than that in 1978. In 2008, judging by the “1978 standard”, the poverty standard should be 895 yuan per person per year, but the actual “2008 standard” was 1,196 yuan per person. 26 The “2008 standard” increased from 865 yuan per person per year in 2001 (corresponding to the “1978 standard” of 630 yuan per person) to 1,274 yuan per person per year in 2010. 27 If the “1978 standard” is used, the poverty population in rural China would decrease from 29.27 million in 2001 to 10.4 million in 2008, down 2.947 million per year. During the same period, the poverty rate in rural areas would drop from 3.2% in 2001 to 1.0% in 2008.

108

3 Total Size and Pattern of China’s Income Distribution …

Table 3.14 Extreme poverty standards of the World Bank US dollar per person per day

Release year

Price base year

Calculation method

1.01

1990

1985

Highest standard in 12 poorest countries

1.08

1994

1993

Average standard of 10 poorest countries

1.25

2008

2005

Average standard of 15 poorest countries

1.90

2015

2011

Average standard of 15 poorest countries

Source Based on the World Development Report of the Word Bank by Xin et al. (2016)

people and help capable poor people to get out of poverty by giving them preferential policies. ➂ 14 areas hit by extreme poverty were identified where development support was intensified to lift the local population out of poverty. To realize the “2+3 objectives”, the poverty standard was further raised in the “2010 standard” to 2,300 yuan per year per person. While the calorie intake level was still 2,100 calories per day, the proportion of spending on food dropped further to 53.5%.28 By the “2010 standard”, the population living in poverty in rural China dropped from 165 million in 2011 to 43.35 million in 2016, down 15.8 million per year, and the rural poverty rate dropped from 17.2% in 2011 to 4.5% (Table 3.13).

3.6.2 China’s Poverty Problem from the International Perspective To ensure international comparability, we adopt a unified international poverty standard. At present, the World Bank’s poverty line of “one US dollar per person per day”29 is the most prevalent standard. Reflecting the condition of “extreme poverty”, this standard is based on the 1985 price level and the cost to meet basic livelihood needs in the 12 poorest countries. The currency is converted by purchasing power parity (PPP). Considering the changes in price, “one US dollar a day” must be adjusted periodically by referring to the price level of the base period (see Table 3.14 for previous adjustments). The most recent adjustment was made by the World Bank in October 2015. The poverty line was raised to “1.9 US dollars a day” (2011 as the base year).

28 More details can be found in Xian et al. [15] and Poverty Monitoring Report of Rural China 2016. 29 In

addition, the World Bank declared the general poverty line of about 2 US dollars per person per day (2005 as the base year) in 2008. The most recent standard is 3.2 US dollars (based on 2011).

3.6 China’s Poverty Problem and Poverty Reduction Strategy …

109

Table 3.15 Absolute poverty rates between China and other BRICS countries (by 1.9 US dollar standard) Country Year % 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2013 2015 World

42.2 39.3 35.2 35.3 34

29.3 28.6 25.8 20.8 18

China

88.3 75.8 60.8 66.6 57

42

India

–

–

21.2 –

Brazil

24.4 29.9 18.1 20.6 19.9 14.2 13.4 12.3 9.6

6.3

5.5

4.9

4.3

Russia

–

–

–

–

2.4

0

South Africa

–

–

–

–

29.3 33.8 –

–

33.8 –

45.9 – 3.6

13.7 10.7 –

40.5 32

18.8 14.7 7.9

–

–

3.4

–

1.9

– –

0.7

0.5

0.1

0

–

–

–

16.9 16.6 –

–

Source World Bank Poverty & Equity Data Portal. Absolute poverty is 1.9 US dollars per person a day (2011 as the base year)

Judging by the extreme poverty standard of “1.9 US dollars per person a day” (conversion by purchasing power parity),30 the poverty rate of China31 drops from 88.3% in 1981 to 1.9% in 2013, and meanwhile the world poverty rate decreases from 42.2% to 10.7% (Table 3.15). China is reducing poverty at a faster speed than the world average. Among the BRICS countries, in 1993, the poverty rate was 57% in China, 45.9% in India, 29.3% in South Africa, 19.9% in Brazil and 2.4% in Russia. China’s poverty rate was much higher than the other four BRICS countries. After the rapid development starting in the late 20th century, China’s poverty rate has been reduced to 7.9% in 2011, the third highest among the BRICS countries, lower than India (21.2%) and South Africa (16.6%), and slightly higher than Brazil (5.5%) and Russia (0%). In 2013, China’s poverty rate (1.9%) was lower than Brazil (4.9%). That means people’s living conditions have improved substantially in China since reform and opening-up, and rapid economic development and government commitment have boosted poverty alleviation.

3.6.3 China’s Contribution to the World in Poverty Reduction Whichever poverty standard is adopted, China has done an amazing job in poverty reduction since reform and opening-up. China has eliminated extreme poverty under

30 According

to Xian et al. [15], China’s official “2010 standard”, which is 2,300 yuan per person per year, is well above the World Bank’s standard of 1.9 US dollars per person per day. In 2011, China’s poverty standard for rural areas was 2,536 yuan, 20% higher than the standard of 1 US dollar per day. 31 It is worth noting that the denominator in the World Bank’s calculation of poverty rate is the total Chinese population instead of the rural Chinese population. As a result, it is not directly comparable with the poverty rates mentioned above.

110

3 Total Size and Pattern of China’s Income Distribution …

Table 3.16 China’s population in absolute poverty as a percentage of the world’s total (by 1.9 US dollar standard) Year

World’s poverty population (00 million persons)

China’s poverty population (00 million persons)

China’s poverty population as % of the world total

1981

19.06

8.78

46.1

1984

18.71

7.85

42.0

1987

17.66

6.60

37.3

1990

18.66

7.56

40.5

1993

18.84

6.72

35.7

1996

16.97

5.11

30.1

1999

17.27

5.07

29.4

2002

16.19

4.10

25.3

2005

13.56

2.45

18.1

2008

12.17

1.95

16.0

2010

10.88

1.50

13.8

2011

9.61

1.06

11.1

2013

7.69

0.26

3.4

Source Author’s calculation by multiplying the World Bank’s poverty rate by the total population. The poverty rate is from the World Bank Poverty & Equity Data Portal, and the total population is from the World Bank’s WDI database. The standard of absolute poverty is 1.9 US dollars per person a day (2011 as the base year)

the United Nations Millennium Development Goals32 ahead of schedule. From 1990 to 2015, the poor population as a percentage of the national total is reduced by half (based on the 1.25 US dollars per person a day standard). Using the World Bank’s standard of 1.9 US dollars, the number of poor people in China would drop from about 878 million in 1981 to 20.6 million in 2013, down 852 million (Table 3.16). At the same time, the world’s poor population fell down from 1,906 million in 1981 to 769 million in 2013, down 1,137 million (Table 3.16). In other words, if the poverty standard is 1.9 US dollars per person a day, China’s contribution to the world’s poverty alleviation is about 74.9% from 1981 to 2013.

32 The Millennium Development Goals (MDGs) were adopted by 189 member states of the United Nations in 2000, including development targets in various areas, such as eradicating extreme poverty and hunger, achieving universal primary education, promoting gender equality, and decreasing child mortality. One of the goals is to reduce the population living under 1 US dollar a day by half between 1990 and 2015. The poverty standard was later raised to 1.25 US dollars per day.

References

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References 1. Li, T., & Li, S. (2013). China’s income distribution reform: Problems, challenges, and solutions. Comparative Economic and Social Systems, 5, 32–43. 2. Ravallion, M., & Chen, S. (2007). China’s uneven progress against poverty. Journal of Development Economies, 82(1), 1–42. 3. Cheng, Y. (2007). China’s overall Gini coefficients since its reform and urban-rural division. Social Sciences in China, 4, 45–60. 4. Wan, G. (2013). The Urbanization-inequality nexus: Method and application to China. Economic Research Journal, 5, 73–86. 5. Zhu, L., & Jin, C. (2009). China’s pattern of personal income distribution and response to financial crisis. Management World, 3, 63–71. 6. Li, S., Terry, S., & Björn, G. (2008). A study on the income distribution of Chinese residents. Beijing: Beijing Normal University Press. 7. Luo, C. (2017). Urban-rural income gap and its effects on national income inequality. Studies in Labor Economics, 5(1), 21–47. 8. Zhang, D. (2012). Annual report on the distribution of household income in China. Beijing: China Economic Publishing House. 9. Lyu, G., & Li, Y. (2015). Statistical calculation and structural analysis of the changes in labor remuneration as a share of national income in China. Statistical Research, 32(8), 4653. 10. Chong-en, B., & Qian, Z. (2009). Distribution of factors to national income: Stories behind statistics. Economic Research Journal, 3, 27–41. 11. Zhang, C. (2012). Changes in the share of labor remuneration in China and the estimation and analysis of the overall income level. Economic Perspectives, 9, 10–19. 12. Yu, F. (2012). Distribution of Personal Income in Major Countries. website of NBS: http:// www.stats.gov.cn/tjz/tjsj/tjcb/dysj/201211/t2012110638098.html. 13. Zhang, C., & Cheng, J. (2013). Income distribution and factor capitalization: Where is the crux of income distribution in China? Economic Perspectives, 4, 14–23. 14. Zhang, L. (2017). The evolution of poverty reduction policies in China: 1949–2005. Beijing: Chinese Financial & Economic Publishing House. 15. Xian, Z., Wang, P., & Wu, W. (2016). Rural poverty lines and poverty monitoring in China. Statistical Research, 33(9), 3–12. 16. Ling, W., Liu, X. (2016). The philosophy, practice and worldwide significance of poverty alleviation and development with Chinese characteristics. Socialism Studies, 4, 69–75. 17. Mao, J., Wang, D., & Bai, C. (2016). Poverty reduction policies and local government public spending: An empirical study based on the 8–7 Plan. China Economic Quarterly, 11(3), 1365– 1388. 18. Wang, S. (2008). Overcoming poverty in development—summing up and evaluating China’s experience of large-scale poverty reduction in the past 30 years. Management World, 11, 78–88. 19. Huang, C., & Tan, Z. (2015). The evolution of China’s rural poverty governance system and targeted poverty alleviation. Research on Development, 2, 56–59.

Chapter 4

Causes and Explanations of Changes in China’s Income Distribution Pattern over the Last 40 Years

Since it embarked on reform and opening-up in 1978, China has tested and proved through practice the effectiveness of its national strategy to allow some people and regions to get rich first. Through effective income distribution reform, China has ensured the people’s basic livelihood needs, but also led its people on the path toward prosperity, laying a solid foundation for building a moderately prosperous society in all respects. In 2016, China became the world’s second largest economy. However, while China has made great achievements in economic development, it is also confronted with challenges such as unbalanced income distribution and the widening wealth gap between the rich and the poor. Looking back on our income distribution reform over the last 40 years, we can see that, of many causes of the widening income gap, some have popped up during the transition from the planned economy to market economy, including enhanced market efficiency and increased productivity. The current income gap, which is within a reasonable range, has contributed to China’s high-speed economic growth. As proved by many studies, an income gap within a reasonable range is good for economic growth, and if it is an outcome of economic growth, it can be adjusted through redistribution. Another major cause of the gap is unequal income distribution caused by market failure and excessive government intervention. This chapter analyzes the income gap caused by industrial transformation, market forces and globalization, and explores the unwanted causes of the income gap like imperfect distribution pattern and mechanism. We will especially discuss how the market-government relationship and the structural changes in the process of economic growth affect the income distribution system, and where it will go in the future.

© Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_4

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4.1 Industrial Transformation and Changes in the Income Gap Since the launch of reform and opening-up, China has established a socialist market economy system and witnessed a rapid growth in its economy and changes in its industrial structure. China has gradually transformed from an agricultural country where more than 70% of its population worked in the primary industry which contributed one third of its total national output in 1978, into a “global factory”, a major manufacturing country. In 2016, China accounted for over 1/4 of the global manufacturing output, occupying the first place in the world. In recent years, China’s services have risen to prominence. Services have surpassed agriculture and manufacturing in total output, and played a big role in promoting China’s economic development. China’s industrial transformation and upgrading have raised productivity and income through the flow of labor. At the same time, the income disparity has expanded, partly because the share of capital factors in distribution has risen. Nevertheless, a certain level of income disparity would motivate people to earn more income by legal means, which would fuel the economic growth. As China’s industrialization accelerates and the people who have got rich first offer their help to make others rich, the income disparity will gradually decline, which coincides with China’s development curve in recent years.

4.1.1 China’s Industrialization and the Income Disparity According to the Kuznets hypothesis, at its early stage of development when agriculture is the sole source of income, a nation has a relatively small income gap. As its economy grows and its labor force shifts from agriculture to industry and services, the marginal output of its labor force will increase dramatically, and the income would be much higher in non-agriculture sectors, which may widen the income gap within the country.1 Furthermore, Kuznets holds that income disparity will follow an inverted-U curve as economy grows: when economy reaches a certain level, labor productivity will converge between all sectors, so the overall income gap will gradually shrink.2 At the early stage of China’s reform and opening-up program, China’s income inequality and industrialization roughly followed the Kuznets curve. Rapid industrialization brought higher income and widened the income gap, which is shown by 1 In

addition to the productivity difference, income disparity is also large within non-agriculture sectors, so the transfer of labor force from agriculture to the non-agriculture sectors would gradually enlarge the income disparity throughout China. 2 In Capital in the Twenty-First Century, Thomas Piketty concludes that since the middle of the 20th Century, returns on capital have been higher than economic growth rate in developed countries such as the USA, the UK and France, but their income disparity worsened as economic growth improved, which is contrary to the Kuznets hypothesis. The Kuznets curve may be an optimistic interpretation of the income disparity decline in the 1940s–1950s.

4.1 Industrial Transformation and Changes in the Income Gap

115

Fig. 4.1 Labor force employment in the three sectors of the Chinese economy (1978–2016). Source NBS

Fig. 4.2 Changes in output from the economic three sectors of China (1978–2016). Source NBS

the changes in the number of workers in each industrial sector and their productivity difference. In 1978, labor forces employed in the primary, secondary and tertiary industries of China were 70.5, 17.3 and 12.2% of the total (Fig. 4.1). In other words, nearly 70% of China’s labor forces were working in agriculture, while industry and services had the rest 30% of labor force between them. In terms of output, in 1978, the three sectors accounted for 27.7, 47.7 and 24.6% of China’s GDP (Fig. 4.2). The productivity of agriculture was obviously low. As market forces strengthened after the launch of reform and opening-up in 1978, the surplus labor in agriculture gradually transferred to industry and services where productivity was higher, leading to a decline of the primary industry in both labor force and output.3 In 2016, the primary industry accounted for 8.6%, less than 1/10, of the total GDP, while the number of people working in the primary industry was only 3 GDP

from agriculture continued to grow in the last decade, with an average actual growth rate of 4.4%, but as manufacturing and services grew faster, agriculture’s share in output declined. The

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Table 4.1 Changes in labor productivity in three sectors of the Chinese economy Sector

Labor productivity (yuan per capita per year) Year 1978

1985

1990

2000

2005

2010

2016

Primary industry

360 (360)

816 (508)

1,289 (498)

4,083 (775)

6,521 (1,005)

14,093 (1,490)

29,621 (2,445)

Secondary industry

2,527 (2,527)

3,743 (3,340)

5,589 (3,833)

28,155 (11,594)

49,580 (17,715)

87,734 (25,692)

132,684 (39,453)

Tertiary industry

1,851 (1,851)

3,195 (2,472)

5,102 (2,733)

20,127 (4,379)

33,034 (6,116)

69,131 (9,582)

113,566 (12,025)

Country overall

916 (916)

1,824 (1,419)

2,915 (1,600)

13,911 (3,875)

25,094 (5,965)

54,271 (9,995)

95,819 (15,280)

Source China Statistical Yearbooks. The numbers without parenthesis are GDP at the current price divided by the number of workers, while the bracketed numbers are labor productivity figures at constant prices (1978 as the base year), or GDP at the constant prices divided by the number of workers

27.7%, less than 1/3, of China’s total labor force, with a sharp drop from the peak of 391 million in the 1990s to 215 million in 2016.4 By contrast, both China’s industry and services have grown fast over the last 40 years, as shown in the remarkable increase in their shares of labor force. In 2016, industry and services employed 28.8 and 43.5% of China’s total labor force and contributed 39.95 and 51.6% of the national GDP. Against the background of aging population, China has seen in recent years a downward trend in the number and share of employment in manufacturing, which means that China may have already passed the highest level of the inverted-U curve. In theory, labor remuneration should reflect workers’ marginal output. Without consideration of other factors, labor remuneration should be higher in a sector where productivity is higher. According to statistics since 1978, industry has not only kept the highest productivity among the three sectors of the Chinese economy, but has also increased at the highest speed. The productivity of services is far higher than that of agriculture, though it is not as high as industry. In 1978, China’s per capita labor productivity in agriculture was 360 RMB yuan, and it was 2,527 RMB yuan in industry and 1,851 RMB yuan in services (Table 4.1). The ratio of labor productivity was 1: 7.03: 5.15, reflecting a very low productivity in agriculture. The household labor force employed in agriculture rose from 283 million in 1978 to the peak level of 391 million in 1991, and has been declining since the 1990s. 4 However, compared with developed countries, China’s agriculture still has a huge amount surplus labor to transfer to other sectors. According to the World Bank’s WDI database, agricultural workers in the USA, the UK, Germany and Japan were 1.63, 1.13, 1.39 and 3.58% of their total labor force in 2015. In China, the share was as high as 28.3%. 5 In terms of output, manufacturing accounted for 39.9% of the total in 2016. It was even a bit lower than the 1978 level, due to the unbalanced industrial distribution under planned economy which put too much emphasis on heavy industries. In fact, since reform and opening-up, China’s GDP from manufacturing has been rising fast, up 10.9% annually.

4.1 Industrial Transformation and Changes in the Income Gap

117

responsibility system, along with other reforms in income distribution, stimulated farmers’ motivation to increase their productivity. At the same time, economic growth and technological advancement also drove up productivity in agriculture. By 2016, the labor productivity in agriculture had jumped to 29,621 RMB yuan (at the current market price) per capita per year,6 up 5.17% annually. Industry and services had also experienced a rapid growth. In 2016, industry productivity was 133,000 RMB yuan (at the current market price) per capita per year, and the average productivity of services was 114,000 RMB yuan (at the current market price) per capita per year, up 7.5% and 5.05%, respectively. The transfer of labor force from agriculture to the non-agriculture sectors, especially industry, increased the overall national productivity but also widened the income gap. We must understand that income disparity before reform and openingup was smaller because the labor force was concentrated in the agriculture sector, where their income was low with very small differences. The subsequent expansion of the income gap is an indication that some people had increased their productivity and got rich first. That was good news for China’s economic growth. There are disputes over the second half of the Kuznets inverted-U curve: will the income gap get smaller as GDP per capita increases in China? In earlier studies, Wang and Fan [1], Li and Li [2] did not find any decline in the income gap, but through recent empirical studies, scholars have discovered that the income gap is shrinking. For example, Zhang et al. [3] and Yang [4] found an inverted-U correlation between economic growth and the urban-rural income disparity, which can partly explain China’s narrowing income gap after the global financial crisis.

4.1.2 The Fast Rise of China’s Services Sector and Change of Income Disparity Services have played a crucial part in China’s economic growth in recent years. Services did a better job than agriculture and industry in terms of labor force employment and value-added output. For three consecutive years, services have been the largest contributor to China’s GDP growth (52.9, 58.4 and 58.8% in 2015, 2016 and 2017, see Fig. 4.3).7 In 2016, services accounted for 51.6% of the total GDP and 43.5% of employment. In recent years, while the growth of China’s working age population in China declined, the labor force employed in industry and agriculture has decreased accordingly, but employment in services has shown a net increase,8 indicating a fast transfer of China’s labor force from agriculture and industry to 6 Agricultural

productivity is based on GDP at the current price. At the constant 1978 price, agricultural productivity in 2016 would be 2,445 yuan per person per year. 7 Services have surpassed agriculture in labor force employment since 2011, and surpassed manufacturing in output since 2013. 8 People working in agriculture and manufacturing dropped 12.94 million and 7.49 million from 2014 to 2016.

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4 Causes and Explanations of Changes in China’s …

Fig. 4.3 Contribution of three sectors to China’s economic growth (1978–2017). Source NBS. The contribution shares are simple averages of annual contribution rates to GDP growth over a decade

services. It should be noted that as the labor productivity is lower in services than in industry, the labor force transfer to services may lead to a slowdown of productivity growth in the coming years. There is still controversy over how the rise of services would affect income disparity. On one hand, the services sector is relatively concentrated in cities and has strong spillover effects on the upstream and downstream industries. For example, the expansion of the real estate industry can drive the industry of cement, steel and other materials. Therefore, the growth of services will lead to the further concentration of social resources in urban areas, widening the urban-rural income gap [5]. On the other hand, as the household registration system is relaxed, it is easier for rural labor force to migrate to urban areas. At present, China’s services sector mainly consists of labor-intensive industries, such as catering and transportation, which can absorb a huge number of rural migrant workers. Expanded employment of rural workers in services increases the income of rural households, and thus will help reduce the urban-rural income gap [6].

4.1.3 Unbalanced Geographic Distribution of Industries and the Regional Income Disparity The unbalanced distribution of industries between urban areas and rural areas can widen income gaps. Since the launch of reform and opening-up, most manufacturing industries have been concentrated in the Eastern coastal areas of China, due to their

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119

Table 4.2 Industrial distribution in Eastern, Middle and Western China Region East

Middle

West

Country overall

Sector

Output as % of the total 1978

1987

1997

2007

2016

Primary industry

22.3

20.7

12.6

6.6

5.2

Secondary industry

57.7

51.1

49.0

50.4

40.6

Tertiary industry

20.0

28.3

38.4

43.1

54.2

Primary industry

35.0

33.4

25.7

15.9

12.5

Secondary industry

45.8

39.8

42.5

46.7

41.2

Tertiary industry

19.2

26.8

31.8

37.4

46.3

Primary industry

35.6

34.6

26.1

14.7

11.4

Secondary industry

44.2

36.0

39.3

46.2

42.3

Tertiary industry

20.1

29.4

34.6

39.1

46.2

Primary industry

27.7

26.3

17.9

10.3

8.6

Secondary industry

47.7

43.3

47.1

46.9

39.8

Tertiary industry

24.6

30.4

35.0

42.9

51.6

Source Based on CSMAR Database. Output is calculated at the current market prices, and the “Eastern, Middle and Western regions” are defined in the previous chapter. The share of agriculture in the Eastern region is the simple average of its shares in all Eastern provinces

advanced industrial background and logistical advantage. Therefore, cities in these areas have gained much faster development. As Table 4.2 shows, from 1978 to 2016, agriculture took the smallest share in the Eastern region. Considering the large productivity differences between agriculture and non-agriculture sectors, this historical fact may account for the unbalanced income distribution between regions. Yuan and Fan [7] examined the impact of industrialization on income disparity. They found that as manufacturing which had the highest productivity was concentrated in the Eastern coastal region, employment expanded rapidly in non-agriculture sectors in these areas, which had created higher per capita income, and eventually led to larger income gaps between the East and the Middle and Western regions, and even within the Eastern coastal region itself. Chen and Zhang [8] found there was an inverted-U correlation between the growth of manufacturing and the income disparity. After the highest level of the inverted-U curve, the bigger share the manufacturing sector has, the narrower the income gap would be. It must be noted that after 2009 the share of the secondary industry in the total output has climbed higher in the Middle and Western regions than in the Eastern region, due to the West Development Program and the rise of production costs in the Eastern region. This tendency coincided with the narrowing gap between the Middle and Western regions and the Eastern region in terms of output per capita in recent years.

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4.2 Opening-up and Income Disparity Since the Third Plenary Session of the 11th CPC Central Committee in 1978 decided to implement the reform and opening-up program, China has become more and more open, giving the world access to more and more areas and markets. From 1979 to 1980, China established Special Economic Zones in Shantou, Shenzhen, and Zhuhai. In 1984, China opened up 14 coastal cities to overseas investment. Including Shanghai, Guangzhou and Tianjin, these cities had higher industrial output, so this bold move led to the rapid economic growth in the Eastern coastal areas. China’s accession to the World Trade Organization (WTO) in 2001 was a landmark event in China’s internationalization endeavor. Since then, China has upgraded from limited openness to all-round openness, from policy-backed openness to institutional openness. In recent years, China has taken more actions in internationalization, including setting up China (Shanghai) Pilot Free Trade Zone (SHFTZ) in 2013, and establishing the Asian Infrastructure Investment Bank (AIIB) in 2015. The Belt and Road Initiative is a new pillar of China’s opening-up strategy, showing China’s commitment to a higher level of globalization and win-win development with other countries. China will participate more actively in international cooperation, assume more responsibility in global affairs, actively advance and improve our global governance system, and play a constructive role in building a community of a shared future for mankind.

4.2.1 Benefits of Opening-up, Economic Growth and Income Growth Benefiting from the opening-up program, China has experienced rapid economic growth, and has become one of the key engines of global economic growth. From 2012 to 2016, China’s share in the global economic growth has remained above 30%. By now, China has made remarkable achievements in building an open economy. In 2016, China became the world’s largest exporter of goods and the second largest importer of goods,9 accounting for 13.2% and 9.8% of the world’s total imports and exports, respectively (Fig. 4.4). In terms of investment, China has evolved from a country relying on in-bound overseas investment into a country that emphasizes both in-bound and out-bound overseas investment. In 2016, China became the world’s second largest source of foreign direct investment (FDI), with a total outflow of 183.1 billion US dollars,10 accounting for 12.6% of the total FDI flow in the world. China’s opening-up strategy influenced income distribution in many ways. Many factors such as import and export (volume and trading mode), FDI, government incentives and exchange rates can influence a country’s income distribution, creating 9 In 2016, China ranked the 5th and the 2nd in export and import in services in the world. The United

States ranked the 1st in both export and import. data come from the UNCTAD website. In 2016, China’s FDI inflow was 133.7 billion RMB yuan. 10 The

4.2 Opening-up and Income Disparity

121

Fig. 4.4 Changes in China’s share in global imports and exports of goods. Source United Nations Conference on Trade and Development (UNCTAD), cited from the Analysis Report on 2018 World Economic Situation published by the Shanghai Academy of Social Sciences

income level differences between regions, industries and jobs. According to the Heckscher-Ohlin Theorem and the Stolper-Samuelson Theorem, when a country or a region opens to the world, it would export large quantities of goods that produce with its abundant factors (like labor-intensive or capital-intensive goods) and import goods that depend on its scarce factors. A change in the supply-demand balance will drive up the prices of the abundant-factor-intensive goods, and drive down the prices of scarce-factor-intensive goods. Completely free trade and free competition would eventually realize factor price equalization. In a developing country, labor is more abundant than capital, and unskilled workers are more abundant than skilled workers. According to this theory, in a country that opens up to the world, labor remuneration will rise, as well as the income of unskilled workers, which will finally reduce the income gap.

4.2.2 Effects of Opening-up, FDI and Trade on Income Disparity Based on their research on China’s development, however, many scholars believe that, while China’s opening-up program has created rapid economic growth, it has also widened China’s income gap11 [11, 12]. One explanation is that due to the lack 11 Some

studies believe that China’s opening endeavor has narrowed its income gap. For example, Wen and Sun [9] examined the impact of international trade on China’s Gini coefficient from 1987

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4 Causes and Explanations of Changes in China’s …

of resource endowments and policy constraints, some regions were “marginalized” in the process of opening-up, benefiting less from foreign trade and FDI, so income growth was much slower there than that in provinces that had benefited more from opening-up. In China, the Eastern coastal region has grown faster than the Middle and Western regions, which widened the income gap between these regions [13]. In terms of international trade in goods as a percentage of GDP (Table 4.3), in 2016, the top five provinces were Shanghai (102.2%), Guangdong (78.5%), Beijing (73.1%), Zhejiang (47.3%), and Jiangsu (43.7%). All located in the East, they have much better geographical locations and industrial infrastructure, so they could benefit much more from China’s opening-up initiative. The Middle and Western provinces, on the other hand, depended less on international trade, for the share was below 10% in 12 Middle and Western provinces. Their inability to benefit from openingup hindered the local economic development and the growth of income. However, good news is that international trade in the Middle and Western regions is on the rise. In terms of trade volume as a percentage of China’s total (Table 4.3), the fastest growing provinces are Henan (1.3%), Chongqing (1.3%) and Guangxi (0.7%), while Beijing (2.4%), Jiangsu (2.9%) and Shanghai (0.6%) are among the fastest declining provinces. The Eastern coastal region generally declined in international trade during 2010–2016, indicating that the Middle and Western regions have got closer to the East in the level of opening-up in recent years, and the income disparity between regions is expected to improve. Another explanation is that opening-up may lead to skill-biased technological change. For a developing country, foreign technologies introduced through foreign capital attraction and foreign trade are far more advanced than its own technologies. Such technologies would increase the marginal output of skilled workers and returns on education. As the domestic demand for skilled workers rises sharply, skill premium would be reflected in wage differences. In other words, technological improvement would not narrow the income gap between skilled and non-skilled workers, but it would even worsen the difference. This is true in China, according to some scholars [14, 15, 16].12 The Firm Heterogeneity theory [19] partly explains the widening wage gap between skilled and non-skilled workers: economic openness helps efficient companies gain international market access for their exports, whereas less efficient companies still sell most of their goods in the domestic market. The market demand for skilled workers thus increases.

to 2005, and found that increase in trade volume can reduce China’s income gap. Wei and Wu [10] found that openness (trade as a percentage of GDP) had a negative impact on the urban-rural income disparity, based on the data of Chinese prefecture-level cities during 1988–1993. 12 Some studies have found different results. For example, Chen et al. [17] examined the 1998–2006 data from China’s provincial manufacturing industries, and found that FDI was good for reducing the wage gap between skilled and non-skilled workers, while trade openness correlated with the wage gap on an inverted-U curve. Zhang [18], from the 2000–2005 data, found that although skilled workers had higher resilience to export, export growth would significantly increase employment in both manufacturing and services, and the income of people working in both sectors. Therefore, the income inequality in a city would be reduced.

4.2 Opening-up and Income Disparity

123

Table 4.3 Total volumes of imports and exports in goods and provincial shares in the national total Province

Imports and exports Imports and exports as a percentage Imports and exports as a percentage of of the country’s total GDP 1995

2000

2005

2010

2016

1995

2000

2005

2010

2016

Beijing

13.2

10.5

8.8

10.1

7.7

205.1

129.9

147.5

144.7

73.1

Tianjin

2.9

3.6

3.7

2.8

2.8

72.1

83.4

111.7

60.3

38.1

Hebei

1.4

1.1

1.1

1.4

1.3

11.5

8.6

13.1

14.0

9.7

Shanxi

0.5

0.4

0.4

0.4

0.5

10.9

7.9

10.7

9.3

8.5

Inner Mongolia

0.4

0.6

0.3

0.3

0.3

9.7

14.1

10.2

5.1

4.3

Liaoning

4.7

4.0

2.9

2.7

2.3

39.4

33.7

41.7

29.6

25.8

Jilin

0.9

0.5

0.5

0.6

0.5

19.1

10.9

14.8

13.2

8.3

Heilongjiang

0.8

0.6

0.7

0.9

0.4

10.0

7.8

14.2

16.7

7.1

Shanghai

8.7

11.5

13.1

12.4

11.8

81.4

94.9

165.1

145.5

102.2

Jiangsu

5.8

9.6

16.0

15.7

13.8

26.4

44.2

100.4

76.1

43.7

Zhejiang

4.1

5.9

7.6

8.5

9.1

27.0

37.5

65.6

61.9

47.3

Anhui

0.7

0.7

0.6

0.8

1.2

9.3

9.5

14.0

13.3

12.1

Fujian

5.1

4.5

3.8

3.7

4.3

57.6

46.7

68.0

50.0

36.2

Jiangxi

0.5

0.3

0.3

0.7

1.1

9.4

6.7

8.2

15.5

14.4

Shandong

5.0

5.3

5.4

6.4

6.4

23.5

24.8

34.2

32.7

22.9

Henan

0.8

0.5

0.5

0.6

1.9

6.2

3.7

6.0

5.2

11.7

Hubei

1.2

0.7

0.6

0.9

1.1

13.5

7.5

11.3

11.0

8.0

Hunan

0.7

0.5

0.4

0.5

0.7

8.0

5.9

7.5

6.2

5.5

Guangdong

37.0

35.9

30.1

26.4

25.9

146.3

131.1

155.4

115.5

78.5

Guangxi

1.1

0.4

0.4

0.6

1.3

17.2

8.1

10.7

12.5

17.3

Hainan

0.8

0.3

0.2

0.3

0.3

54.2

20.2

22.7

28.4

18.6

Chongqing

–

0.4

0.3

0.4

1.7

–

8.3

10.1

10.6

23.5

Sichuan

1.2

0.5

0.6

1.1

1.3

11.9

5.4

8.8

12.9

9.9

Guizhou

0.2

0.1

0.1

0.1

0.2

8.7

5.3

5.7

4.6

3.2

Yunnan

0.8

0.4

0.3

0.5

0.5

14.7

7.5

11.2

12.6

8.9

Xizang

0.1

0.0

0.0

0.0

0.0

32.3

9.2

6.8

11.2

4.5

Shanxi

0.6

0.5

0.3

0.4

0.8

13.6

9.8

9.5

8.1

10.3 6.3

Gansu

0.2

0.1

0.2

0.2

0.2

9.0

4.5

11.1

12.2

Qinghai

0.1

0.0

0.0

0.0

0.0

7.7

5.0

6.2

4.0

3.9

Ningxia

0.1

0.1

0.1

0.1

0.1

10.5

12.4

12.9

7.9

6.8

(continued)

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4 Causes and Explanations of Changes in China’s …

Table 4.3 (continued) Province

Imports and exports Imports and exports as a percentage Imports and exports as a percentage of of the country’s total GDP 1995

Xinjiang

0.4

2000

2005

2010

2016

1995

2000

2005

2010

2016

0.5

0.6

0.6

0.5

12.0

13.7

25.0

21.3

12.1

Source China Statistical Yearbooks. In this table, “Imports and Exports as a Percentage of National Total” is the local international trade volume (in US dollars) divided by the total national volume; “Imports and Exports as a Percentage of GDP” is calculated by converting the regional trade volume (in US dollars) into RMB yuan at the annual exchange rates and then dividing it by the regional GDP. All values are calculated at the current price

Some other studies believe that international trade has an inverted-U influence on income disparity. In the short term, international trade will widen China’s income gap, but in the long term it will reduce income disparity [20, 21]. Still some other studies have found that exports and imports have different impacts on regional income inequality. For example, Wang [22] believes that imports will worsen regional income disparity, while exports can ease the disparity.

4.3 Changes in the Urban-Rural Duality and Income Distribution China has a typical urban-rural duality in its economy. The division is clear between its urban and rural areas, both in geography and development policy. Since China implemented the household registration system in 1958, large differences have been observed in social security and public services accessible to urban and rural residents, such as healthcare, old-age pension plan and education. For a long time after the launch of reform and opening-up, the policy orientation favored urban areas and helped them get rich first. As a matter of fact, this policy had played a positive role in China’s rapid economic growth. However, under this policy orientation, the income of rural residents had grown far more slowly than urban personal income. Since the reform and opening-up program started, income disparity has long existed between urban and rural residents, and it is likely to get worse. At present, China is shifting development strategy to synchronize urban and rural development. This change can not only help explore new potentials for growth, provide a new impetus for the economy, but also help the rural residents benefit from China’s development. It will reduce the income disparity between urban and rural residents.

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125

4.3.1 Causes and Trends of the Urban-Rural Duality China’s urban-rural duality had taken shape under planned economy when China must establish a preliminary industrial system within a short time in order to adapt to the special domestic and international circumstances after the founding of the People’s Republic of China. Borrowing the Soviet Union model, China gave priority to heavy industries which were concentrated in urban areas. As a result, favorable policies were launched for cities. Foods were purchased by the government on a unified basis at low prices, forming a “price scissor” between industrial and agricultural goods in order to promote the development of manufacturing industries, and accumulate technological and capital resources. Rural areas were mandated to support industrial production, providing capital resources and products. Before reform and opening-up, the economic duality had created a lot of social differences in China. For example, the Regulations on Household Registration and the Regulations on Agriculture Tax released in 1958 restricted the mobility of the rural population through household registration, employment and social security policies,13 separating urban residents from rural residents and limiting the circulation of land and agricultural products (Table 4.4). Since the launch of reform and opening-up, market forces have played a role in the allocation of resources, and multiple ownerships have been allowed. China’s urban-rural duality began to loosen in this context (Table 4.4). Implementation of the household responsibility system and reform on the pricing mechanism of agricultural products in the early 1980s not only raised the level of marketization in rural areas, but also promoted the urban-rural exchange of factor through the market. The “price scissor” was replaced by equal exchange between agricultural products and industrial products. But in the 1990s, the Chinese government shifted its focus back to urban areas, causing the divide between rural and urban areas to expand (Qiao and Gong 2014). For example, wage reform, social security, and employment contract were first implemented in cities, so they had received more resources and subsidies. The urbanrural gap in these aspects gradually widened, and the rural household registration system and the restriction on land use right transaction made it more difficult for agricultural factors to circulate freely. Since the dawn of the 21st century, China has implemented even bolder reforms, renewed its development concepts, and tried to address the urban-dual duality (Table 4.4). The government has adopted measures such as reform of the household registration and revocation of employment restrictions on migrant workers. It has also worked to address the urban-rural inequality in terms of access to public services. Agricultural tax was repealed, government investment in rural areas increased, and 13 In 2014, according to the Research Department of Rural Economy of the DRC of the State Council, from 1952 to 1978, the output of agriculture as a percentage of total GDP dropped from 50.5 to 28.1%, while employment in agriculture as a percentage of total employment only declined from 83.5 to 70.5%.

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4 Causes and Explanations of Changes in China’s …

Table 4.4 Evolution of China’s urban-rural duality Evolution

Phase Phase 1

Phase 2

Phase 3

Period

1949–1978

1978–2002

2002 onward

Status

Urban-rural duality was established and strengthened in more and more areas

Urban-rural duality began to ease in some areas, but it intensified in other areas

Urban-rural duality gradually came to an end

Major policies and regulations

Government procurement on a unified basis, household registration rules, “60 Provisions” of the People’s Commune

People’s Commune revoked, agricultural products were allowed to circulate in the market, household registration reform proceeded, and rural labor migrating to cities; land use right and market further differentiated between cities and rural areas

Household registration reform intensified, migrant workers registration promoted, public services extended to rural areas, financial reforms implemented in rural areas, land requisition system piloted

Source Rural Affairs Research Group of the State Council Development Research Center 2014

infrastructure in rural areas was developed. In addition, the social security system in rural areas has been enhanced with the launch of the New Rural Cooperative Medical Care system with an aim to bridge the gap between urban and rural development. It should be noted that urban-rural imbalances still exist; the duality has not been completely resolved.

4.3.2 The Effect Mechanism of Urban-Rural Duality on Income Inequality 1. Influence of household registration and urban-oriented development policy on the urban-rural income disparity Shortly after the founding of the People’s Republic of China, China established a dual economic system which included unified purchase and supply of goods, household registration system, and a strict employment system. The economic system was clearly biased toward industrial development. Due to the strict household registration system, rural labor could not migrate to cities. The household registration system was reasonable to some extent during that special period, and it did create favorable conditions for China’s industrialization. However, when China’s economy started to grow fast, undesirable imbalances began to exist between urban areas and rural areas, and the negative impact of the household registration system became apparent.

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Table 4.5 Insurance coverage of rural migrant workers Insurance %

Year 2008

Old-age insurance

2009

2010

2011

2012

2013

2014

9.8

7.6

9.5

13.9

14.3

15.7

16.4

Work-related injury insurance

24.1

21.8

24.1

23.6

24

28.5

29.7

Health insurance

13.1

12.2

14.3

16.7

16.9

17.6

18.2

Unemployment insurance

3.7

3.9

4.9

8

8.4

9.1

9.8

Maternity insurance

2

2.4

2.9

5.6

6.1

6.6

7.1

Source National Monitoring Survey of Migrant Workers, 2013 and 2014

Although rural migrant workers can reside, work, study and pay social security contributions in cities, they cannot be registered as urban residents to enjoy the same access to public services and social security. In this way, the urban-rural income gap is still there. Residence-based discrimination has led to rising wage inequality between migrant workers and their urban colleagues, as well as the gap between their income and their marginal output. The inequality also includes unequal employment opportunities and social security benefits. In 2014, the proportions of rural migrant workers who were covered by an old-age pension plan, insurance against work-related injuries, health insurance, unemployment insurance and maternity insurance were 16.4, 29.7, 18.2, 9.8 and 7.1%, while 64.9, 52.5, 53.5, 43.4 and 43.3% of urban workers were covered by the basic urban employee pension plan, insurance against work-related injuries, basic health insurance for urban residents, unemployment insurance and maternity insurance (Table 4.5).14 2. Rural-urban migration and income disparity Rural-urban migration might enlarge the overall income gap at the early stages of economic development, but it can increase the income of rural labor. The income of rural migrant workers would increase in the first place. As migrant workers normally work in manufacturing and services where the marginal output is higher, their wages are usually higher. Part of their income would be transferred back to rural areas and invested in agricultural production, which would eventually push up agricultural productivity and the income of local farmers. Besides, rural-urban migration can 14 The proportions of urban population covered by social security are the author’s own calculation based on the Statistical Communique on Human Resources and Social Security Development issued by the Ministry of Human Resources and Social Security. According to the Communique, there were 393.1 million urban workers in China in 2014. At the end of 2014, 255.31 million of them were covered by basic urban employee pension plan (excluding retirees), 210.41 million were covered by basic health insurance, 170.43 million (including 40.71 million migrant workers) were covered by unemployment insurance, 206.39 million were covered by insurance against work-related injuries (including 73.62 million rural migrant workers), and 17.039 million were covered by maternity insurance. The proportions are very close to the 2012 urban residents’ insurance coverage rates published by the Research Department of Rural Economy of the DRC of the State Council (2014).

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effectively increase labor supply in cities and meet some industries’ demand for labor. Where capital investment is unchanged, increasing labor supply will help reduce the marginal output of urban labor and prevent urban wage from growing too fast, which is good for reducing the urban-rural income gap [23, 24].15 At present, the urban-rural duality is limiting the free allocation of labor between urban and rural areas, resulting in non-market-based differences in income and productivity between the urban and rural labor force. 3. Influence of changes in labor supply-demand on income disparity As China’s economy keeps growing, the supply-demand balance in China’s labor market is also changing, from unlimited supply of rural surplus labor at the beginning of reform and opening-up to limited supply. Since 2004, insufficient labor supply has become more acute, with “labor shortage” becoming a hot topic16 and attracting the widespread attention of scholars in this field. Meanwhile, due to the shortage of rural labor, the wage income of migrant workers has also increased rapidly in recent years (Fig. 4.5). According to Lu’s estimates [26] and the National Monitoring Survey of Migrant Workers by NBS, during 1980–1990, 1990–2000, 2000–2010, and 2010– 2017, the monthly wage of China’s migrant workers grew by 1.1%, 3.4%, 10.6%, and 8.3% in real terms, respectively.17 Since the dawn of the 21st century, the growth of migrant workers’ wage has accelerated significantly. Over the same periods, the average growth of China’s GDP was 9.2, 9.9, 10.4 and 8.0%. That means the wages of migrant workers have caught up quickly since 2000, and exceeded the real GDP growth during 2010–2017. According to NBS’s sampling data, the proportion of migrant workers who signed an employment contract with their employers during 2009–2016 was between 38 and 43%,18 so wage inertia alone can hardly account for the rapid rise in rural migrant workers’ wages in recent years. It is more likely to be a direct reflection of supply-demand balance in China’s labor market.

15 Considering the large urban-rural gap in education quality, the increased rural migrant labor may only go to industries with lower skill requirements, while the industries where income grows faster such as finance and information technologies mainly employ urban workers. 16 In the news cited by Bao [25], the shortage of migrant labor is described as a major indication of the structural imbalance in China’s employment market in 2004. Labor shortage used to occur in the Pearl River Delta, Southeast of Fujian province and Southeast of Zhejiang province where manufacturing industries are clustered. 17 According to Lu’s [26] estimation and the National Monitoring Survey of Migrant Workers by NBS, the average monthly income of Chinese migrant workers was 85 RMB yuan, 190 RMB yuan, 517.8 RMB yuan, 1,690 RMB yuan, and 3,485 RMB yuan in 1980, 1990, 2000, 2010 and 2017, respectively. The real growth rates exclude the influence of price changes (measured by CPI). 18 According to the National Monitoring Survey of Migrant Workers by NBS, the rural migrant workers who had a labor contract with their employers were 42.8%, 43.8%, 41.3%, 39.7% and 38.2% of the total in 2009, 2011, 2013, 2015 and 2016, respectively. If rural labor workers working locally were considered, the percentages would be even lower.

4.4 Monopoly and Income Distribution

129

Fig. 4.5 Changes in Chinese rural migrant workers’ monthly wage (1978–2017). Source The 2001– 2010 wage statistics are from Table 5 “Estimation of Chinese Rural Migrant Workers’ Wage 1979– 2010” by Lu [26]; the 2011–2017 statistics are from the National Monitoring Survey of Migrant Workers by NBS (According to NBS, rural migrant workers refer to those who are registered in rural areas, but are engaged in non-agricultural work in their local rural area or have been engaged in non-agricultural work in urban areas for more than 6 months.)

4.4 Monopoly and Income Distribution Monopoly companies operate in a market with imperfect competition where they can manipulate the price of their products through expanding or reducing their own production or using their administrative privileges, so they can make long-term excess profits. Monopoly has two types. The first type is natural monopoly that exists through natural factors and scale returns. It is closely connected to production costs. Once early entrants have grabbed big shares of the market, start-up costs would be high for late entrants, especially in public utilities like water, electricity, coal and railway transportation. The other type is administrative monopoly, where the barrier to entry is created by administrative regulations or local government protection. Some companies are prevented from entering the market which may still be competitive, such as tobacco manufacturing, finance, and telecommunications. In China, SOEs are mandated to play many social roles, including addressing employment challenges, maintaining national security, providing public goods, and supporting national development initiatives. As they are closely connected to the government, it is easier for them to gain administrative privileges and monopoly power. High income offered by monopoly companies and industries has led to income disparity. Ren and Zhou [27] found that monopoly accounted for 35–40% of China’s income during 1999–2006, and the share peaked at 44% in 2004, exceeding human capital, employment, and FDI. Currently, China is actively pursuing supply-side reforms (especially targeting SOEs), aiming to mobilize market forces, restore the law of survival of the fittest, and create a fairer environment for both state-owned and non-state-owned enterprises.

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4 Causes and Explanations of Changes in China’s …

They promise to improve the efficiency of factor allocation in the market, reduce nonmarket factors in income distribution, and reduce the income gap between industries and individuals.

4.4.1 Increase in Monopoly Profits and Capital Income as a Share Since the launch of reform and opening-up, labor remuneration and household income have been declining as a share of total national income, which is mainly due to the increase in the profitability of monopoly sectors. In possession of resources, monopoly industries and enterprises can easily reduce their production costs and obtain excessive profits. However, their high profitability does not mean they are efficient or competitive. Instead, it is a product of administrative monopoly. Chu and Jin [28] found that 40 state-owned monopoly enterprises took 95% of the total profits of 169 SOEs under the central government in China. Twelve monopoly enterprises in petroleum, petrochemicals, telecommunications, coal, transportation and electricity reported a combined profit of 10 RMB billion yuan, accounting for 78.8% of the total profit of all SOEs under the Chinese central government. Monopoly profit and its irrational distribution have distorted the domestic income distribution pattern. Capital (corporate) income as a share of national income has continued to rise, while personal income has declined. According to the research of Bai et al. [29] on labor remuneration in China’s manufacturing sector, the more monopolized an industry is, the higher the share of income goes to enterprises. From 1995 to 2004, labor remuneration in China’s manufacturing sector fell from 49 to 42% of total income, and monopoly was responsible for 30% of the decline. Overall, increase in monopoly distorts the market, reduces the share of labor remuneration, and hinders economic growth.

4.4.2 Income Gap Due to High Wage in Monopoly Industries Excessive income of employees in monopoly industries and monopoly enterprises widens the overall income gap, worsens unfair income distribution and weakens worker motivation. A very typical case is the compensation of executives of monopoly companies. Without proper regulation or supervision, executives of monopoly SOEs would design and implement a compensation system that benefits themselves. Based on a survey of 197 large SOEs in 2011 focusing on executive compensations, Li and Li [30] found that 35% of the responding companies paid an average of 500,000–1,000,000 million RMB yuan to three top executives, 8.12% paid 1,000,000–1,500,000 million RMB yuan, 5.58% paid 1,500,000–2,000,000 million RMB yuan, and 13.7% paid

4.4 Monopoly and Income Distribution

131

more than 2 million RMB yuan [30]. Their compensations are “too high” even compared with other high-paid employees in monopoly enterprises. Yue and Cai [31] found the irrational part of the high compensations offered by monopoly industries gradually expanded with the rise of the overall income level. In other words, the compensation level of the executives of monopoly enterprises is even more unreasonable as the overall wage level rises. The excessive compensations of executives raise the average income level of monopoly industries and worsen the income disparity between monopoly and competitive industries, while they also worsen the income disparity within monopoly enterprises and distort incentives. Since 2015, the Chinese central government has put a “compensation limit” on the key executives of SOEs under the central government. The policy aims to cut the executive compensations in monopoly industries and eventually eliminate irrational excessive incomes. In addition to extremely high-paid executives, monopoly industries offer higher pays to their people at all income levels than other industries. Even if the differences in education, age and gender are considered, the income gap is still apparent. Apart from compensations, monopoly industries often offer hidden income and income in kind. Fu [32] compared three monopoly industries with five competitive industries using micro survey data (Table 4.6), and found that top 10% to top 90% employees of monopoly industries in the income percentile earn 30–40% more than people working in competitive industries, and this difference is going to be more apparent if income in kind is measured. Excessively high income in monopoly industries will Table 4.6 Income differences between monopoly and competitive industries Percentile

Annual pay in cash (yuan) Monopoly industries

Competitive industries

Annual income after payment in kind (yuan) Difference

Monopoly industries

Competitive industries

Difference

10%

4,800

3,600

1,200

4,870

3,600

1,270

20%

6,720

4,890

1,830

6,780

4,933

1,847

30%

8,500

6,000

2,500

8,570

6,056

2,514

40%

10,000

7,100

2,900

10,080

7,160

2,920

50%

11,553

8,187

3,366

11,621

8,259

3,362

60%

12,830

9,467

3,363

13,044

9,600

3,444

70%

14,771

11,200

3,571

14,944

11,298

3,646

80%

17,267

13,263

4,004

17,549

13,476

4,073

90%

22,339

17,457

4,882

22,971

17,618

5,353

Average

12,851

9,765

3,086

13,092

9,875

3,217

Source Fu [32]. Data are based on 2002 Urban Household Survey of the Institute of Economics of the Chinese Academy of Social Sciences. The survey selected three monopoly industries (finance and insurance; electric power, gas and water; transportation, warehousing, post and telecommunications), five competitive industries (agriculture, forestry, animal husbandry and fishery; manufacturing; food and catering; construction; mining) which were used as the reference groups

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4 Causes and Explanations of Changes in China’s …

cause social problems such as corruption and seeking favor through networking. Chen et al. [33] found that people can enter high-paying industries through social networking, political identity and urban household registration, but they also form entry barriers in the labor market.

4.5 Imperfect Redistribution and Income Distribution System Primary distribution of national income divides the output among three sectors (enterprises, government and households) according to the input of factors. In addition to primary distribution, the government also adjusts the income share of households through redistribution measures such as taxation and social security to address imbalances in primary distribution and maintain social stability. The data of China’s national income distribution quoted in the previous chapter suggest that the share of household income declined during 1992–2008 after primary distribution and redistribution. From 2009, it recovered slightly. According to the flow-of-funds accounts in 2015, households’ income (personal income) was 60.9% of national income in primary distribution and 61.6% in redistribution, far lower than government revenues and corporate income.

4.5.1 Imperfect Taxation and Income Disparity Taxation is an important tool for the government to generate fiscal revenues and regulate redistribution. According to the practice of developed countries, by taxing high-income groups at higher rates and taxing low-income groups at lower rates, the government can play an active role in reducing the income gap. For example, the tax regime of the Obama administration reduced the Gini coefficient by 0.009. In 2010, the Portuguese Gini coefficient dropped by 9%, in which 4 percentage points were accounted for by income tax [34]. However, China’s taxation regime has failed to play a role in regulating income disparity. It is mainly due to some irrationalities in China’s current tax regime. (1) At present, China mainly levies regressive indirect taxes (such as business tax and value-added tax), while progressive direct taxes (such as personal income tax) account for a small proportion. This tax regime is not good for reducing the income gap. According to Liu et al. [35], the share of direct taxes was about 74.5% in high-income countries in 2011, but direct taxes accounted for only 43.4% of China’s tax revenues in 2010 (Fig. 4.6). In China, personal income tax accounted for only 6.61% of total tax revenues in 2010, far lower than 25.38% in high-income countries, and lower than 10.94% in higher-middle and 11.32% in lower-middle-income countries [36]. In 2016,

4.5 Imperfect Redistribution and Income Distribution System

133

Fig. 4.6 Shares of direct and indirect taxes in different countries in 2011. Source Liu et al. [35], excluding social security tax. Countries are grouped into high-income, middle-income, and lowincome countries by the World Bank’s classification standard. Low income is 1,005 US dollars or less, lower-middle income is 1,006–3,975 US dollars, higher-middle income is 3,976–12,275 US dollars, and high income is 12,276 US dollars or more

personal income tax accounted for 7.74% of China’s total tax revenues, equivalent to 1.36% of GDP. It is rising in recent years, but still far lower than the level in developed economies (Fig. 4.7). (2) China’s personal income tax is not progressive, as it does not put high-income individuals under a heavier tax burden [37]. According to 2009 international data, top 50% individuals in the income percentile in the United States accounted for 86.5% of the country’s total income, and they paid 97.75% of the total income

Fig. 4.7 Changes in personal income tax in China (1999–2016). Source 1999–2015 data are from Li and Li [40]; 2016 data are author’s own calculation

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4 Causes and Explanations of Changes in China’s …

Table 4.7 Gini coefficients before and after personal income tax (1994–2015) Gini coefficient

Year 1994

1996

1998

2000

2002

2004

2006

Gini coefficient before income 0.179 8 0.173 0 0.192 1 0.209 5 0.258 3 0.283 4 0.287 5 tax Gini coefficient after income tax

0.166 8 0.159 7 0.192 6 0.208 1 0.258 1 0.279 5 0.283 6

Gini coefficient before income 0.294 5 0.280 5 0.280 6 0.268 3 0.269 8 0.260 9 0.254 3 tax Gini coefficient after income tax

0.289 9 0.280 9 0.280 5 0.267 7 0.266 8 0.274 4 0.266 0

Source Li and Li [40]

tax. In China, however, top 50% individuals in the income percentile accounted for 76.2% of the total income, but they paid only 62% of the total income tax. That means the tax burden was mainly borne by people earning a lower income. Some Chinese scholars studied the influence of personal income tax on income distribution, and the results show little difference between China’s Gini coefficients before and after tax, and a negative influence was found during 1994–2015 (Gini coefficient getting bigger after tax, Table 4.7). Studies by Hu [38] and Li [39] also found China’s personal income tax could even widen the urban-rural income gap. (3) At present, China does not tax property holder through inheritance tax and real estate tax which can encourage charitable donation, boost consumption, cut the intergenerational transmission of wealth, reduce wealth differences, and enhance social-class mobility. (4) Personal income tax in China classifies sources of income, with different rates imposed on different incomes. The income sources of high-income earners are more diversified. In addition to wage (or labor remuneration), high-income earners have other various incomes, while most low-income earners depend on wage which is their single income source. As a result, a higher tax burden is put on the working class, or wage dependents, especially by the tax with holding and remitting practice. The wealthy people can escape the tax burden more easily, because property and operational income can be concealed more easily. The inversion of tax burden widens the personal income gap. Therefore, in the future, China’s taxation reform must increase the proportion of direct taxes and enhance the progressiveness of taxation, so that the taxation regime can play a positive role in addressing income disparity. This has been defined as a goal of China’s fiscal and taxation reform during the 13th Five-year Plan period. Substitution of value-added tax for business tax has been launched in full swing, and the subsequent tax cut will make room for personal income to increase in the future.

4.5 Imperfect Redistribution and Income Distribution System

135

4.5.2 Imperfect Social Security and Income Redistribution Social security plays an important part in redistribution. As its total size continues to expand, China’s social security fund can cover more and more people and meet needs in more and more areas. Social security has also become an important tool to regulate income distribution. According to Tao [41], from 1980 to 2000, the social security accounted for 82.5, 72.1 and 55.3% of the income gap improvement in Sweden, Germany and the United States. In this regard, social security plays a bigger role than taxation. China’s current social security system is not strong enough in regulating income distribution. It works on both ends:“income” and “expenditures”. On the income side, China’s social security is mainly financed by individual and enterprise contributions. The imposition of upper and lower limits to the Social Security Wage Base (SSWB) makes China’s social security regime regressive,19 so low-income earners pay higher social security contributions. In addition, compared with other countries, China’s government subsidies for social security are insufficient. At present, China’s expenditures on social security20 are only 10% of its total fiscal expenditures, far below the 30–50% range in developed countries. For example, in 2001, the proportion was 38.6% in France, 39.5% in the United Kingdom, and 46.3% in Germany [42]. On the expenditure side, China’s social security coverage is still too limited. The vast rural areas are left behind in the insurance and relief system, and lowincome earners, informal employees and highly mobile workers are left outside the social security system (Table 4.8). For example, rural migrant workers change their residence often, as they live in one place when they work and live in another place after they retire. It would be hard for them to meet the minimum years of contribution or enjoy all social benefits. However, they are the most vulnerable group and most in need for social security. China should get social security to play a bigger role in regulating income distribution, make social security contributions more progressive, increase government subsidies, expand social security coverage, and support the low-income groups and the poor population in employment, healthcare, old-age pension and education. This is a critical step to build a more reasonable income distribution system.

19 The upper and lower limits of the Social Security Wage Base in China are 60 and 300% of the average overall wage. People earning less than 60% of the average overall wage should pay their social security contributions based on no less than 60% of the average wage, while those earning more than 300% of the average wage should pay their contributions based on no more than 300% of the average wage. 20 Government expenditures on social security include social insurance premium and social insurance benefit payments and employment promotion expenditures. Data are from NBS and added up by the author.

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Table 4.8 Urban-rural differences in social security coverage Social security projects

Urban residents

Rural residents

Basic Old-age Insurance

Contribution from both employers and employees; beneficiaries are employees

Organized by villages and supported by the State; premium paid by individual farmers; beneficiaries are insured farmers

Basic health insurance (or Rural Cooperative Health Insurance)

Contribution from both employers and employees; beneficiaries are employees

Organized by villages and supported by the State; premium paid by individual farmers; beneficiaries are insured farmers

Unemployment Insurance

Contribution from both employers and employees; beneficiaries are employees

Not covered

Work-related Injury Insurance

Contribution from both employers; beneficiaries are employees

Only some migrant workers are covered

Maternity Insurance

Contribution from both employers; beneficiaries are employees

Not covered

Minimum Living Standard Guarantee

Covered by government budget or social donation; beneficiaries are low-income urban households

Covered by government budget or social donation; beneficiaries are low-income rural households

Source Tao [43]

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34. Ma, C., & Miao, S. (2017). The latest development on tax equity reform overseas and its implications. Taxation Research, 4, 8–14. 35. Liu, G., Li, Q., & Huang, W. (2015). A study on the proportion of direct and indirect taxes in China from a global perspective. Public Finance Research. 36. Liu, G., Li, Q., & Huang, W. (2015). Data are based on IMF reports. 37. Liu, Y., Ran, M., & Wang, Z. (2014). Personal income tax, personal income distribution and fairness: Based on an empirical comparison of personal income tax between China and the United States. Economic Perspectives, 9–17. 38. Hu, W. (2017). The PVAR model analysis on the contrary adjustment effect of China’s personal income tax on income distribution. Journal of Shanxi University of Finance and Economics, 39(1), 15–27. 39. Li, Q. (2012). The effect of China’s individual income tax on income distribution: Based on different perspectives and data from different sources. Finance & Trade Economics, 5, 37–44. 40. Li, S., & Li, A. (2017). Analysis of the moderating effect of income distribution of personal income tax in China. Taxation and Economy, 5, 92–99. 41. Tao, J. (2010). A comparative analysis of the adjustment of income distribution gap by social security system in western countries. Contemporary Economic Research, 9, 65–69. 42. Project Team of the Department of Social Security of the PRC Ministry of Finance. (2007). International comparison of social security expenditure levels. Financial Research, 10, 36–42. 43. Tao, J. (2008). Social security system and income gap between urban and rural areas. Lanzhou Academic Journal, 12, 54–57.

Chapter 5

Debates over Income Distribution in China and Changes in Ideas and Theories over the Last 40 Years

Income distribution is the distribution of production outcome over a certain period. China’s reform and opening-up program began on the basis of Deng Xiaoping’s proposal to “cross the river by feeling the stones” and has solved the problem of insufficient domestic production. It is a great endeavor to blaze the trail of socialist modernization. In this process, the Chinese academia has shaken off ideological restraints, reconsidered the theories and models of income distribution, and explored a feasible pattern that meets China’s development needs, providing an important theoretical basis for the transition from distribution according to work to the coexistence of multiple forms of distribution and the shift from mere emphasis on fairness to emphasis on both efficiency and fairness. This chapter analyzes the evolution of China’s income distribution ideas and theories across five periods. The first period is from the founding of the People’s Republic of China in 1949 to the Third Plenary Session of the 11th CPC Central Committee in late 1978 when the system of distribution according to work took shape. This period is essential for research on China’s income distribution over the past 40 years since the reform and opening-up. The development of income distribution ideas and theories during this period offered a ground for exploring different distribution system models and the relationship between efficiency and fairness, and examining income gaps in the next 40 years. Then came a period from 1978 to the late 1980s. In this period, the regime of distribution according to work gradually matured. The third period is the 1990s when foreign capital and western economic theories were introduced and distribution according to work began to be combined with distribution according to factors of production. The next period is the first decade of the new millennium when the widening income gaps spurred concerns about the relationship between fairness and efficiency. The last period is from 2012 up to now.

© Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_5

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5.1 China’s Income Distribution Ideas and Theories from 1949 to 1978 5.1.1 Distribution in the Early Years of New China: The “Soviet Textbook” and Distribution According to Work In the first few years after the founding of the People’s Republic of China, i.e., from 1949 to 1956, five economic sectors coexisted: state economy, cooperative economy, private capitalist economy, individual economy and national capitalist economy [1]. Distribution took three forms: distribution according to work, self-sufficiency, and distribution according to production factors, in which self-sufficiency can also be put under distribution according to production factors. In addition, material supply was implemented as a special system of distribution for Party and government organizations and the military. The five economic sectors took different shares in GDP and the total population. Individual economy had the largest share, and was followed by state economy, cooperative economy, and capitalist economy. Therefore, distribution according to production factors was the main form of distribution, supplemented by the distribution according to work and the material supply system. In 1953, Mao Zedong described the general policy line during the transition period in this way: “In a fairly long period of time, we must endeavor to basically realize industrialization and complete the socialist transformation of agriculture, handicraft industry and capitalist commerce. The socialist transformation was completed in 1956 [2].” In some publicprivate joint operations, capitalists only took fixed interest rates and were excluded from production and business operations. Therefore, there were only two forms of ownership: state-owned and collective-owned. Material supply for government organizations and the military was replaced by wage payment; rural cooperatives began to implement a work- point system [3]. Therefore, distribution according to work became the main form of distribution. Distribution according to work also became the basis of China’s distribution theory and a core issue of discussion until the late 1970s [3]. In 1955, the Textbook of Political Economy compiled by the Institute of Economics of the Academy of Sciences of USSR was published in China, starting the spread of the Soviet Union socialist economic theory in China. Regarding distribution according to work, people focused on its theoretical connotation and how to implement the principle and overcome egalitarianism. No large-scale debate had occurred. However, the real-world issues of distribution, such as personal material needs and rights, attracted a lot of attention from the research community. At that time, the national economy recovered and developed rapidly, but not enough attention was paid to improving people’s life. While labor productivity increased, “the personal interests of the people were ignored [4]” Meanwhile, discontents occurred about distribution. In this context, a large-scale discussion was launched about principles concerning material interests in a socialist country, with a clear focus on the relationship between the personal interests of workers and the growth of production.

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In the end, the need to take care of the material interests of workers under socialist conditions was affirmed. Yu Guangyuan said, “It is not only because safeguarding the individual material interests of workers is a basic economic mandate of socialism. In fact, to build socialism, we rely on more than a small number of working-class vanguards; we must rely on most people who had grown up in the old society and kept the remnants of old concepts. Moreover, our socialist country has not yet reached the level where people can do what they can do and take what they need [5]” Others believed that material benefits must be safeguarded because: ➀ workers would see the benefits of development in real. life; ➁ labor is still a means of livelihood, but not a primary need; ➂ private ownership, individual economy, and capitalist ideology still exist; ➃ there are still differences between work; and ➄ workers should be encouraged to improve their literacy and technical know- how1 . This affirmation of people’s material interests shows that regarding the relationship between spirituality and materiality, the economic community generally puts materiality before spirituality. If their material interests are not guaranteed, people would not maintain their enthusiasm for work. At the same time, safeguarding people’s material interests is also a prerequisite for implementing distribution according to work, and is consistent with Marxist principles. From the late 1950s to the late 1970s, extreme Leftists were opposed to the emphasis on people’s material interests, dismissing it as a revisionist thought.

5.1.2 Debates on Distribution According to Work from 1958 to 1965 In 1958, the Second Plenary Session of the 8th CPC Central Committee adopted the policy line of “Encouraging Hard Work to Build Socialism as Fast as Possible.” This policy line, however, ignored basic economic laws and set the Leftist waves soaring across the country [6]. Radical reform movements were launched one after another in the name of building socialism. During this period, the work-point system was given up and the material supply system (having meals without paying cash) was prevalent in rural areas. For urban workers, bonuses and piecework wage were also cancelled. At the same time, the extreme Leftist thought expressed in an article “Eliminating the Revisionist Concept of Bourgeois Right” claimed that “bourgeois thinking is based on the belief in a hierarchical system”; “ranked wage and piecework wage reflect blind worship of money”; they “cannot stimulate the enthusiasm for production, but the enthusiasm for fame and benefit”; and “in fact, their aim is to substitute the hierarchical rituals of the bourgeois for the equal relations of the proletariat.” The first debate on distribution according to work in China started in this context. The main issues included: what is distribution according to work, the necessity of distribution according to work, and the relationship between distribution according 1 See

“Summary of Contributions on the Combination of Laborers’ Personal Interests and Social Public Interests”, Study Monthly, No. 10, 1955.

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to work and Bourgeois Right. The Resolution of the Sixth Plenary Session of the 8th CPC Central Committee of the Party on Several Issues of the People’s Commune in December 1958 said, “Denying distribution according to work will hamper people’s enthusiasm for work and will not support the increase of social products. So, it is not good for reaching communism [7]” This resolution corrected in time the tendency to deny distribution according to work and cancel the wage system, so the whole nation gradually reached an agreement on the necessity of implementing distribution according to work under socialist conditions. However, the following questions divided the academia. 1. What is distribution according to work? About the definition of distribution according to work, people depended on some statements. in Karl Marx’s Critique of the Gotha Program like: “Every producer, after making various deductions, gets back from the society exactly what he gave to the society. What he gives to society is his own labor.” “The amount of labor he gave to society in one form was taken back by him in another form [8].” There was no disagreement in this regard. The controversy was mainly about the reasons or conditions for implementing distribution according to work, and the qualitative and regulatory issues of distribution according to work [9]. First, regarding the conditions of implementing distribution according to work, there were four opinions. First, distribution according to work was subject to the socialist public ownership of the means of production. As Marx pointed out, “Any form of distribution of consumer goods is the result of the distribution of production conditions [10].” Yu Liangxin argued, “The principle for goods distribution is always based on the form of ownership of the means of production. In other words, the form of ownership of production means determines the form of distribution [11].” Another view was that the possibility and necessity of distribution according to work were determined by socialist ownership, and distribution according to work was the result and manifestation of socialist ownership. It existed on the premise of the centrality of the public ownership of the means of production [12]. In short, under the conditions of socialism, as exploitation has been eliminated, distribution according to work is an inevitable choice. However, it does not answer the question why on-demand and equalitarian distribution (distribution according to need) should not be implemented on the premise of public ownership. The second opinion was that distribution according to work was determined both by the ownership of the means of production and the level of productivity. Xue Muqiao said, “Goods distribution is subject to the ownership of the means of production; and the change in the ownership of the means of production depends on the level of productivity. Why should a socialist society distribute goods according to work, but not according to need? This was because in socialism (as a lower stage of communism) productivity has not yet fully developed [13].” However, this did not answer the question why egalitarian distribution could not be implemented.

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The third was that distribution according to work was subject to multiple factors. Some believed that there were four determinant factors: socialist public ownership of the means of production, the level of productivity, the differences between workers and peasants, between urban and rural areas, and between manual labor and mental labor, and people’s ideological awareness [14]. This view was relatively balanced. However, it did not explain the basis for recognizing individual labor differences in distribution according to work, or answer why and how distribution according to work should recognize the three major differences. Without answering this question, you can not explain why material interests should be guaranteed, why people care about their personal interests, and why egalitarianism should not be implemented. The fourth was that distribution according to work was determined by the personal ownership of labor. According to Ai Siqi, under socialist conditions, “Although there is no private ownership of the means of production, individual labor is actually recognized as private. Based on such private labor ownership, people can demand their own remuneration [15].” Yu Wu argued that “the direct basis of distribution according to work is nothing else but the private ownership of labor”, and that public ownership and the level of productivity “are necessary conditions to implement distribution according to work. They are not the direct basis”. He also said, “The term ‘distribution according to work’ indicates clearly that ‘labor’ (the quantity and quality of labor expense) is the direct basis of distribution of consumer goods. A socialist society recognizes that workers have a natural privilege for their labor, which may be strong or weak, and the recognition of labor as a private right indicates that a socialist society still has the production relationship of private ownership [16].” Recognizing the private ownership of labor as an immediate basis of distribution according to work is a major progress in the discussion of distribution according to work in the 1950s. First, this agreement is a correct understanding of the Marxist economic theory and even a step further. As Karl Marx proposed in the Critique of the Gotha Program, “Any form of distribution of consumer goods is the result of the distribution of production conditions [17].” Understanding of this statement more often focused on the distribution of production materials (possession), but it is improper to exclude labor which is also a production condition. It mechanically emphasized that different production methods corresponded to different distribution methods. After socialist public ownership of the means of production was institutionalized, there was only one distribution method according to work under this doctrine, which ignored or denied the laws of economic operation. Whether it was admitted or not, however, distribution according to production conditions always existed. It was recognized between the state and collectives, and between individual collectives, that the other party was implementing distribution according to factors. It recognized the fact that labor was an indispensable production condition. So, ownership or labor has equal right with the means of production in distribution. This is indeed a form of distribution according to production factors. Meanwhile, an idea became popular that labor was a collective property. As Karl Marx said, “The basis of the capitalist mode of production is that the material conditions of production are in the hands of non-workers in the form of capital and real estate, and the masses have only the personal condition of production, that is, labor. The way the factors of production

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are distributed should determine the way in which consumer goods are distributed. If material conditions of production are the collective property of workers, then a way of different forms of distribution of consumer goods is needed. Vulgar socialism, imitating bourgeois economists (some democrats also imitating vulgar socialism), interpreted distribution as something that did not depend on the mode of production, thus describing socialism as a circle around distribution [18].” In fact, distribution according to work is a negation of exploitation. This qualitative prescriptiveness is determined by the public ownership of the means of production in the socialist mode of production, rather than the public ownership of labor. Second, the connotation of distribution according to work broadened. The traditional view was that distribution according to work was opposite to distribution according to production factors. In fact, however, distribution according to work is a form of distribution according to factors of production [19, 20]. It is because workers are construed as a factor of production. The private ownership of labor determines the distribution according to work, so labor has the equal right as other production factors such as land and capital in distribution according to production factors. Therefore, the private ownership of labor and its role in distribution provided a theoretical basis for combining the distribution according to work and distribution according to production factors, which was proposed by the 15th CPC National Congress. Third, recognition of the private labor ownership was a powerful tool to overcome egalitarianism. Traditional distribution theories held that under socialist conditions, the purpose of distribution is to secure supply. Defining distribution as a guarantee of supply in socialism is a concept created by the attempt to realize so-called basic economic laws of socialism through natural economy. Because of the emphasis on supply, an ideological tendency occurred in 1958 to abolish the wage system and restore the material supply system, and egalitarianism had also occurred for this reason and lasted so many years. On the other hand, due to the recognition of private ownership of labor, distribution became a means to realize ownership, and distribution relationship should be defined from the perspective of the combination of economic operation and socialist characteristics. Therefore, it can overcome egalitarianism. 2. What is “work” in distribution according to work? In distribution according to work, “work” is the standard or measure of distribution. In previous academic discussion, “work” was defined as the individual labor expenditure, referring only to the quality and quantity of labor, but leaving out the impact of production conditions on labor quality [21]. In fact, due to the differences between work, skill of workers, and working conditions, work cannot be quantified under the conditions of large-scale socialized production. In addition, some individual labor may not be recognized by society as effective labor. Another view was that “work” was social labor. Since no production of goods existed under socialist conditions, “work” could only be measured by equal amount of labor in value relations, but it does not represent the socially necessary labor that creates value [22]. Therefore, “work” should be defined as average labor expenditure. Third, according

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to the natural form of labor, some proposed three forms of “work”: potential labor paid for by hourly wage; mobile labor, such as the work-point system in the rural collective economy; materialized labor paid for by piecework wage [23]. This last view was widely recognized by virtually all economists. However, there were disagreements about when work should be confirmed. It was because the three forms of “work” were divided theoretically, and the division had defects in real life. First, potential labor is just a possibility of labor expenditure. If labor does not really occur, labor cannot transform into mobile or materialized labor. If potential labor does not transform into actual labor, it would disappear over time. In addition, some lazy people may have more potential labor, but they should not get paid as they do not expend real labor [24]. Second, mobile labor is the most ideal form of labor theoretically, but it is difficult to capture as it moves fast and its evaluation differs. Therefore, this form of labor is not likely to serve as a basis of distribution according to work [25]. Third, materialized labor may be affected by production conditions, so it cannot serve as a basis of distribution according to work either [26]. 3. The relationship between distribution according to work and Bourgeois Right At that time, there was big discussion about Bourgeois Right. It focused on the following questions. The first was whether distribution according to work was equivalent to Bourgeois Right. Zhong Jin argued, “Exploitation has been eliminated by the establishment of a socialist system. This is the foundation of real equality in society, but distribution according to work is a form of exercising Bourgeois Right. Compared with distribution according to need, distribution according to work creates social inequality [27].” Once again referring the Bourgeois Right, some people regarded distribution according to work as a bourgeois distribution principle. They believed that Bourgeois Right was closely connected to private ownership, hierarchy, and individualism. Distribution according to work emphasized the private ownership of labor and divided labor into levels, which encouraged individualism. In this sense, what is distribution according to work if it was not Bourgeois Right [28]? Some believed that distribution according to work had derived from capitalism and was affirmed as Bourgeois Right, so we should weaken its role until it disappeared [29]. Some others argued that distribution according to work was a right of the proletariat, reflected the will of the working people and aligned with their interests protected by law [30]. These opposite views indicate how heated the debate was. However, many economists did not accept any of the above views. They held that distribution according to work was one form of labor exchange, and a certain level of inequality remained while equality was largely guaranteed. In other words, it “retained some traces of Bourgeois Right [31].” The second was whether restrictions could be imposed on distribution according to work. There were two opinions. First, it was necessary to recognize distribution according to work and at the same time restrict it in order to gradually eliminate it. We could not beautify it, develop it, or expand it [32]. The second opinion was

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that “distribution according to work is relatively stable, just like the socialist mode of production. In the context of China’s backward economy, it has even long-term stability. Some people stress its transitional nature, claiming that it has disadvantages as it has the nature of Bourgeois Right, and that at the current stage we must actively cultivate the” buds “of distribution according to need. It is as if distribution according to work has been gradually narrowed while distribution according to need has grown since the first day of socialism. This view is questionable, because distribution according to work will remain the major form of distribution throughout the entire socialist stage, which is a fairly long period in China. China will still be a socialist society even when we’re coming towards the gate of the communist society, and consumer goods will still be distributed according to work. Nevertheless, distribution according to work will undergo a long process of improvement, consolidation and development [33, 34].” The third was whether distribution according to work would nurture capitalism and bourgeois elements. There were two views. The first was that distribution according to work was indeed a favorable factor for the growth of capitalism, because it involved equal rights and exchange at equal values, which could create material conditions for the exploitation of other people’s labor. So-called equal rights inevitably led to de facto inequality. If de facto inequality expanded and continued, the original wealth differences would develop into gaps between the rich and the poor. The rich had money and the poor had none. The rich might lend their money and gain speculative profits; those who had no money might have to borrow and suffer from exploitation. Therefore, if monetary and economic relations existed and distribution according to work was implemented, exploitation would still occur [35]. The second was a negative answer. The idea was that distribution according to work had nothing to do with the distribution system in a capitalist society, and implementing distribution according to work did not benefit the bourgeoisie who were completely unprofitable here. Capitalism would not happen in this context [36, 37]. 4. The relationship between distribution according to work and safeguarding people’s material interests In 1958, in his article “Eliminating the Revisionist Concept of Bourgeois Right”, Zhang Chunqiao put forward his basis for restoring the material supply system, which led to a debate on the principles of distribution according to work, the Marxist material-interest principle (the principle that gives priority to personal material interests), and the priority of politics (or so-called ‘politics in command’). Many economists still believed, however, that people’s material interests must be safeguarded. Wu Jiapei said, “Workers are engaged social production to maximize their own material interests, which is one of the basic laws of distribution according to work. The role of distribution according to work in the socialist economy directly determines the material- interest principle which has a completely new content in the socialist context, and offers new incentives for workers that a non-capitalist system can offer … So, the better and more fully this principle is applied, the greater and more obvious the superiority of socialism becomes. In order to create conditions for

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eliminating the desire for material interests at the advanced stage of communism, it is necessary to make full use of and vigorously develop the material- interest principle at a lower stage, or the stage of socialism [38].” Another view was that the implementation of distribution according to work and the emphasis on material interests assigned excessive value to money (putting money in command). Emphasis on material interests would turn people into mediocre benefit seekers who work for pay only. “If socialist enterprises rely on the stimulation of immediate material benefits, they are not fundamentally different from capitalist enterprises which forced workers to intensify their labor [39].” On the other hand, Shen Zhiyuan said, “Any one-sided emphasis on political priority and ignorance of personal material interests would dampen the enthusiasm of the people. Even though it may still be inspired in a certain period, their enthusiasm cannot be sustained, if their material benefits are not guaranteed through wage payment, reward, or welfare distribution.” He also argued that “correctly implementing distribution according to work under the socialist principle is also an important aspect of political priority. Otherwise, if the principle of distribution according to work is not valued and personal material interests are ignored, politics would be an empty talk [40, 41].” Still another view put emphasis on the role of politics, claiming that distribution according to work serves Bourgeois Right, and it is wrong to consider it as a driver of productivity. Therefore, political leadership must be guaranteed and enhanced, the communist ideology must be strengthened, and people’s ideological and moral qualities must be improved. Material incentives, on the other hand, should not be emphasized [42]. At this stage, the mainstream criticized material stimulation and emphasized political priority. People’s understanding of distribution according to work was based on the classic writer’s vision of future social distribution. At the same time, extreme Left ideology rose and exerted its influence. However, there were some positive developments. For instance, about the conditions of distribution according to work, the previous no-goods theory was given up, “work” was defined as social necessary labor, and private ownership of labor was recognized, all of which laid the foundation for the further progress of the distribution theory.

5.1.3 To 1976: Confusion and Controversy During this period, China was caught up in intense political movements, and most academic activities were suspended. Under the extreme Left ideology, the distribution theory had confusions on the following issues. 1. The material-interest principle According to Marxism, all economic relationships are manifested in competition for material interests [43]. However, the extreme Left wing regarded materialism as a revisionist point of view, claiming that revisionism “puts excessive emphasis

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on materialism, machinery or mechanization, and material stimulation [44].” Some people compiled a book “Socialist Political Economy”, in which they argued that “material incentives can sometimes stimulate some people’s enthusiasm. However, the enthusiasm stimulated in this way is by no means socialist enthusiasm; it is the enthusiasm of the bourgeoisie. It is the enthusiasm for fame and gains, and the enthusiasm for taking the capitalist road. If we allow modern revisionists to exist, bourgeois ideas will flood our country, and new bourgeois elements will emerge in large numbers. This will not only deter the development of socialist production, but will inevitably lead to the restoration of capitalism [45].” 2. Renewed debate on distribution according to work and Bourgeois Right Under the extreme Left ideology, distribution according to work was considered as equivalent to Bourgeois Right. For example, Nankai University compiled a book on political economy which argued, “Since Bourgeois Right still exists, the so-called exchange of equal values, or the equivalence between labor and remuneration, can easily get into some people’s minds. Some people will be misled by the so-called ‘equivalent exchange’ principle to seek for personal interests. This will help bourgeois individualism grow, and finally lead to the evil world of capitalism [46].” This school of thought advocated a “poor transition” in the ownership of the means of production and insisted on implementing distribution according to need right away. Under this concept, distribution according to work “must be restricted under the dictatorship of the proletariat, class differences must be gradually reduced, a campaign must be launched against Bourgeois Right, and the spirit of communism must be advocated to create material and spiritual conditions for substituting distribution according to need for distribution according to work. Otherwise, distribution according to work would be solidified and institutionalized, Bourgeois Right would be consolidated, expanded, and strengthened, and inequality will take root between the rich and the poor who will polarize. In this way, capitalism and the bourgeoisie will develop faster [47].” 3. Negation of piecework wage and bonuses After the founding of the People’s Republic of China, piecework wage and bonuses were offered to workers, which aroused the enthusiasm of workers and stimulated the development of production. However, the system had been affected by political movements and extreme policies, and once and again labeled as a product of capitalist ideology. It was revoked, restored, and then revoked again. During this period, the extreme Left wing once again negated this system and reversed the Marxist view that material determines ideology. The fallacy of the extreme Left wing on distribution was not accidental, but reflected the dominance of petty producers in China. It was a “religious” fanaticism on issues of social development. It also revealed the defects of the traditional economic theory and the old plan management regime which had not adapted to the reality of productivity development and reflected merely a dogmatic understanding of Marx’s socialist theory. Therefore, while disturbing people’s consciousness and

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economic life, confusions during this period make us deliberate on what type of economic system China really needs. The development of socialist theory with Chinese characteristics is an outcome of the deliberations.

5.2 Debates over Distribution According to Work and Schools of Thought from 1978 to Late 1980s After reform and opening-up was implemented, the economic research community began to deal with the previous chaos in economic theories, including the theory of income distribution. However, as the general knowledge level was not much higher than the 1960s level, barely any progress was made. Later, a heated discussion on distribution according to work occurred again and the depth of discussion increased remarkably compared to the 1960s. After the launch of reform and openingup, Western economic theories, which had been dismissed as vulgar by Chinese economists, were introduced and got popularly very fast. These included modern distribution ideas, theories and analytic methods. For example, the Kuznets curve, the idea of sharing economy, the theory of factor distribution, the Lorenz curve and Gini coefficient broadened the horizons of Chinese economists and enriched China’s income distribution theory.

5.2.1 Discussions About the Implementation of Distribution According to Work From 1956 to the early 1980s, the Chinese government clearly favored equalitarian distribution. Statistics show that in 1980, China’s national per capita income was 2.98 times higher than the 1952 level, but the average wage was only 1.25 times higher [48]. As the World Bank estimated, the Gini coefficient of Chinese urban residents in 1980 was 0.16 [49]. China’s wage growth was far below national income. People’s living standards had been barely improved and there was near perfect equality in the income of Chinese urban residents. Against this backdrop, the economic research community began to discuss how to implement distribution according to work. 1. Relationship between labor and remuneration Karl Marx said in his Critique of the Gotha Program, “Workers’ rights are proportional to the labor they provide; equality exists when labor is used as the universal metrics. Workers will be paid in another form according to the amount of labor they give to society [50].” Although the Marxist principle of exchange of equal values was generally accepted, people disagreed whether “equal values” were absolute or relative. The debate began in the 1950s. Zhong Jin argued that distribution according to work did not necessarily entail a fixed ratio between the amount of labor and the

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remuneration they receive [51]. But until the late 1970s, relativity was not accepted by most people. The mainstream absolutism held that “if labor and remuneration are not connected by a fixed ratio, there will be imbalances: less pay for more labor, or more pay for less labor. That’s not distribution according to work [52].” Therefore, during this period, most theorists believed in fixed equivalence between labor and remuneration. 2. Distribution according to work and the income gap To understand “income gap”, in the 1960s, Chinese theorists identified a pattern based on the productivity level:“Under China’s actual conditions, the validity or adequacy of distribution according to work would gradually improve. … Before the goals of socialism are fully realized, as productivity and people’s living standards rise, income gap would generally widen. After socialism matures and we are near communism, the gap would gradually shrink [53].” This pattern bears high resemblance with the Kuznets curve. That means income inequality would expand rapidly at the early stage of economy during the transformation from pre-industrialization to industrialization, and then level off, and then gradually decline at a later stage of growth [54]. Therefore, at the current stage when “more pay for more work” is a popular belief, income gap is inevitable. Deng Xiaoping’s proposal of unbalanced and yet coordinated economic development indicated that China would abandon the egalitarian approach of distribution implemented before the reform and opening-up and allow the income gap to widen to some extent under certain circumstances [55]. Thus, in the process of reform and opening-up, equalitarian distribution in the disguise of distribution according to work was gradually repealed. During this period, economic development gave rise to a variety of distribution forms, while income levels differed but the overall income increased. Economic policies had also played a role in increasing people’s income. As personal income increased, the income gap widened. Overall, people advocated the recognition of labor remuneration and operational income, and emphasized control over illegal incomes. 3. Relationship between fairness and efficiency As the widening income gap was justified under certain circumstances and the strategic policy was adopted to allow some people to get rich first [56], China’s income gap expanded rapidly and the Gini coefficient of urban residents rose from 0.16 in 1980 to over 0.4 [57], which triggered discussions on the relationship between fairness and efficiency. There were three main opinions. First, fairness should be put before efficiency. Pursuing efficiency at the expense of fairness was contrary to socialist principles [58]. This opinion held that distribution according to work entailed a balanced commitment to both fairness and efficiency, labor was the fairest measure of exchange value under socialism, and more pay for more work was the premise for promoting efficiency. However, some people feared that over-emphasis on fairness would entrench egalitarianism in distribution according to work, so fairness and efficiency should be really combined and put on an equal footing. The

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second opinion was that priority should be given to efficiency. Putting efficiency in the first place was a prerequisite for increasing wealth and achieving fairness at a higher level. When a conflict occurred between fairness and efficiency, efficiency should be guaranteed in the first place. If we pursued fairness regardless of the historical and current conditions, efficiency would not be improved and fairness would be delayed [59]. The third opinion deemed fairness and efficiency to be inter-dependent and mutually conditional. Fairness would enhance efficiency. An appropriate level of fairness is a prerequisite to adequate efficiency. Efficiency would support fairness. Fairness based on low efficiency means “common poverty”. High efficiency would pave the way towards “common prosperity”. The reform must aim at minimum inequality and maximum efficiency [60]. About the principle of “giving priority to efficiency and due consideration to fairness”, there were two opposite opinions. Those who supported this principle believed that priority should be given to increasing efficiency and productivity, and personal efforts should be fully recognized to motivate the providers of production factors. At the same time, income distribution should be coordinated to control wealth gaps and income gap between regions 61]. Those who opposed this principle argued that under socialism, distribution according to work would realize a historic balance between fairness and efficiency. Since distribution according to work was a defining feature of socialism, and at the current stage the implementation of distribution according to work was inevitable, the principle of “giving priority to efficiency” was obviously mistaken. The priority given to efficiency might be meant to address egalitarianism under the traditional system, but the problem with the traditional system was not overemphasis on fairness and negligence of efficiency. The reality was that both efficiency and fairness were neglected. Equalitarianism was an absolutely equalitarian pattern of distribution that ignored the current level of productivity and the pattern and nature of production relations. The practical result was that some people enjoy the rewards of others’ labor, which was unfair. The traditional system did not secure scientific fairness, or the type of science that could promote efficiency, so efficiency was low and productivity remained stagnant [62]. Since the launch of reform and opening-up, people have gradually shifted the focus to efficiency, and the concept of fairness has changed along with the development of commodity economy. In this case, fairness meant that providers of production factors had equal opportunities to participate in market competition on fair conditions. While labor remained a measure for equal values, distribution according to capital contribution and operational income were accepted as fair. Thus, theoretically, some people getting rich first and common prosperity were compatible to each other. This change in the concept of fairness had occurred on the ground that production relations must adapt to the nature of productivity. Putting emphasis on productivity could be called the “efficiency first” principle. In other words, in the relationship between fairness and efficiency, fairness supports efficiency, not the other way around. This was a revolutionary concept [63].

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5.2.2 Discussions About Distribution According to Work Under Commodity Economy 1. Feasibility of distribution according to work under commodity economy The reform and opening-up program transformed China into a “planned commodity economy”, which later evolved into a commodity and then a market economy. A debate occurred in this process over whether commodity economy supported distribution according to work. In Karl Marx’s definition, distribution according to work is based on the unitary public ownership of means of production, the intermediary role of commodity money is unnecessary, and it happens in a unitary planned economy. According to this definition, distribution according to work cannot be achieved under commodity economy [64]. According to Zhuo Jiong’s analysis of the Marxist principle of distribution according to work, “monetary capital no longer exists in publicly owned production. Labor and means of production are distributed to different production sectors. Producers may be given paper vouchers, by which they may claim a share of the consumer goods reserve in a society proportionate to the input of labor time. These vouchers are not currency. They are not circulated [65].” “Under this principle, distribution according to work is impossible in a commodity economy [66].” However, after the 1980s, it became popularly accepted that socialism was synonymous with market economy, but “distribution according to work” in a market economy had deviated from the definition of Karl Marx. People held different opinions on the definition of distribution. The common ground was that more pay for more work was a fair distribution model without any form of exploitation on the ground of public ownership. People mostly disagreed on whether distribution according to work could exist in a commodity economy. A radical view was that distribution according to work was an abstract concept [67]. However, some other people believed that though distribution according to work under commodity economy deviated from Karl Marx’s definition, the basic relationship between public ownership and distribution according to work has not changed. First, workers provided partially direct labor, which must be recognized by society through exchange. Second, in the distribution of consumer goods, the law of value played a role in addition to distribution according to work. Third, for distribution according to work, there were two levels of labor measurement: between enterprises and society, and within enterprises [68]. These opinions represented the serious deliberation on the nature and feasibility of distribution according to work in the new historical context. 2. New characteristics of distribution according to work under commodity economy After the egalitarian regime of distribution under the planned economy was repealed, China has developed a new distribution system in which distribution according to work played the dominant role and various other distribution modes co-existed. The new distribution system has the following characteristics. First, given the relatively low level of productivity, distribution according to work should play the main role,

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but it should not be the only method of income distribution. Different ownerships of means of production and hence various distribution mechanisms must co-exist for a long time to drive Chinese economy, like distribution according to production factors and the household responsibility system. Second, “work” is measured by the amount of necessary labor that generates commodity value. Under market economy, workers’ remuneration cannot be distributed according to the total social labor (after necessary deduction) enterprises provide to society. The labor should be the part of social labor which enterprises realize through the market, rather than workers’ direct labor hours [69]. Third, labor remuneration is paid in the form of commodity money. Distribution of consumer goods is replaced by income distribution [70, 71]. Fourth, enterprises that distribute income to commodity producers implement distribution both according to joint labor in society and according to joint labor within enterprises [72]. Fifth, the principles governing distribution according to work under commodity economy are more pay for more work, exchange of equal labor and ability standard [73]. 3. Relationship between private ownership of labor and distribution according to work After the late 1970s, most people believed that labor was privately owned, and the private ownership of labor was a condition for distribution according to work. Xue Muqiao held that “any denial of ownership of labor has the risk of confusing different socio-economic patterns in history and obscuring the essential difference between the lower and higher stages of Communism. I believe it will make a deeper understanding of distribution according to work impossible [74].” Of course, there was much controversy over this issue, but the proposition that the private ownership of labor was a condition for distribution according to work enriched the theory of distribution according to work. Meanwhile, people have a realistic view of the nature of socialist production relations. In addition, under commodity economy, this proposition gave rise to the question whether labor was a commodity. One opinion was that if labor was a commodity, wage was a way to realize the value of labor. In the exchange of equal values, workers would not be paid more than the labor value, whereas if workers’ income was higher than the labor value, their wage and bonuses were not the value or price of the labor, and their labor was not sold as a commodity. If labor was a commodity, labor value would decrease as labor productivity increases, and the proportion of necessary product would decline. Distribution according to work, however, was not subject to this mechanical economic rule. The principle of distribution according to work is that the income of workers increases proportionately as labor productivity and the wealth created by workers increase. In short, where socialist distribution according to work is implemented, income is not based on labor value [75]. Another opinion was that as reform advanced, contract-based labor employment and the labor market have emerged and grew, so two-way selection was possible between workers and employers. Workers were not directly combined with the means of production any

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more, and they also must pay safety and protection costs out of their wage, so wage became the value of labor. In this sense, labor was still a commodity [76]. While the private ownership of labor was popularly accepted, some argued that the recognition of labor as a commodity could be construed as a negation of distribution according to work, but allowing labor to move freely as a commodity in the labor market did not violate the principle of distribution according to work. On the contrary, it was an approach to realize distribution according to work under commodity economy [76, 77]. During this period, people gradually got rid of the dogma of classic writers about distribution according to work, and regarded distribution according to work as payment of labor remuneration without exploitation on the ground of public ownership [78]. So there was no contradiction between private ownership of labor and distribution according to work. In a way, although there was still some controversy, the proposition of private labor ownership had great significance. First, it completely negated the unified and planned labor management model based on the doctrine that workers were masters, recognized the existence of the labor market, promoted the rational flow of labor, and provided a theoretical basis for the rational use of human factors in a market economy. Second, it prompted people to think about distribution according to production factors in the entire society.

5.3 Debates and Development of Distribution Theory in the 1990s In the early days of reform and opening-up, as market economy grew, incentives were introduced to break the rigid and inefficient egalitarian system of “eating from the same pot”. However, there was still much controversy over the distribution of income, and some people looked at the new distribution regime with “red eyes” (jealousy). After the principle of giving priority to efficiency and due consideration to fairness was established at the Third Plenary Session of the 14th CPC Central Committee, disputes gradually disappeared [79]. In particular, the large-scale introduction of foreign capital and advanced technologies fueled China’s economic development. In this context, in the 1990s, China’s income distribution theory paid more attention to the structural changes in income distribution under the new distribution regime and the application of foreign income distribution theory in China. The key issues were the relationship between the factors of production and distribution according to work, the definition and recognition of non-labor income, and the contradiction between efficiency and fairness as the income gap widens.

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5.3.1 Relationship Between Distribution According to Production Factors and Distribution According to Work For a long time, China’s economists had put distribution according to production factors at odds with distribution according to work, believing that distribution according to production factors was a capitalist distribution method, a mode of distribution based on labor value, while distribution according to work was the unitary distribution mode possible on the ground of public ownership of the means of production [80]. Since the reform and opening-up program was rolled out, various economic sectors have grown, which gave rise to multiple forms of distribution. The 13th CPC National Congress in 1987 proposed to “allow the existence and development of private economy”, insisted that “distribution according to work should play a dominant role and be supplemented by other distribution methods”, and established the principle that “non-labor income … as long as it is legal, should be allowed [81].” This constituted an acknowledgement of distribution according to factors of production. In addition, theorists also voiced their view that in addition to distribution according to work, distribution according to production factors should be implemented [82]. By the 1990s, discussions of this issue proliferated. The 15th CPC National Congress held in 1997 clearly stated that “distribution according to work should be combined with distribution according to production factors, and that priority should be given to efficiency while due consideration is given to fairness. This approach would help optimize resource allocation, promote economic development, and maintain social stability [83].” At this point, distribution according to factors of production was no longer excluded. That was a breakthrough in the theory of income distribution, extending the scope of distribution from consumer goods to production conditions. During this period, based on domestic and international income distribution theories, the research community mainly discussed the connotation and significance of distribution according to production factors, and how to combine distribution according to factors that had been labeled as “capitalist” with the “socialist” mode of distribution according to work [84]. 1. Discussions about the connotation of distribution according to production factors The traditional economic theory drew a connection between distribution according to production factors and Say’s Law that “three factors are the source of value”, which was called “bourgeois vulgar economics”. People used to believe that distribution according to production factors meant that the owners of production factors shared the outcome according to the quantity, quality, and duration of each production factor’s participation in production. In other words, it was the economic realization of the ownership of factors. As reform and opening-up progressed, theorists continued to deepen their understanding of Western theories, and gradually changed their mind. Their new view was that value creation by labor and the participation of non-labor factors were not at odds with each other [85]. In addition, they dismissed the view that

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only labor had the right to participate in distribution while non-labor elements must be barred from distribution as a historical idealist view that ignored personal material interests [86]. Others believed that distribution according to factors of production was in line with the theory of labor value. In the theory of labor value, the value of a commodity was created by the labor of living humans. It was on the production side. Distribution according to production factors was about how the value created in the production process would be distributed. It was on the distribution side, but did not involve how value was created at all [87]. Say’s Law was that factors created value, but the Chinese concept of distribution according to factors did not refer to the creation of value by factors, but referred to the role of factors in generating wealth [88]. Others believed that distribution according to production factors was a basic aspect of market economy. Distribution according to factors of production was equivalent to distributing the benefits of ownership of factors of production, and ownership might be public or private. Distribution according to factors did not reflect the nature of ownership [89]. This proved the universal applicability of distribution according to production factors. In other words, it was applied not only to the private economy, but also to the public economy. 2. Positive implications of recognizing distribution according to production factors First, the recognition of distribution according to production factors could address unfairness in distribution that the mode of distribution according to work envisioned by classic writers could not solve. In the view of classic writers, distribution according to work should not encourage creative labor, because the cost of training was paid by society and should be withheld [90, 91]. In addition, in the term “distribution according to work”, “work” should mean individual labor expenditure. “Every person’s labor, regardless of its special usefulness, is social labor from the very beginning. The amount of social labor contained in a product can be determined directly; daily experience directly shows how much social labor is required for a product on average. Society can calculate easily how many hours of labor are contained in a steam engine, 100 L of recently harvested wheat, and 100 square meters of cotton cloth of a certain quality [92].” These empirical data referred to general labor only, while creative labor was excluded. In real life, distribution according to work took the form of wage payment, in which the average labor expenditure was the measure for “labor”, and creative labor of workers was not considered. However, in the context of rapid productivity growth and especially the rising knowledge economy, the role of creative labor was more and more prominent. Second, in real economy, distribution according to production factors would help optimize the allocation of resources, improve efficiency, and promote economic development. At the same time, it also promised to increase personal income. It would let some people get rich first and ultimately achieve the goal of common prosperity.

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3. Discussions about combining distribution according to work with distribution according to production factors The discussions were based on the definition of “distribution according to work”. In Karl Marx’s definition, it was impossible to combine distribution according to work and distribution according to production factors, because he argued that no one could give anything in addition to his labor, whereas nothing could be put under the ownership of individuals in addition to individual means of consumption [93]. In other words, no other factor than labor could participate in income distribution. In this sense, distribution according to work and distribution according to production factors were mutually exclusive, so they could not be combined. However, distribution according to work could go beyond the scope defined by Karl Marx. Many factors of production, such as knowledge, technologies and patent, were outcomes of intellectual and complex labor, and they played important roles in increasing efficiency and productivity. Therefore, distribution according to factors of production could be put under the umbrella of distribution according to work [94, 95]. Apparently, this view was different from the classic definition by Karl Marx. Despite the difference, there was a general belief among Chinese theorists that the combination of distribution according to work with distribution according to production factors could still be deemed as possible, although they disagreed in some aspects. First, they were combinable by nature. While private ownership of labor was recognized, some argued that workers were both owners of their labor and owners of public property. Therefore, since distribution was an economic realization of ownership, the combination of the two types of distribution was inevitable under socialist market economy [96, 97]. According to He Wei, workers should be considered as a production factor under socialism. Workers played the role of a production factor whether their labor was recognized as a commodity or not, and income should be distributed under the principle of “more pay for more work, less pay for less work, no pay for no work”, which would bear much resemblance with the Capitalist distribution according to production factors. The only difference would lie in the relations of production. In this sense, distribution according to work was also a kind of distribution according to production factors [98]. Second, the mode of personal income distribution was determined by the nature of ownership. Distribution according to production factors was a basic aspect of market economy. In a socialist market economy, as various types of ownership coexisted, distribution according to work must be combined with distribution according to production factors [99, 100].

5.3.2 Definition of Labor Remuneration and Non-labor Incomes Given that distribution according to work and distribution according to production factors must be combined, a widespread concern was how to keep labor remuneration safe from the threat of production factors, such as capital and exploitation.

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1. Definition of labor remuneration and non-labor incomes Labor remuneration is payment for work in the form of wage, bonuses and allowances. Labor remuneration can be roughly divided into: income distributed to workers in the sector of public ownership; income distributed to workers in the private sector according to the value of labor; and net income of self-employed workers (individual business operators). Yet, income obtained through redistribution like insurance is not included. Non-labor incomes differ from labor remuneration in that they are gained from various sources, other than the input of labor (nonlabor production factors). Given the important role that non-labor production factors play in the national economy, the owners can get paid for their ownership of factors [101]. Non-labor incomes fall into three categories: personal income derived from the outcome of others’ labor, such as dividends, interests and rental; lawful income received on the basis of social status, such as social security benefits, relief and annuity; and hidden income obtained by unfair means such as monopoly and hedging practices [102]. The statistical methods for calculating labor remuneration vary from country to country. The key difference is whether the mixed income that self-employed workers earn from their individual business operation is recorded under labor remuneration [103]. In 1992, China began tentatively to use the System of National Accounts implemented by the Statistics Division of UN Department of Economic and Social Affairs (UN DESA). The scope of labor remuneration at that time was small, excluding employees’ stock options and employers’ social contributions. Individual workers’ net income earned from business operations, however, was counted in [104]. 2. Protection of labor remuneration and non-labor incomes Although there was still controversy over whether non-labor incomes should include illegal gains and whether they were exploitative, non-labor incomes were widely accepted and the legal components were put under protection during that period. Incomes from production factors, including capital, technology and management, were considered legitimate [105]. As China’s legislation and market regulation improved, legal non-labor incomes such as bond interests and dividends were also put under protection. This offered a solid ground for the proposal to protect legal non-labor incomes in the report to the 16th CPC National Congress. However, as the scope of non-labor incomes became wider than that of labor remuneration, and illegal gains were popularly included in non-labor incomes, many people questioned the idea of protecting all non-labor incomes. For instance, some believed that hidden non-labor incomes constituted a violation of the law of value and distribution according to work. Besides, it often involved illegal activities, contributed to the widening income gap [106], and disrupted the economy. Incentive policies for private economy should be aligned with the development of State-owned and collective economy [107]. Meanwhile, some argued that non-labor incomes would eventually disappear. It was necessary to review the socialist nature of non-labor incomes in theory and formulate scientific regulatory policies [108].

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5.3.3 Contradiction and Relationship Between Efficiency and Fairness The debate on the balance between efficiency and fairness in the 1980s centered around the legitimacy of the unequilibrated development strategy that allowed some people to get rich first. The widening income gap since market economy took shape in the 1990s once again triggered heated discussion about the relationship between efficiency and fairness, as well as the growing income gap between labor-remuneration earners and people earning non-labor incomes like incomes from capital, technology and rental. Once again, the controversy focused on the policy of “giving priority to efficiency and due consideration to fairness”. 1. Controversy over “giving priority to efficiency and due consideration to fairness” “Giving priority to efficiency and due consideration to fairness” was an update of the policy of considering efficiency and fairness at the same time proposed by the Third Plenary Session of the 14th CPC Central Committee in 1993. Previously, efficiency and fairness were put on an equal footing, but now efficiency was put before fairness. In other words, the priority was given to growing the total size [109]. The change had five supports. The first was the Kuznets curve, an inverted-U curve indicating the relationship between income inequality and economic growth. On the curve, as economy develops, the income gap would first grow and then narrow down. That means China’s growing income gap was inevitable because the economy was just taking off. The income gap would gradually narrow down as the economy matures. Therefore, we should put more emphasis on efficiency compared to fairness. The second support was the effect of incentives. The theory claims that fair distribution can motivate economic entities to improve their productivity, and then the overall efficiency would gradually improve while factors that hinder productivity would decrease. The third support was the Keynesian emphasis on equal opportunities. Keynesian economists believe that work abilities and production factors vary between individuals, so they demand the fairness of rules and the parity of results. Proponents of this school of thought argue that emphasis should rest on efficiency in primary distribution and then shift to fairness in redistribution. The fourth support was a rebuttal of the traditional egalitarian distribution of income. It was popularly believed that egalitarian distribution offered “neither efficiency nor fairness”, because equalitarianism breached the exchange of equal values. Equalitarian distribution would increase unfairness instead. Values should be measured scientifically, so that missile scientists could earn more than tea egg vendors [110]. The fifth support was dialectical materialism. Efficiency and fairness were involved in the dialectical unity of opposites. Fairness was a prerequisite for efficiency and efficiency was a necessary condition for fairness. Without fairness, efficiency would be meaningless [111]. On the other hand, some people feared that “giving priority to efficiency and due consideration to fairness” would polarize income distribution in China, considering that China’s Gini coefficient was already near the international warning line. They advocated putting equal

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emphasis on efficiency and fairness. Some argued that a huge income gap would hinder efficiency. The traditional psychology of “fearing not scarcity but uneven distribution” may sharpen the sense of inequality and dampen the enthusiasm of economy participants. On a macro level, it could also cause an imbalance between insufficient domestic demand and overproduction, and even social discontents and political unrest [112]. 2. Discussions about “distribution according to work playing the dominant role with various other forms of distribution coexisting” The distribution system in which distribution according to work plays the dominant role and various other modes of distribution coexist was established after Deng Xiaoping vocally recognized the central role of efficiency during his 1992 tour to the south. Based on the policy statement of putting equal emphasis on efficiency and fairness made by the 14th CPC National Congress and the policy line of giving priority to efficiency and due consideration to fairness advocated by the Third Plenary Session of the 14th CPC Central Committee, this new distribution regime was an innovation with China’s socialist distribution regime. The 15th CPC National Congress clearly proposed to combine distribution according to work with distribution according to production factors, and confirmed that distribution according to production factors was a crucial part of the national distribution regime [113]. These new strategic policies triggered a heated discussion among scholars who were divided over the actual approaches and preconditions of the new income distribution regime. Some held that different modes of distribution should be used for different types of ownership. For example, distribution according to work was a good match for public ownership, distribution according to production factors was good for non-public ownership, and the combination of the two distribution modes should be implemented for mixed ownership [114]. Some advocated distribution according to contribution of production factors which should include both distribution according to work and distribution according to factors of production [115]. Other people insisted on the combination of form and substance, or the combination of distribution according to work that reflects the general external form of production and distribution according to work that reflects the special internal essence of socialist production [116]. Scholars also discussed the preconditions for implementing the new distribution system where distribution according to work would play the dominant role and various other forms of distribution would coexist, and they reached an agreement on two tasks: establishing a property rights system to enable value creation through the transfer of resource rights under market conditions, which is equal to enabling exchange of equal values between resource owners and users; facilitating fair competition in the market according to Friedrich Hayek’s Neoliberalist economics to encourage the free will of suppliers and buyers of production factors to price and trade flexibly while reducing excessive government intervention in market pricing [117, 118].

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5.4 Controversy over the Income Gap in the Early 21st Century The development of market economy laid a solid ground for China to deepen its reform and opening-up, and helped secure its accession to the WTO, and attract foreign capital and advanced technologies in the early twenty-first century. At this stage, China saw a rapid economic growth and fast-growing income gaps as well, especially the gaps between urban and rural and between geographic regions and economic sectors. Changes in income distribution and the widening income gap spurred Chinese scholars to take the theory of income distribution into reconsideration. Their discussions focused on the measurement of income gaps and their influencing factors.

5.4.1 Discussions About the Widening Income Gaps and Their Causes Since the launch of reform and opening-up, there have been two shifts of focus in the studies of income distribution. One is the shift from the principle of income distribution to the pattern of distribution and its changes, and the other is from normative analysis to empirical analysis. The two shifts correspond to the changes in the international research landscape and reflect the progress of China’s economic reform and development. They will help update the Chinese theory of income distribution and Chinese economics [119]. 1. Measurement and judgment of income gaps As income gaps kept growing, the measurement became the focus of research. Official data of income inequality in China have been updated, with data from field studies accumulated on a continuing basis. Databases such as China Household Income Project, China Health and Nutrition Survey and China General Social Survey have been built, and now they’re providing a strong statistical basis for income gap measurement. Furthermore, various indexes and ratios, such as the Gini coefficient, the Theil Index, the Engel’s coefficient, China’s income inequality index and the share of labor remuneration in GDP, have been calculated, applied and improved in China. For example, the Gini coefficient once had limitations in measurement and data matching. Chinese scholars simplified and refined the previous approach. For example, Zhang Jianhua [104, 120] used the cumulative weighting method and Hu Zuguang [105] proposed a simplified calculation method and found that approximating was more applicable for China’s income distribution data in which personal income is divided into five groups [121]. As data of NBS showed, since the implementation of reform and opening-up, the urban- rural income gap, the income gap within urban and rural areas, the gap between Eastern, Middle and Western regions, and the gap between industrial

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sectors and production factors were growing bigger and China’s income inequality was approaching the international warning level [122]. There were doubts about this conclusion. First, the domestic income gap was massively underestimated. For example, the China Household Finance Survey [123] estimated that the domestic Gini coefficient was already 0.61, but Li Shi and Wan Haiyuan (2013) [124] and Luo Chuliang (2012) [125] and others questioned the sampling of the survey and believed there was data bias in the data. Second, the Gini coefficient had its own limitation. For example, Wan Guanghua (2004) believed that the Gini coefficient was too sensitive to changes in higher-income groups, and Huang Renwei and Weighing (2006) also believed that the measurement of the Gini coefficient had its weakness and international comparison should not be made simplistically based on this index, especially considering the large migrant population in China [126]. Third, the method of measurement was controversial. For example, Chen Zongsheng [111, 127] and Li [112, 128] disagreed whether public housing subsidies for urban residents, private housing rental income, and the land use right as a property of rural residents should be included as items of income. Fourth, the changes in the income distribution pattern were controversial. The Chinese Household Income Project found that “the urban– rural income gap has been widening since the 1990s” and that it was the basic trend [129], but Hua Sheng (2010) argued that in the current data, hundreds of millions of migrant workers were counted as urban population while the children, seniors and low- income rural families left behind were recorded under the rural population, and that this statistical method accounted for the widening gap between urban and rural areas. If the urban population had been limited to citizens with urban residence (hukou), and rural migrant workers had been counted in the rural population, the income gap between urban and rural residents in China since the mid-1990s would have narrowed, although the urban-rural property gap continued to widen sharply [130]. Still some others believed that the decline in labor remuneration as a percentage of GDP had been exaggerated. Hua Sheng (2010) argued that the statistical methods for calculating the share of labor remuneration in GDP were problematic and, in fact, labor remuneration in China had been increasing as a share in GDP [131]. Qian Zhenjie and Zhu Xiaodong (2013) claimed that although China’s labor remuneration was declining as a share, it was still close to the world average [132]. 2. Influence of economic reform and inherent deficiencies on income disparity Although substantial progress had been made in economic development after reform and opening-up, still plenty of weaknesses existed in the economic structure and system, which deterred income equality. The top five problems rested with differences in labor productivity, differences in education and human capital, immature financial markets, capital deepening, and capital-labor substitution. First, labor productivity was obviously different between urban and rural areas, and there were also sharp differences in conditions for industrial development, access to resources and technology development, which widened the income gap between urban and rural areas as well as between industrial sectors and geographic regions. Second, although compulsory education was implemented throughout China, educational resources were still

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unevenly distributed between urban and rural areas. The access to education resources in rural, mountainous and poor areas was extremely limited, which magnified the difference in human capital development. A Matthew Effect occurred and played a big role in widening the income gap between rural and urban areas. Third, Chinese capital markets were far from mature, which had deterred investment in human capital. The scarcity of financial resources had kept the living cost of rural households high and contributed to the growing gap between rural and urban areas. Fourth, China was encouraging capital accumulation by attracting FDI and promoting technological upgrade since the implementation of reform and opening-up, and suppressing the rise of labor remuneration as a share. Besides, China’s technological progress driven by technology import accelerated the substitution of technology for labor, which made labor even less important and further suppressed labor remuneration [133–135]. 3. Effect of industry monopoly and government control on income disparity Although China had basically got away from planned economy through reforms, some weaknesses of the previous economic system remained and became noneconomic and non-market contributing factors to the income gap. Above all, the income of monopoly industries was too high. On average, telecommunications, finance, insurance, public utilities and tobacco industries offered two to three times higher wage than other industries. Considering perks, the difference in real income would be even bigger. The highest could be about 15 times higher than the lowest. Employees in petroleum, electricity and tobacco industries accounted for less than 8% of the total work force in China, but their total wage took up about 60% [136]. The wealth of China concentrated in real estate, mining and securities and income was excessively high in industries that depended on the ownership of land, capital and other resources [137]. Meanwhile, the household registration system worsened the urban rural duality, restricted the mobility of rural labor, gave rise to policies that favored urban areas, distorted the market price of labor, and caused resource mismatches. Therefore, this can be listed as a major cause of China’s urban-rural income gap [138].

5.4.2 Discussions About the Adjustment Mechanism of Income Redistribution Redistribution is an important tool of the government to regulate the distribution of income. It is realized mainly through taxation and government transfer payments. As income gaps widened, the effectiveness of redistribution has attracted a lot of attention and spurred much controversy. 1. Effect of taxation on income distribution After the launch of reform and opening-up, China’s taxation regime had undergone several major adjustments. The taxation system became more complete after tax

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sharing was implemented in 1994. Among them, personal income tax, property tax, and some indirect (consumption) taxes, which were the major taxes used in adjusting income distribution, reflected the emphasis on fairness and efficiency in China’s fiscal system. Some studies found that although income gaps widened, taxation had played a role in redistributing personal income and narrowing the income gap. Personal income tax was particularly useful in adjusting incomes from labor, business operations and property transfer, as well as contingent incomes and interest income [139]. China implemented a progressive personal income tax system, basically in line with international standards. While it regulated income distribution, personal income tax also increased government revenues, so the government was able to reduce income gaps through transfer payments. It would also play a role in the historical process of allowing some people to get rich first and realizing common prosperity [140]. Yet there was still much controversy about China’s personal income tax system. On one hand, the taxation regime, in which personal income tax was marginal, was structurally too simple to regulate income gaps. On the other hand, the low tax threshold increased the tax burden on low-income and middle-income groups, while high-income earners had multiple sources of income and some of their incomes were hidden, which could help ease their tax burden. Moreover, tax collection administration was weak. All in all, the tax system was regressive [141]. In addition, Yue Ximing, Zhang Bin and Xu Jing (2014) found through surveys that the progressive nature of personal income tax could not offset the regressiveness of indirect taxes, so China’s taxation regime was regressive overall, especially in rural areas [142]. 2. Effect of social security policies on income distribution Although China has been working to enhance social security and implementing policies and measures to improve people’s wellbeing, access to basic public services was far from equitable, and the policies had produced few effects on income distribution. First, the big development gaps between rural and urban areas and between regions, and the mismatch between financial power and administrative duties of local governments have created urban–rural inequality in access to basic public services. Second, the urban–rural duality in China’s social security, which reflected the general social divide between urban and rural areas in China, worsened the inequality of income distribution between urban and rural areas. Due to “shallow urbanization”, rural migrant workers were counted in urban population but could enjoy the social security benefits of urban residents. Finally, some scholars believed that China’s redistribution system was problematic because reverse urban-rural transfer, reverse regional transfer and reverse transfer between different groups were widening the income gap after redistribution [143]. In addition, some argued that social security for the rural migrant population was a heavy task. Their old-age insurance was a particularly pressing issue, given the aging population [144].

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5.4.3 Questions About the Income Distribution Order 1. Debates on the new Labor Contract Law The new Labor Contract Law of the People’s Republic of China enacted by the 28th Meeting of the Standing Committee of the 10th National People’s Congress in 2007 had caused some controversy. On one hand, due to the imbalances in labor relations, the lawful rights and interests of workers had lacked proper protection for a long time. The underprivileged people, mainly rural migrant workers, had suffered unfair treatment in the form of low wage, back pay, poor working conditions, and different pays for the same work. While employers had a bigger say, the price of labor depended on the balance between supply and demand, which exposed labor to risks and exploitation. Therefore, the new Labor Contract Law could hold the government accountable for rationalizing the income distribution, protecting the interests of the underprivileged, and increasing the income of low-income earners [145]. However, some studies suggested that although the new Labor Contract Law could increase the income of some workers, labor cost would increase, which would discourage the demand for labor. Any increase in unemployment would lower the total labor remuneration in the short term, and make income distribution worse in the long run [146]. 2. Questions about the salary system of government bodies, enterprises and public institutions The salary system of government bodies, enterprises and public institutions had been a hot issue in discussions about China’s income distribution. It was generally believed that the government controlled almost most resources and played the key role in allocating resources, which had created a hotbed for corruption. Therefore, grey income and power- for-money deals proliferated, which made the income distribution system unfair [147]. Theorists held two different views on the reform of the public servant salary system. One view was that the salary system of the public sector disturbed the order of income distribution, as the civil service pay was raised to an excessively high level by the abuse of public power, which worsened income disparity. In addition to corruption, inherent flaws in the salary system of public servants and the monitoring system made grey income possible. Off-book accounts, hidden income, income obtained through information advantage, and excessive perks were wellperceived problems. Moreover, improper government intervention in primary distribution and redistribution had a negative impact on the order of income distribution and posed a huge challenge to fair distribution [148]. Others found that Singapore’s public civil pay system was a good example showing that a decent pay for public servants could both reduce corruption, attract talent to work for the government and enhance government efficiency. Low “regular” salary in the public sector in China had created irregular sources of income, such as off-book accounts, hidden income and grey income. Thus, it was necessary to raise the official salary of public servants to a proper level and make the pay system transparent to guarantee the legitimacy

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of public service pay. For example, Zhao Renwei [127] argued that in order to guarantee fairness in income distribution, we must regulate the compensations for public servants including their pay, benefits and perks, and standardize the salary formation mechanism for personnel in government bodies and public institutions [149].

5.5 Discussions About China’s Distribution Theory and Equality Issues Since 2012 Since 2012, China’s income distribution theory has developed further and discussions have heated up again. One reason is that the widening income gap has caused great concerns throughout the country, and income growth has declined slightly after the implementation of various regulatory restrictions. Another is that theory discussions about income distribution abroad have deepened and many new views, methodologies and policy suggestions for income distribution research have come up.

5.5.1 Further Discussions on Income Gaps and Equality Issues Regarding income gaps and income fairness, China has completed the shift from “giving priority to efficiency and due consideration fairness” to “giving equal weight to efficiency and fairness [150].” This is above all because income gaps have caused great concerns, and the imbalanced development runs the risk of income polarization. The second reason is that China is the world’s second largest economy but it is urgent to reduce income gaps to realize common prosperity. 1. Causes of the urban–rural disparity in income distribution and issues pertaining to agriculture, farmers and rural areas The income gap between urban and rural areas has always been an important aspect of China’s income disparity. However, as the economic and demographic structures change, the causes of the widening income gap between urban and rural areas in China have also shifted. Although agricultural taxes have been revoked, direct subsidies to farmers have increased year by year, and urban and rural residents have been covered by the basic medical insurance system, the urban-rural income gap is still the major source of China’s income gaps. First, institutional barriers like household registration are being gradually eliminated through reforms, which has reduced restrictions on the mobility of urban and rural labor. Second, the labor shortage in the Eastern coastal region may indicate that the Lewis turning point is near at hand, and the income gap between urban and rural areas is narrowing down. Third, the low productivity of rural areas and the low development level of agriculture are still the key reasons for the income gap between urban and rural areas, which makes urban-rural integration

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a pressing task. Fourth, many people in rural areas may slip back into poverty due to illness, which is a hard nut for reducing poverty and narrowing the income gap. Fifth, while the income gap between urban and rural areas is narrowing, income gaps within rural areas are widening [151]. 2. Geographical income gaps and the implementation of regional development strategies In order to effectively address the gradual widening of income gaps between the Eastern coastal region and the Middle and Western regions, China has implemented a series of preferential policies and measures for the Middle and Western regions. Tax incentives have been offered to encourage the transfer of industries from the East to the Middle and Western regions to drive local economic development. However, the regional development support has not significantly reduced the income gap, and even some manufacturing companies are moving to Southeast Asia. Some people believe that despite the regional development strategy, the economic development capacity is still weak in some regions, poverty is still prominent, and income gaps have remained wide. The root causes include the lack of regional differentiation, the backward mode of economic growth, and the slow improvement in people’s livelihood [152]. Some held that there are big differences in many aspects between the Middle and Western regions and the Eastern coastal region, which are mainly reflected in the flexibility of preferential policies, timing of economic transformation, local governance reform, and geographic conditions [153]. Still some others argued that the relative advantage of labor costs in the Middle and Western regions over the Eastern region is not obvious, and some industries require a clustering effect, but it is difficult for the Middle and Western regions to attract investment from the East, especially in capital-intensive industries. 3. Inter-sectoral income gaps and compensation reform The income gap between economic sectors is expanding in China overall. Monopoly SOEs such as banks, securities companies, and tobacco companies can use their monopoly power to seek unfairly high gains [154]. The compensations of SOEs executives lack a reasonable and transparent determination mechanism, which would cause the personal income gap to widen. Some believed that the excessive incomes obtained through monopoly over natural resources such as oil and natural gas are not operational incomes, but natural resource proceeds. They should not feed into executives’ hidden income; they should be spent on public services [155]. Some others believed that the difference between the income level of monopoly industries and other industries exceeds half of the average income level of all industries, so the power of executives in monopoly industries must be weakened and employee income should be made a key performance indicator of the management. The conspiracy space of monopoly industry executives must be gradually suppressed [156].

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4. Performance-based salary system in public institutions Public institutions are public policy advisors to the government and providers of public goods. The salary scheme of public institutions is an important means of motivating employees, and building a fair and equitable income distribution system. Performance-based salary was first offered to personnel of public institutions in 2006, and based on reasonable classification, different methods of wage payment are implemented according to the type of public institutions [157]. However, the performance salary system has several problems. First, the system is inadequate and lacks scientific effectiveness; second, the performance standards are too simple and not institutionalized; third, there is over emphasis on qualitative measurement and quantity is neglected; fourth, the rewards are not motivational enough; and fifth, the evaluation cycle is too monotonous [158].

5.5.2 Concerns About Social Stratification and the Lack of Income Fluidity As income gaps widen, theorists have begun to pay closer attention to income fluidity. This is because higher income fluidity means that access to opportunities would be more equitable, and social tolerance for income gaps will be higher, while lower income fluidity may result in clear social stratification based on income levels, which also means a reduction in fair opportunities and thus more social conflicts. 1. Structural income gaps and income fluidity Some studies found that China’s overall income fluidity is rising fast. There is an upward spiral between adjacent income classes. Relative income fluidity is higher in rural areas than that in urban areas, but absolute fluidity is lower [159]. Some other studies found that the lower- income and highest-income classes have greater income fluidity, while the income level of the middle-income class is most solidified, with their fluidity being higher in urban areas than that in rural areas [160]. There were also studies showing that the people at the lowest level in rural areas are clearly flowing upward, but the majority of this class are those who have fallen from upper classes, revealing a clear phenomenon of poverty backtracking in rural areas, while the middle and high-level groups have maintained fluidity on high levels [161]. From the perspective of income fluidity and structural income gaps, power factors have a greater impact on intergenerational income fluidity, and the impact of institutional factors such as the household registration system is also rather strong. As the market economy grows, the institutional factors that impede income fluidity will decrease gradually. However, at present, the extremely poor people in China are facing a huge challenge, and low-income fluidity will hamper their enthusiasm for improving their conditions. Many laid-off workers find it difficult to improve

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their income level due to their own human capital conditions, and they are likely to complain about the unfairness of opportunities [162]. 2. Education and income fluidity Some scholars believed that investment in education is an important factor affecting income fluidity. Educational capital has a time lag, but it will affect income fluidity in the future, especially intergenerational fluidity. Parents’ education level and the family background, income level and other factors determined by parents’ education level will directly determine or affect children’s education and income levels, which may lead to class solidification due to unfairness in opportunities [163]. Chen Lin and Yuan Zhigang (2012) confirmed this impression by empirical analysis, claiming that intergenerational income fluidity in China is declining, while the major improvement up to now has mainly come from the rise in relative income. Human capital, social capital and especially wealth capital are important explanatory variables of intergenerational transmission in China, so it is necessary to promote equal access to education and ease differentiation in the labor market as we further upgrade the market economy system [164].

5.5.3 Theoretical Research on Urbanization, Service Economy Development and Income Distribution An important factor of the urban-rural income gap is the low efficiency of agricultural production. Rural migrant workers have realized their income growth by gaining access to urban production factors. Therefore, some argued that China should promote urbanization [165]. By increasing the proportion of urban population, we can increase the overall income level, and reduce income gaps. However, income disparity or even polarization is common in cities, too, especially in large international cities. Therefore, a lot of discussions have been conducted on the impact of urbanization and the development of services industry on income gaps. 1. Income polarization in the process of urbanization Although the urban-rural income gap is the main source of income disparity in China, income gaps within the urban population are also obvious. In terms of impact, first, urbanization would absorb a large amount of low-skilled rural surplus labor and at the same time squeeze out low-skilled urban labor, lowering the wage level of lowskilled groups. Meanwhile, the influx of rural surplus labor raises the demand for land and housing in cities and raises the level of non-labor remuneration such as house rental, so the gap between labor remuneration and non-labor remuneration would widen. Second, the marketization of land elements in China is inadequate, and the pricing of rural land cannot reflect its market value. Landless farmers would suffer in the process of rural urbanization, which would worsen the income gap. Third,

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the relationship between the level of urbanization and the income gap within the urban population takes an inverted U shape: urbanization will increase the income gap in the short term, and will reduce it in the long run [166]. In addition, some studies find that the improvement of urbanization and marketization will help ease the urban-rural income gap caused by the agglomeration of large cities [143]. 2. Development of services and income gaps After the completion of urbanization, the manufacturing industry will give its prominent position over to the service industry and labor will shift to productive services like financial services and commercial services. The services economy has high productivity. As it is knowledge-intensive and capital-intensive, it generates and pursues high returns and high added value. Service employees have high skill levels and obtain high income. At the same time, the further division of labor in the services industry and specialization of core services would give rise to low-end and lowvalue-added services which would absorb many low-skilled and medium-skilled labor. As a result, the services industry will take a pyramid shape with a small number of high-income high-end service segments on the top and many low-income service segments at the bottom. Meanwhile, there will be a small number of high-income earners and a huge number of low- income earners, and the income gap would be further widened [144]. 3. Equal access to public services and income distribution The lack of equal access to public services has lowered the income level of backward areas such as rural areas in China, and widened the urban-rural income gap. Some believe that as China’s existing tax adjustment mechanism is ineffective, promoting equal access to public services is an effective way to address the income disparity between urban and rural areas. In other words, the government should try to meet the basic public needs of residents by the provision of public goods such as safety, public facilities, compulsory education, social security, and employment services that are indispensable for improving people’s wellbeing [145]. Reducing the differences in the access to public services between cities and regions that cannot be urbanized can essentially reduce the urban-rural income gap. Some others believe that the rise of Internet finance has made financial services more inclusive, lowered the barriers for investment in financial services and cross-region transactions, and reduced information and transaction costs, which would narrow the income gap to some extent. As a result of the rise of Internet finance, financial consumption expands, the availability of financial services improves, channels to obtain property-based income increase, financial efficiency rises, and access to financial services becomes more equal [116, 146, 147].

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5.6 Schools of Thought on Income Distribution with Chinese Characteristics Since the reform and opening-up program was rolled out, schools of thought and research projects using different methods on income distribution have bloomed in China, which has not only enhanced research on relevant issues and promoted the development of theories, but also provided a strong support for the formulation and implementation of government policies. Roughly speaking, China’s income distribution theory research has eight schools as follows.

5.6.1 The “System” School The “system” school of thought on income distribution, focuses on research of China’s basic economic system and basic distribution system. Leading scholars of this school include Professor Lin Yifu of Peking University and Professor Cai Fang of the Chinese Academy of Social Sciences. Lin Yifu believes that the government should try to shape the income distribution mechanism through the labor market according to the industrial development strategy, and at the same time consider leveraging comparative advantages to avoid negative impacts on regional income gaps and functional income gaps [148, 149]. He also believes that the improvement of the market economy system since reform and opening-up will play a key role in addressing the widening income gaps [150]. Cai Fang believes that China’s household registration system hinders the free movement of labor and worsens the urban-rural income gaps [151, 152].

5.6.2 The “Gap” School The “gap” school makes an empirical analysis of income gaps. Leading scholars include Professor Zhao Renwei of the Chinese Academy of Social Sciences and Professor Li Shi of Beijing Normal University. Zhao Renwei has surveyed China’s income distribution in the early stage of reform and opening-up through data sampling [153]. Li Shi has organized household sampling surveys since 1988 and has empirically calculated the income gaps of Chinese residents [112, 154].

5.6.3 The “Factor” School The “factor” school focuses on the influencing factors of income distribution. The leading scholar is Professor Bai Chong-en of Tsinghua University. In the analysis

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of the factors of income distribution, he argues that the impact of many factors on labor remuneration has declined such as the nature of SOEs, per capita income levels, enterprise monopoly, technology, and the relative prices of production factors [155, 156].

5.6.4 The “Structural” School Leading scholars of the “structural” school include Professors Lu Ming and Luo Changyuan of Fudan University. They examine income distribution from the perspective of the urban- rural duality and the evolving industrial structure. Lu Ming’s argument is that the household registration system hinders labor mobility, and urbanoriented economic policies have worsened the urban-rural income gap, so the household registration reform should be accelerated [157]. Luo Changyuan believes that, according to the empirical research, China’s industrial structure and the proportions of labor remuneration in different industries change simultaneously with a positive correlation, which has increased the fluctuations of labor remuneration [158].

5.6.5 The “Government” School The “government” school focuses on redistribution and the provision of public services. The leading scholar is Professor Jia Kang of the Chinese Academy of Fiscal Sciences of the Ministry of Finance. He believes that China’s fiscal system has improved steadily since the reform and opening-up program started, and the income distribution system has played a regulatory role, especially through redistribution. This reflects the important role of the government in maintaining social justice [159, 160].

5.6.6 The “Dynamic” School The “dynamic” school focuses on income fluidity and dynamic research, and the leading scholar is Professor Quan Heng of Shanghai Academy of Social Sciences. He believes that China’s income fluidity has clear characteristics. The evolution of China’s income distribution during the transition period shows that power factors, human capital accumulation, education, and the market economy system affect China’s income fluidity. We need to advance legislation, improve the market economy system, and realize equal access to basic education resources [137, 162, 163].

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5.6.7 The “Growth” School The “growth” school focuses on economic growth as a factor of income distribution. Leading scholars include Professor Zhang Weiying of Peking University and Professor Yuan Zhigang of Fudan University. Zhang Weiying believes that marketization of the economy eases the government’s control over resources and restrictions on market access, and reduces the uncertainties caused by government behavior, and we should use market approaches and market mechanisms to drive economic growth and solve efficiency problems [71]. Yuan Zhigang believes that we should face income gaps squarely. The widening of income gaps in China is a natural result of the development of the labor market and the formation of a labor price system. Under the planned economy, fairness was pursued at the expense of efficiency, and the income range was very small. Over-emphasis on income equality would set the society to slip back to the planned economy and cause economic stagnation [164].

5.6.8 The “Fairness” School The “fairness” school focuses on fairness and justice in income distribution. The leading scholar is Professor Wang Xiaolu of the National Economic Research Institute of China Reform Foundation. Wang Xiaolu has made a lot of calculations and surveys on gray income and hidden income, and believes that gray income as a result of system defects has interfered with the normal distribution of national income. Irrational forms of income distribution, such as gray income and illegal income, distort the allocation of factors in the primary distribution, reduce efficiency and suppress economic development, and the inadequacy of redistribution policies and mechanisms further widens the income gap and makes the distribution unfair [165]. In addition, hidden income causes the income gaps to be under-estimated [166]. These findings reveal the unfairness in distribution and propose how to make income distribution more equitable.

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Chapter 6

Experience and Characteristics of China’s Income Distribution Reform over the Past 40 Years

Over the past 40 years, under the leadership of the Communist Party of China, China has made remarkable progress in developing the income distribution system. In this process, China has continuously “liberated the mind” and “sought truth from facts”, trying to strike a balance between growth and distribution and use proper incentives to mobilize every participant in the economic and social development. The progress has maximized the driving force for economic growth, and fueled the overall economic reform and the development of socialist market economy. The income distribution reform and changes in interest relations have provided a strong motivation for growing the market economy and helped release and develop productive forces. Meanwhile, rapid economic development has created stable and favorable conditions for implementing innovations in the income distribution system to achieve fairness in rules, opportunities and rights, and make the income distribution pattern more reasonable and efficient. Therefore, income distribution reform must proceed in line with the overarching goals of socialist modernization and the great rejuvenation of the Chinese nation. It is firmly believed that the income distribution reform in China will play a positive role in building a moderately prosperous society in all respects and a great modern socialist country that is prosperous, strong, democratic, culturally advanced, harmonious and beautiful.

6.1 Best Practices of China’s Income Distribution Reform Marxism holds that productivity determines efficiency in a social economic system, and relations of production in the system determine whether it is fair or not. Income distribution involves productivity, but ultimately depends on the relations of production. During the first 30 years after the founding of the People’s Republic of China, China underwent a huge transformation from a New Democracy to a socialist country. After the implementation of reform and opening-up, China decisively abandoned the policy line of “taking class struggle as the key link” and turned the attention to © Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_6

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economic development. This political change laid a strong theoretical foundation for China to grow its economy, and enriched the practice of income distribution reform. Over the past 40 years, as part of the grand reform and opening- up program and the effort to build socialism with Chinese characteristics, China’s income distribution reform aiming at both efficiency and fairness was a bold attempt to adapt Marxism to Chinese conditions. The best practices offer useful inspirations for China to advance people-centered development.

6.1.1 Coordination Between Innovations in Theory and Practice China has innovatively adapted the general principles of Marxism to China’s specific needs, and developed a theory of “socialism with Chinese characteristics” in this process. It demonstrates that theoretical innovation originates from practice, and in turn guides practice. Over the past 40 years, the theory of income distribution with Chinese characteristics has evolved through practice, which fully shows that the theory is based on practice, and then enriches practice. Beginning with the household contract responsibility system in rural areas, China’s distribution system reform was a prelude to economic system reform. In this course, the distribution regime has gone through the following stages: ➀ unitary distribution according to work; ➁ distribution according to work playing the dominant role and supplemented by other distribution modes; ➂ distribution according to work playing the dominant role and various other distribution modes coexisting; ➃ combination of distribution according to work and distribution according to production factors; and ➄ distribution according to contribution of production factors. This change has enriched Marxist political economy, and shows that China has learned from neoclassical economics and development economics. The development of income distribution theory has played a role in China’s transition from planned economy to market economy, and reforms in public finance and SOE reform. The socialist income distribution theory with Chinese characteristics has grown through coordination between innovations in theory and practice.

6.1.2 Coordination Between Top-Level Design and Grass-Roots Innovation China’s income distribution reform has followed two basic pathways: one is bottomup, from practical innovations to theoretical distillation, and the other is top-down, from top-level design to practical implementation. These two pathways have enriched the methodology for building socialism with Chinese characteristics. First, practical innovation, or innovation at the base level, has played an important role in

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China’s development. In 1978, farmers of Xiaogang Village, Fengyang County, Anhui Province, signed a “secret covenant” to pioneer the household contract responsibility system, which was a prelude to China’s overall reform and opening-up. The system which had sprung from grass-roots practice stimulated the farmers’ enthusiasm, increased productivity in rural areas, and increased farmers’ income. It paved the way for reform and innovation, and served as a model of raising farmers’ enthusiasm and income. In 1984, the Third Plenary Session of the 12th CPC Central Committee proposed for the first time to allow some regions, some enterprises, and some people to get rich first through hard work. Since then, the CPC National Congress held every five years has formulated a top-level design on income distribution and issued a new ideological guideline for income distribution reform based on the actual development. In fact, the practice of income distribution reform has followed the ideological guideline offered by the top national organization. China is a vast country with a large population, and different regions have different endowments (factors and resources), so local governments is well-positioned to issue specific policies and plans which, however, must be based on the central government’s strategic design. It is especially noteworthy that since the 18th CPC National Congress, in order to deepen the income distribution reform, China’s central government has worked hard with the top-level design, like reshaping the pricing mechanism for production factors and offering incentives to workers. In line with the strategic design of the central government, local governments have actively renewed their practice to create employment, improve people’s wellbeing, and ultimately ensure that income distribution policies are implemented on a fair basis.

6.1.3 Aligning Distribution Modes with Production Modes Marxist political economy believes that production determines distribution, which is a basic economic law conforming to the law of contradiction. Over the past 40 years, China’s income distribution reform has closely followed this basic economic law. The distribution pattern has been adjusted accordingly to changes in the ownership of means of production. For example, before reform and opening-up, China had mainstreamed public ownership of the means of production, giving workers equal access to the means of production and making it impossible for individuals to reap the benefit of other people’s labor through the previously private ownership of the means of production. This change laid the foundation for implementing distribution according to work. In this sense, the production mode based on the public ownership of the means of production gave rise to distribution according to work. In 1992, the 14th CPC National Congress proposed that China “should develop socialist market economy, adjust the ownership of the means of production, and mobilize multiple production factors to increase productivity.” Thus, China established the production mode in which public ownership played the predominant role and other forms of ownership coexisted, and then established the regime of income distribution in which distribution according to work played the dominant role while various other forms

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of distribution coexisted. The 15th CPC National Congress raised the new idea of “combining distribution according to work and distribution according to production factors”. The 16th, 17th, and 18th CPC National Congresses proposed a new regime of distribution: “distribution according to the contribution of production factors such as labor, technology, capital, and management”. The 18th and 19th CPC National Congresses proposed that China should work to ensure that personal income grows in step with economic development, and labor remuneration grows in step with increase in labor productivity.

6.1.4 Taking a Problem-Oriented and Progressive Approach Economic theories, either Marxist political economy, development economics, or welfare economics, study the dynamics of social, economic and human development. Economy only grows through solving problem. Reform and opening-up over the past 40 years has shown that economic development is a process of solving development problems, and the evolution of income distribution principles entails the establishment of fair rules. While production improves but distribution is not fair, problems will emerge, like mismatch between income and production, widening income gaps and chaos in the income distribution pattern. Reform means to remove institutional barriers that impede economic growth. Following the problem-oriented approach, China’s income distribution reform has addressed three problems. First, by implementing the household contract responsibility system and developing market economy, China has removed equalitarianism, with some people allowed to get rich first. Second, to address the widening income gap, China shifted from “giving priority to efficiency and due consideration to fairness” to “giving equal weight to fairness and efficiency in both primary distribution and redistribution”. Third, in order to deal with distributive injustice, China has worked to ensure the fairness of rules, opportunities and rights. In terms of methodology, China has developed a progressive approach to reform, instead of taking extreme actions. Over the past 40 years, China has drawn valuable inspiration from practice. One resounding example is the proposal to “cross the river by feeling for the stones”. China is also committed to improving the top-level design. Another idea is that to improve income distribution China should try to safeguard people’s interests, which is a matter of concern to the entire society. Development of the country depends on whether the people get the real benefits; the success of reform depends on whether people can be mobilized. Therefore, the Chinese government has proposed and earnestly implemented market-oriented reforms to rationalize the relationship of interests. The reforms, including the income distribution reform, have followed an easy- to-difficult progressive approach. Market economy is a type of commodity economy, in which price directly reflects the relationship between demand and supply. China has made great efforts to develop market economy for three reasons. First, reasonable prices which are free from government intervention reflect the real value of commodity. Second, market forces can mobilize the people in rural and urban areas. By virtue of the household contract responsibility system

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and accelerated development of some cities, some people could get rich first and they could help others get rich later, so the country could realize prosperity for all. In this case, efficiency is the topmost consideration. Third, China should gradually change from “baking a bigger cake and then dividing the cake fairly” to “baking a big cake and dividing the cake fairly at the same time”. The balance between fairness and efficiency is a major measure of good governance and decides whether the society can reap the biggest benefits.

6.1.5 Driving Income Distribution Reform Through Economic Growth As a socialist country, China has launched the income distribution reform aiming primarily at economic development. China has exercised overall control over the total income, income gaps, and the distribution pattern. It has not followed populist welfare economics or oligopoly economics. China has put equal emphasis on both “baking a bigger cake” and “dividing the cake fairly”. While promoting economic growth, China has also worked to improve the income distribution pattern to reduce the widening gap between the rich and the poor. At the same time, China didn’t advocate absolute income equality which would impair economic efficiency. Promoting economic development and raising people’s income are two direct and realistic approaches to improve people’s wellbeing. Income distribution should align with economic growth, and they should support each other. Otherwise, one scenario is the aggregate output increases but the gap between the rich and the poor widens rapidly, and the other is that distribution is fair but efficiency is low. China must try to avoid both scenarios. At the same time, while China tries its best to improve people’s wellbeing, it must consider its overall national power. If State welfarism is implemented without the support of economic growth and labor productivity, the burden on the State would become too much. Following such a short-sighted approach, a State would not be able to make ends meet.

6.1.6 Aiming at Common Prosperity Deng Xiaoping proposed to allow some people, including farmers and workers, to get rich and enjoy a better life first through hard work. The basic idea is that, with these people serving as role models, the entire nation would be mobilized to develop the economy, and prosperity for all will be achieved. His proposal involves the dialectical relationship between individual prosperity and common prosperity, and suggests the methods for achieving common prosperity. It has answered the basic questions about prosperity, guided China’s economic and social reform, and highlighted that common prosperity is an inherent socialist value and a basic aspect

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of socialism with Chinese characteristics. The practice of reform and opening-up over the past 40 years has proved that this approach is suitable for China under the current conditions and should be applied throughout the course of China’s income distribution reform. Allowing some people to get rich first would be the first step towards common prosperity. Common prosperity doesn’t mean that all people get rich at the same time. It must be achieved step by step. “Some people getting rich first” is an immediate goal, but the immediate goal would be meaningless if the final goal is missed. In the 1980s and the 1990s, China gave priority to productivity and efficiency in the development of market economy, and several industries sprang up and attracted a large amount of foreign capital. During this period, the first batch of “10,000-yuan households” appeared, which were families having more than 10,000 RMB yuan in their savings account. Through taxation incentives, industrial restructuring, and human capital investment driven by the “early rich”, the State has managed to make people rich and created a rugby-shaped income pattern. This approach has injected vitality and vigor into China’s distribution system which is not a zero- sum game, but aims at building a community of a shared future for all. Some people getting rich first will not dump others into poverty. The Recommendations for Formulating the 13th Five-year Plan for Economic and Social Development by the Fifth Plenary Session of the18th CPC Central Committee reiterated that “the fruits of development should be shared by all” and “we shall make steady progress towards common prosperity”.

6.1.7 Safeguarding Fairness and Justice of Distribution as Socialist Values In income distribution, absolute fairness is impossible, because people have different endowments and capabilities, which will inevitably lead to differences in income. However, fairness of rules, opportunities and rights must be safeguarded, which is a precondition for realizing the overarching goals of socialism. Commitment to fairness and justice ensures that the same mistake is not made on critical and fundamental issues. Over the past 40 years, concepts of income distribution have also improved, and the restrictions of planned economy have been shaken off. Guided by the concept of socialism with Chinese characteristics, China has greatly updated and enriched the theory of distribution according to work. Over the past 40 years, China has improved its concept of income distribution, upgrading from a previous concept that distribution according to work should play the dominant role while various other distribution modes coexist, to an updated concept that income should be distributed according to production factors. In addition to labor and capital, other production factors such as land use right, technology, management can participate in the exchange of equal values in the market. The change in the income distribution policy reflects the change in the ideology underlying income distribution. By allowing more production factors to participate in income distribution, Chinese government has worked to address the rise of the Gini coefficient, the growing unfairness in wealth distribution and

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the widening income gap. Thus, income distribution has become fairer and more reasonable, and people’s living conditions are getting better and better.

6.2 Key Characteristics of the Changes in Income Distribution After 40 years of reform and opening-up, China’s economic strength has increased greatly, people’s living conditions have improved, and major innovations have been achieved in science and technology. The growth of economic and technological strengths has created a material foundation for national prosperity. The income distribution policy, which aims to enable people to share the fruits of development, has really benefited the people, but structural problems still exist, and distribution has not been reasonable yet [1]. An analysis of the key characteristics of changes in China’s income distribution system since reform and opening-up is good for understanding the basic law of income distribution and figuring out what is the best mode under China’s current conditions, as well as identifying the problems and finding the right solutions.

6.2.1 Distribution Reform Driving Economic Growth Income distribution that aims at both fairness and efficiency not only can safeguard social justice, but also is an important means to stimulate growth. In other words, income distribution is a driving mechanism for development, and distribution rules should be improved in the reform process. A good distribution regime would increase social production efficiency, and a bad one would hinder growth. Before reform and opening-up, China once implemented an egalitarian distribution system, which resulted in “high centralization, low efficiency, and equalitarianism”. The denial of competition by equalitarianism produced a huge negative impact on social production, which finally led to the decline of production. Equalitarianism ended in poverty. After the implementation of reform and opening-up, the household contract responsibility system adopted in rural areas mobilized the entire society. The new policy allowed farmers to use the collectively-owned land and conduct their production activities independently. It showed that individuals can be inspired and mobilized if they are given full land use right. It also marked the first step towards market economy. Income distribution practices over the past 40 years have confirmed the impact of distribution on efficiency. However, the growth of personal income is never a universal growth. People from different regions, industries and social classes would earn different incomes, and the rewards for different factors of production vary widely. Any increase of the Gini coefficient and any chaos in the distribution order would affect the healthy and sustainable development of a society. That’s why

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government authorities have paid attention to the impact of distribution reform on society and taken measures to improve fairness and justice.

6.2.2 Distribution Reform Reflecting China’s Current Conditions China is currently at the primary stage of socialism and will remain at this stage for a long time. This level of national development determines the goal of income distribution. As a part of the national economic system, China’s income distribution regime is subject to dynamic adjustments according to the progress of national economy. Given the huge population, weak economic foundation and relatively inadequate resources per capita, priority should be given to efficiency at the primary stage of socialism. In the early years of reform and opening-up, China decided to break the “big rice pot” to overcome egalitarianism, proposing that efficiency should be prioritized, while due consideration should be given to fairness. Following the economic law that “production determines distribution”, China implemented the income distribution system in which distribution according to work plays the dominant role while various other modes of distribution coexist in order to mobilize all factors of production. In the early 21st century, as income gaps widened, more attention was paid to fairness, while egalitarianism remained a taboo, to narrow down income gaps and ease social conflicts. In short, income distribution modes have been profoundly affected by economic development, the balance between fairness and efficiency, social security needs, social class structure, and labor supply and demand at the primary stage of socialism. Therefore, changes in China’s income distribution system have always been made to solve real problems. Theoretical research and the top-level design of income distribution have also been made to address real problems.

6.2.3 Distribution Reform Following the Market Orientation Income distribution is a key issue for both socialist countries and capitalist countries, but it plays a bigger role in market economy. China’s income distribution reform has followed the market orientation. The Third Plenary Session of the 18th CPC Central Committee confirmed the decisive role of market in the allocation of resources, triggering a new round of income distribution reform. Price is a key transmission factor in a market economy, while fairness is playing a more and more important role in income distribution. In the early years of reform and opening-up, China implemented the policy of allowing some people to get rich first and the income distribution system in which distribution according to work should play the dominant role. However, the 18th CPC National Congress proposed to “promote both economic efficiency and fairness to realize more sustainable development”, “increase personal income in

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step with economic development, increase personal income as a share of national income, and increase the proportion of labor remuneration in primary distribution”. The Congress also insisted that “a proper balance should be struck between efficiency and fairness in both primary distribution and redistribution, with particular emphasis on fairness in redistribution.” Over the years, China’s income distribution reform has always considered efficiency as the basis of fairness, and considered fairness as a guarantee for efficiency. However, in China’s renewed concept, fairness must be secured through utilizing market forces to prevent the history of egalitarianism caused by administrative intervention from repeating itself. Market forces must be utilized to mobilize all market participants, promote industrial upgrading and increase human capital to stimulate economic growth. After 40 years of unremitting efforts, personal income has increased significantly. The income gap between different economic sectors has widened as their contribution to productivity varies, but the internal income gap within a certain sector has been narrowed down. The regional income gap has also been reduced by the industrial transfer gradient and endogenous growth. When it shrinks, people’s sense of gain is obviously enhanced. China’s Gini coefficient of personal income dropped from 0.491 in 2008 to 0.465 in 2016, and the ratio of urban and rural disposable income has dropped to below 3.1

6.2.4 Distribution Reform Reflecting the Impact of Globalization Since the 1980s, the global income gap has been widening. The income gap is bigger in developing countries than developed countries. China’s income distribution reform reflects the global trend while meeting its own needs. Since the 1980s, globalization has accelerated, and international trade has grown rapidly. The proliferation of network technologies has also fueled global integration. In 2001, China joined the WTO, and has gradually become a champion of free global trade. China has advanced its income distribution reform in this context, which has been affected by moves of globalization, like FDI, technology upgrade and the Belt and Road Initiative. In terms of FDI promotion, China first opened up the Eastern coastal region and then the hinterland (Middle and Western regions). For 40 years, China has attracted a large amount of foreign capital to support its technology progress by this approach. During the early years of the reform and opening-up, relying on the combination of foreign investment and cheap local labor, China had built a lot of factories to engage in processing trade and import substitution. In this process, the income distribution pattern changed through the increase in total work remuneration under the distribution system in which distribution according to work played the dominant role. “Time is money” became a popular slogan, indicating that efficiency had got into the mind of the Chinese people. National income soared as a result. Later, capital gained a much bigger share in income distribution, as the capital markets grew. Technological 1 Source:

NBS.

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transformation directly spelt into a sharp increase in productivity, competitiveness, and marginal income. The Belt and Road Initiative has increased the outflow China’s capital and technology, which has boosted China’s globalization in an opposite way. The export of capacity, equipment and technology has a long-term impact on national income.

6.2.5 Distribution Reform Following a Progressive and Innovative Path As said above, China’s reforms have followed a progressive approach. This approach reduces “absolute resistance” to reform and allows for “trial and error”, as remedies can be made after a policy is found mistaken or flawed. Momentum can be maintained in this way. After the launch of reform and opening-up, progressive reform was first implemented in the field of income distribution. China has a vast territory and its provinces are enormously different. Therefore, any one-size-fits-all reform is doomed to fail in China. Since reform and opening-up started, China has been trying to strike a balance between stability and development through reform. Stability is a top priority. Without a stable environment, it is impossible to develop. Therefore, while encouraging people to develop the economy, the government has paid closer attention to social stability. An uneven and unfair income distribution system would inevitably cause social unrest. Therefore, improving personal income and narrowing income gaps can assure social stability. China’s income distribution reform began in rural areas and then gradually extended to urban areas. The reform put great emphasis on efficiency. The value of labor was first recognized, and then the contributions of other factors of production were measured and rewarded. After efficiency improved, the importance of fairness became more prominent. Since the 14th CPC National Congress, every CPC Congress and every Plenum of the CPC Central Committee have put fairness of income distribution at the center and stressed the urgent need to realize distributive justice. Along with income distribution reform, reforms have been implemented in many other areas, including the fiscal and taxation regime, SOEs, factors of production, the financial system, and rural development. Synergy has been formed and the benefits of reform have been maximized.

6.2.6 Distribution Reform Creating Synergy Between Market and Government The government’s role in income distribution is mainly performed through levying inheritance tax and income tax, controlling corruption, and implementing rule-based governance. Market forces, however, play a decisive role in income distribution, and the transmission factor is price. In China’s income distribution reform, both

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government and market have played their roles. Throughout the history of reform and opening-up, China has been trying to identify the boundaries of government power and the value of market forces. The 14th CPC National Congress clearly stated that before the establishment of a socialist market economy system, the government had intervened with economic operations, and distribution according to work played the dominant role, with other distribution modes playing supplementary roles. The Congress proposed to “let the market play a fundamental role in the allocation of resources”. The income distribution system therefore became more market-oriented, while the government worked to build a more complete and adequate social security network to ensure that people’s basic needs are met. The government has also tried to address excessively high incomes and eliminate illegitimate incomes. The Third Plenary Session of the 18th CPC Central Committee proposed to “let the market play a decisive role in the allocation of resources and let the government play its due role in a better way”. Theory and practice have proved that market has the best mechanisms for allocating resources, but the distribution of income cannot be implemented through market forces. Instead, the government has its role to play. The market forces can be used in primary income distribution, while the government is mandated to meet people’s basic needs, eliminate corruption while accelerating economic transformation and adjusting the development mode according to real needs.

6.2.7 Distribution Reform Highlighting Inclusive Development Since the 18th CPC National Congress, the CPC Central Committee has attached great importance to income distribution reform and proposed five major development concepts, including “inclusive development”, to guide the income distribution reform. Xi Jinping once said, “Development should not benefit some people only. It should benefit all”.2 That means development should be inclusive, or shared by all. China must bake a bigger cake and then share the cake. In real terms, China must further develop the economy and the “cake” must be shared by all the people. Guided by the concept of inclusive development, China has stepped up its efforts to reduce poverty by implementing targeted poverty alleviation. The goal is that the poverty-stricken rural population must be lifted out of poverty and regional poverty must be eliminated during the Thirteenth Five-year Plan period. After diminishing marginal effect of poverty alleviation, which is a weak link in income distribution, is eliminated, inclusive development can be realized. Inclusive development requires the strong support of redistribution. The government must let its taxation regime play a more progressive role in regulating income distribution, enhance social security, 2A

speech delivered by Xi Jinping at the seminar of leading provincial and ministerial cadres on implementing the spirit of the Fifth Plenary Session of the 18th CPC Central Committee, January 18, 2016.

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improve rule- based governance, rationalize the income distribution order and create a fair and reasonable income distribution pattern.

6.3 Achievements of China’s Income Distribution Reform in the New Era As the income distribution reform advances, the conflicts of interests have intensified. In order to ease the resistance and accelerate the reform, China has introduced the new idea of classified reform: encouraging people to get rich through hard work and legal business operations, expanding the middle-income group, increasing the income of lower-income groups, controlling excessively high incomes, and banning illegal incomes. The government now pays attention to different fields and demographic groups, and tries to address income distribution issues of different classes according to the order of priority. The reform has made great achievements and offers great clues for further reform and reforms in other fields.

6.3.1 Deepening the Civil Servants Salary Reform Civil servants refer to personnels who perform public duties according to law and are included in the State administrative staffing system, and whose salary and perks are paid by public finance. The salary of civil servants is part of administrative cost, and cannot create any economic output directly. It is also an important variable that can stimulate civil servants’ performance. Therefore, the salary system has a great influence on administrative efficiency, and thus affects economic performance. The civil servants salary system was adjusted in 1956, 1985, 1993 and 2006, and now China is believed to be implementing a rather well-regulated civil servants salary system. However, there are still many problems. One is the lack of a dynamic adjustment mechanism. While the international and domestic economic conditions are volatile and living costs are rising, the fixed salary system for civil servants looks more and more obsolete. Now, local governments are giving their personnel special allowances out of their own financial resources to increase real income of civil servants to ensure stable civil service provision. Recognizing the deficiencies in civil servant salary system, in January 2015, the General Office of the State Council forwarded the “Implementation Plan for Adjusting the Basic Salary Standards of Government Personnel” (the “Implementation Plan”) formulated by the Ministry of Human Resources and Social Security and the Ministry of Finance. The Implementation Plan proposed two major adjustments. One is to raise the salary standards and regulate allowances, recognizing and transferring some allowances to the regular salary. The other is to establish a regular salary standard adjustment mechanism

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by comparing salary payments to civil servants with the wage standards of enterprise employees of a comparable level in accordance with the Civil Servant Law of People’s Republic of China. Using the same mechanism for adjusting minimum wage standards, the basic salary standards for civil servants would be adjusted once a year or every two years. The adjustments should be based on wage comparisons, national economy surveys, government budget balance and the price index.

6.3.2 Deepening Reform on Compensations for SOE Executives Compensation is an incentive for the development of enterprises. The reform of State- owned assets and SOEs depends very much on regulating the compensations for SOE executives, making their compensations transparent, regulating their perks, and properly including the management performance as a factor in the wage system of enterprises. In early 2013, China issued Guiding Opinions on Income Distribution Reform, which established a comparative principle for compensations for SOE executives. The Decision of Third Plenary Session of the 18th CPC Central Committee pointed out that SOEs should appropriately increase the proportion of market-oriented recruitment, and rationally determine the pay standards and strictly regulate the payment of salary, position-related benefits and perquisites to SOE executives. This Decision laid down the basis for the reform of compensations for SOE executives. On August 29, 2014, the Political Bureau of the CPC Central Committee reviewed and approved the Plan for Reform of the Compensations of Executives of SOEs under the Central Government. The Plan proposed to pay differentiated compensations according to the present performance and long and mid-term development of SOE executives, and prevent paying excessively high compensations to SOE executives by putting a cap on the income of government-appointed SOE executives, especially those in monopoly industries. The goal was to close the income gap within SOEs. One means to achieve this goal was that the income of SOE executives must grow slower than the average of all employees [2]. Under this Plan, the performance evaluation and compensations of SOE executives should be subject to stricter Party rules. First, a maximum limit was placed on the seven duty-related expenditures by executives of SOEs. Second, four kinds recreational activities paid for by public finance were banned. Third, excessively high annual salary of executives of financial enterprises was put under restriction. In addition, the duty-performing acts of executives of SOEs under the central government should be governed by both the “eight-point frugality code” and the current rules for employment of SOE executives.3

3 Excerpted from “A Reform Plan for the Payment Packages of Executives of SOEs under the Central

Government in 2014”, https://www.360doc.com/content/16/0213/20/30522794_534367354.shtml.

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6.3.3 Establishing a Mechanism for Regular Wage Increases Wage is the core economic interest of workers. Establishing a mechanism for regular wage increases is an important way to realize fair income distribution and decent work for all and let workers share the fruits of development. Considering that the income level of shop-floor workers is low and their working conditions are poor, and that workers are paid differently for the same work, the report to the 17th CPC National Congress stressed that the income distribution reform should be deepened and the share of labor remuneration in primary distribution should be increased. Efforts should be made to develop and put in place a mechanism of regular wage increases for workers, especially shop-floor workers, and a mechanism to guarantee that their wage is paid in full. This aims to guarantee that they can work decently. At the macro level, a wage adjustment mechanism means a set of market-based rules and norms to adapt the standards and pattern of workers’ wage to changes in production and business performance, the external business environment and the balance of labor supply and demand. If external conditions improve, a business would be more profitable, and the pay to workers rises. At the micro level, a wage adjustment mechanism refers to a set of rules and norms agreed upon by enterprises and workers through negotiation concerning the standards and methods of payment of workers’ wage [3]. A regular wage adjustment mechanism consists of three part: wage bargaining; regular wage adjustment; and wage payment supervision.

6.3.4 Implementing Employee Shareholding Schemes in Publicly Listed Companies The Third Plenary Session of the 18th CPC Central Committee emphasized that, under mixed ownership, workers should be allowed to hold an equity stake in the company. In previous enterprise ownership reforms, equalitarian and universal employee shareholding schemes had all failed, as such schemes encouraged egalitarianism and forced enterprises to pay excessive dividends. In June 2014, CSRC (China Securities Regulatory Commission) issued the Guiding Opinions on the Pilot Program of Employee Stock Ownership Plans Implemented by Listed Companies, which pushed SOEs to explore their own employee shareholding schemes. Unlike the previous measures, this document first encouraged high- tech enterprises to conduct pilot programs, and allowed the company management and key employees to hold an equity stake in the company. Compared with stock ownership shared by all employees, this approach offered more incentives to the core personnel of enterprises and created a stronger internal drive. Giving employees an equity stake would motivate them to take risks and make efforts to maximize their personal interest. Pilot employee shareholding schemes implemented by publicly listed companies would

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facilitate benefit- sharing between employees and owners, improve corporate governance, motivate their employees and increase the company’s competitiveness. This would also maximize the value of private funds through the market.

6.3.5 Regarding Knowledge and Technology as Factors of Production to Stimulate Innovation In order to accelerate innovation-driven development, China has offered income distribution incentives to mobilize the initiative and creativity of scientists and R&D personnel and encourage them to produce more and better results and translate technology innovations into real productivity. In 2016, the General Office of the CPC Central Committee and the General Office of the State Council issued “Several Opinions on Implementing Distribution Policies to Enhance Knowledge Value”. The Opinions aimed to maximize the value of knowledge by offering income distribution incentives to people working in natural sciences and philosophy and social sciences, and building a complete innovation chain including basic research, applied research, product research and development, and research outcome industrialization. This measure aimed to strengthen systemization and classification. Hoping to borrow market mechanisms, the Opinions proposed to raise basic wage stably, offer performance pay distribution, and even allow scientists and R&D personnel to claim a share of the benefits from industrializing outcomes. In short, scientists and R&D personnel’s income should be closely tied to their job responsibilities, work performance, and their actual contribution. A virtuous circle must be shaped in which knowledge could create value, and value creators could get a due share of the value and be motivated to create more knowledge. The income distribution should reflect and even enhance the value of knowledge. First, the income of scientists and R&D personnel should be increased through a regular performance pay rise mechanism, and an increase in the share of R&D personnel in the value of research outcomes. Second, government funds should be mobilized to encourage and guide scientific research. For this purpose, administrative rules for managing government funds and research projects and outcomes should be improved and institutionalized, and government purchase of service should be implemented to support social sciences institutions and think tanks. Third, scientists and R&D personnel should be encouraged to earn a reasonable income by commercializing their research outcomes. Accelerating the commercialization of research outcomes should be utilized to realize the value of knowledge through market forces. In addition, scientists and R&D personnel, including university professors, could take part-time jobs and earn lawful extra income, so that labor, knowledge, technology, managerial expertise and capital could be mobilized to create value, and labor, knowledge, talent and creativity are respected in the entire society.

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6.3.6 Giving Farmers More Property Rights to Increase Farmers’ Income Due to the urban–rural duality, the income gap between urban and rural residents has remained huge, which is partly caused by inequality in ownership of houses and other properties. The Decision of the CPC Central Committee on Some Major Issues Concerning Deepening the Reform Comprehensively adopted at the Third Plenary Session of the 18th CPC National Congress in 2013 proposed that China should establish a unified construction land market for both urban and rural areas to give farmers more property rights. This Decision aimed to build an income distribution system that connects urban and rural areas. The Decision focused on strengthening the farmers’ ownership of rural land use right, allowing them to have an equity share of the collective assets and a share in the land value- added income. Above all, it confirmed farmers’ housing property rights and their power over collectively owned profit-oriented construction. To be more specific, the government would give farmers the rights to land mortgage and guarantee of contracted land use right, and give the same rights to rural collectively owned profit-oriented construction land as those given to state-owned land. The government would allow rural collectively owned profit-oriented construction land to be sold, leased and appraised as shares, on the premise that it conformed to planning and its use was under control, and would ensure that it could enter the market with the same rights and at the same prices as Stateowned land. The government would improve the secondary market for land leasing, transfer and mortgage. There was a huge space to increase farmers’ transferable income mainly through promoting equal exchange of urban and rural factors and balanced allocation of public resources. Efforts would be made to increase economic and social investments in rural areas, promote education, culture and medical care in rural areas, direct more resources to rural areas, which would also help increase farmers’ income.

6.3.7 Promoting Rural Taxation Reform to Energize Agricultural Development Taxation reform is a key measure to develop rural productivity. In order to ease farmers’ burden, the central government proposed to reform the current rural taxation system. The reform was piloted and then implemented in some provinces after 2001. This reform measures included “Three Cancellations”, “Two Adjustments”, and “One Reform”. “Three Cancellations” refers to the cancellation of administrative fees and government fund obligations imposed on farmers, such as contributions to the “township planning fund” and rural education fund; cancellation of livestock slaughter tax; and cancellation of the obligation to provide free and voluntary labor to the government. “Two Adjustments” refers to adjusting the current agricultural tax and the special agricultural product tax.

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“One Reform” refers to the change of the current methods of contribution to the “village reserve fund”.4 In 2000, the rural taxation reform started in Anhui Province. This was another reform project piloted in Anhui province after the household contract responsibility system. Following the pilot project in Anhui province, Jiangsu Province launched the pilot rural taxation reform. In 2002, based on feedbacks from the pilot reform projects and local willingness to reform and local financial strengths, the State Council permitted 20 more provinces to introduce the reform. After the 16th CPC National Congress, the State Council issued the “Recommendations for Extending Rural Taxation Reform Nationwide”, so the rural taxation reform was carried out throughout China. In 2004, in order to ensure stable increase in agricultural output and increase farmers’ income, the central government decided to cancel agricultural tax within five years. As the first step, a pilot tax exemption project was launched in Heilongjiang and Jilin, tax rates were cut in other provinces, and taxes for special agricultural products were cancelled, except for tobacco. In March 2006, the agricultural tax was completely cancelled nationwide. The State Council decided to shift the focus of reform to township and village institutions, rural compulsory education, and county and township public finance systems, which was a new phrase of comprehensive reform in rural areas [4]. The rural taxation reform has played an important role in maintaining social stability and improving the ties between the Party and the rural people. The reform was also a major step taken by the CPC Central Committee and the State Council to curb unauthorized collection of fees, charges, fines and fund contributions from farmers, to improve the rural distribution system, and to reduce the burden on farmers.

6.3.8 Promoting Compensation Reform in Monopoly Industries and Eliminating Unfairness of Distribution Monopoly influences the income distribution system on two ends: income and consumption. Due to administrative monopoly, benefits that should have been distributed to consumers are often turned into profits of monopoly enterprises. Even worse, monopoly causes unfair distribution, unfair opportunities and unfair rules, which would disturb the social mentality. If actions are not taken to address the impact, even the best designed and the most targeted reform plan for improving income distribution would not really work. For this reason, China’s income distribution reform has attached great importance to addressing administrative monopoly and its impacts. Together with SOE reform, the government has opened up administrative monopoly enterprises in competitive fields to private capital and foreign capital. Market competition has also been introduced to curb their excessively high incomes. At the same time, profits of SOEs have been incorporated in the national budget system; compensations of SOE executives are put under stricter regulation; 4 Rural

Tax Reform Office of the State Council, Q&As about the Rural Tax Reform in China, December 3, 2015, https://znzg.xynu.edu.cn/a/2017/07/13826.html.

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while the access barrier to industries critical to the national economy and people’s livelihood, public security, industries with natural monopoly, and industries owning strategic resources is lowered appropriately. Great efforts have been made to increase people’s business operational income by improving business facilitation and implementing policies that favor small and medium-sized enterprises. China has taken many measures to improve the pricing mechanism of resource products, like in water, oil, natural gas, electricity, transportation and telecommunications and some other sectors, set up a reasonable mechanism for sharing proceeds from transfer of public resources, and implemented a sound compensation system for use of resources and damage to the ecological environment.

6.3.9 Enhancing Government Integrity to Reduce Corruption in Income Distribution To eliminate unfairness in income distribution, it is important to combat corruption and hold the government accountable. Abuse of power to seek personal gains would not only cause unfairness of distribution, but also undermine the relationship between the Party and the people, and even erode the integrity of the entire society. To combat corruption, China has taken radical measures to hunt down “tigers”, “flies” and “foxes”. The government promised that when we stepped onto the stone, we would leave our footprint on it; when we clutched a piece of iron, we would leave our handprint on it. In other words, the fight against corruption has been very decisive. A key step was “to confine the exercise of power within an institutional cage”, which means enhancing disciplinary restriction on Party and government officials. The core is putting in place a penalty mechanism to deter corruption, a warning mechanism to prevent corruption and a guarantee mechanism to control corruption. The mechanisms address both the symptoms and root causes of corruption. In fields where the incidence of corruption is high, the government is implementing strict rules and regulations to tackle corruption based on the three mechanisms.

6.3.10 Implementing Targeted Poverty Alleviation to Build a Well-Off Society in All Respects Targeted poverty alleviation is not only an effective measure to realize common prosperity after some people have got rich first, but also a critical link in the income distribution system and an important means to build a well-off society in all respects. China has mobilized the entire Party, the entire country, and the entire society to implement targeted poverty reduction measures. Targeted assistance has been delivered to areas stricken by extreme poverty. The government has promised that by the year 2020, all rural residents living below the current poverty line would be lifted

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out of poverty, poverty would be eliminated in all poor counties, and poverty alleviation would reach those who truly need it and produce real outcomes. In November 2013, President Xi Jinping visited western Hunan Province, where he gave the order that the government must recognize the reality and implement development policies that reflect the local conditions. Poverty alleviation must target the real need. In January 2014, the General Office of the CPC Central Committee issued a guideline for implementing targeted poverty alleviation. In the new era, when we’re close to the goal of building a well-off society in all respects, the challenge is even bigger to alleviate and eliminate poverty. It is a pressing task. To achieve the goal that no one is left behind, the government has paid attention to helping people increase their confidence in their own ability to improve their own conditions and see that they can access the education they need to realize their dream. Education is a key factor in mobilizing the internal driving force for poverty alleviation. For poor areas and poor households, the government has shifted the focus from “blood transfusion” to “blood production”. In other words, the government is giving the poverty-stricken people a better access to education to eradicate the soil that breeds poverty and stimulate the motivation to eliminate poverty.

References 1. Quan, H. (2017). The new normal state and income distribution: Mechanisms, trends and solutions. Journal of the Party School of the CPC Central Committee, 21(05), 39–47. 2. Su, H. (2018, February 28). Compensation for SOE executives would not lead to brain drain. The Economic Observer. 3. Tan, Y. (2010). The collective bargaining system: Collective bargaining and collective contract. Shanghai: East China Normal University Press. 4. Xiao, J. (2011, August 2). Rural tax reform: A reform influencing rural development. The Economy Daily.

Chapter 7

Chinese Income Distribution over the Past 40 Years: Theoretical Development and Innovation

China’s income distribution theory has grown based on the combination of the practice of reform and opening-up over the past 40 years and the theory of Marxist political economy as well as the combination of China’s history and reality and the international experience of income distribution. The theory of income distribution with Chinese characteristics is an innovation of Marxist political economy, neoclassical economics and development economics.

7.1 Income Distribution Theory with Chinese Characteristics and the Marxist Political Economy Karl Marx had developed Marxist political economy based on dialectical materialism and historical materialism, explaining the basic law of production, distribution, exchange and consumption of materials at various stages of human development. Marxist political economy is the most profound, comprehensive and practical application of Marxism [1]. It is both scientific and revolutionary, theoretical and practical. Regarding distribution theory, Marxist political economy holds that production determines distribution, and therefore the theory of value underlies the theory of distribution. Since labor is the sole source of value, distribution according to work is the inevitable mode of distribution. During China’s economic modernization when Marxist political economy was put to test and had proved its validity, China has developed a socialist income distribution system with Chinese characteristics, and the process of theoretical development included three shifts: ➀ from unitary distribution according to work to the coexistence of multiple distribution methods; ➁ from labor-capital conflict to harmony between labor and capital; and ➂ from fighting for the surplus value to sharing profits.

© Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_7

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7.1.1 Shift from Unitary Distribution According to Work to the Coexistence of Multiple Distribution Methods The labor theory of value (LTV) is the cornerstone of Marxist political economy [2]. The income distribution theory based on the LTV explains how the private ownership of the means of production has caused the disparity of personal income and predicts that public ownership would replace private ownership, and distribution according to work would replace distribution according to capital. The idea of distribution according to work is now an important part of Marxist political economy and scientific socialism. Marxist labor theory and distribution theory have evolved alongside with social and economic development of a society, but are still valid up to now. Several years after the founding of the People’s Republic of China, China established a socialist distribution system under the guidance of Marxism. In the era of planned economy, unitary distribution according to work was implemented in line with public ownership. Distribution according to work was a product of socialist public ownership. It is a total negation of the exploitative capitalist system. While productivity was relatively low, public ownership played a big role in boosting productivity, ensuring people’s basic livelihood and laying down the basis for industrialization. As the economic reform deepened, the weakness of a unitary distribution system showed up: it did not reflect the contributions of other factors of production. To mobilize producers, a reform in ownership was implemented. Thus, the mixed ownership system took shape in which public ownership took a central position and other forms of ownership developed side by side. As the ownership of production materials determines the distribution of consumption materials, the distribution system must be adjusted as the ownership pattern changed. Therefore, the income distribution system became the one in which distribution according to work coexisted with various other distribution methods. At the primary stage of socialism, in addition to public economy, there were non-public forms of economy, which made the diversification of distribution methods necessary. The 17th CPC National Congress stressed “the need to adhere to and improve the system whereby distribution according to work remains the predominant mode and co-exists with various other modes, and to improve the system so that production factors such as labor, capital, technology, managerial expertise have a right share according to their contribution”. The Third Plenary Session of the 18th CPC Central Committee insisted on “giving all production factors equal right to share in national income in order to mobilize all factors of development, including labor, capital, land, knowledge, technology and managerial expertise.” The shift from a unitary mode of distribution according to work to a mixed system in which distribution according to work played the predominant role and co-existed with various other modes and then to the combination of distribution according to work and distribution according to factors of production has been based on the Chinese theory of the primary stage of socialism which is in turn based on Marxist

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political economy. As practice has shown, at the early stage of socialism when productivity was still low, unitary distribution according to work was inadequate, and it must be combined with distribution according to factors of production. The combination has been proved crucial for boosting productivity and has also demonstrated how keen China is on absorbing and further developing Marxist political economy.

7.1.2 Shift from Confrontation to Harmony Between Labor and Capital Marxist political economy believes that labor-capital conflict would last as long as capitalism lasts, and labor-capital confrontation is the driving force for capitalist development. Since WWII, the capitalist labor-capital relation shifted from reconciliation to confrontation. Due to the predominance of private ownership, no matter how the labor-capital relation changes, an underlying conflict remains under capitalism, the conflict between the socialized nature of production and the private ownership of the means of production. Therefore, labor-capital confrontation is the root cause of many problems in a capitalist society: disparity between the rich and the poor, relative overpopulation or unemployment, overproduction, blind development, economic virtualization, environment crisis, and even global economic distortion. The Marxist theory on the labor-capital confrontation under capitalism is also applicable to the employment relationship in a socialist economy. Labor-capital confrontation exists in any mature market economy where some people are employed by others. However, in the socialist economy, the means of production is publicly rather than privately owned. Moreover, the labor-capital relation is different in a socialist economy from a capitalist economy. Under socialism, “labor” is not antonymous or antagonistic to capital, but refers to workers at large, or builders of socialism. Therefore, although the employment relation still seems to be based on benefits, the conflict between employers and employees is reconcilable from the perspective of the relation between productivity and production relations: the level of productivity determines the type of production relations. In China, labor is still under-privileged at the primary stage of socialism when the supply of labor was nearly unlimited. The imbalance between strong capital and weak labor, together with market failure, would lead to frequent labor conflicts. The imbalance would worsen as labor lacks negotiation power and adequate organization. To address this problem, China’s income distribution theory points out that the government, which represents the people’s interests, should exercise market regulation and play a major role in coordinating the labor-capital relation. The Chinese government has enacted laws to guarantee harmony between labor and capital. The principle is that, on one hand, capital must be reasonably rewarded (returns on equity must be safeguarded), and on the other hand, workers’ reproduction capability (wage income) must be guaranteed to promote the efficient allocation of resources and ensure the smooth operation of enterprises. Under this principle, China has made efforts to

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build lasting harmony between labor and capital, through institutionalizing collective bargaining to reverse the imbalance of “strong capital and weak labor”. Such efforts have reduced conflicts between labor and capital, and created win-win results for both sides. This is a key symbol of socialism with Chinese characteristics, and a major step to build a harmonious society. The shift from labor-capital confrontation to harmony also reflects the alignment between socialist practice in China and Marxist political economy, and extends the connotation of labor-capital relation. While advancing socialist modernization, the government must fully understand the forms of labor-capital conflicts which are inevitable in a socialist market economy, properly handle the conflicts, alleviate their impact on social and economic development. A harmonious labor-capital relation benefits all parties. This is another innovation of Marxist political economy contributed by China.

7.1.3 Shift from Fighting for the Surplus Value to Sharing Profits As said above, the LTV is a cornerstone of Marxist political economy. In a capitalist economy where means of production are privately owned, capitalists have the “residual claim”. In other words, capitalists take away the residual value created by “living labor” (total earnings minus contractual reward to labor), and keep the right over the surplus value (profit). The contradiction between the socialized nature of production and the private ownership of the means of production in a capitalist economy underlies almost all conflicts in a capitalist economy, and underlies the basic economic law of the capitalist economy, i.e., the law of surplus value. Karl Marx believed that the purpose, motivation or essence of capitalist production is to seek the surplus value created by workers’ labor. In the production relation characterized by capitalist occupation and exploitation of labor, socialized productivity is the means by which capitalist extracts surplus value and realizes capital appreciation. Capital appreciation is basically a process of surplus value creation. In this process, the capitalist class, which is a minority group, accumulated wealth rapidly through exploitation of the working class, and meanwhile most workers became poorer. In this process, the gap between the rich and the poor becomes wider, leading to a huge gap between production capability and consumer capacity and the conflict between the capitalist class and the working class. The Marxist theory of surplus value reveals how accumulation is realized in commodity economy. Capitalists use some of the surplus value they’ve exploited from labor for personal consumption, and convert the rest into capital to acquire additional means of production and labor to scale up production. Capitalists claim the right over surplus value and increase their capital by turning surplus value into capital. By expanded production and reproduction, more surplus value is generated

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which becomes profit and then capital. Production and living materials are supplemented, and social wealth is accumulated in this way. Therefore, surplus value plays a very important role. The amount of surplus value created by workers is an important measure of social productivity and determines the national financial strength. In a socialist economy, profit maximization is also a common goal, but how profits should be distributed remains a big problem. Public ownership determines that all factors of production, including labor, claim a share of the surplus value. This provides the theoretical basis for a profit-sharing system, which is equal to redistribution of after-tax profits and a form of compensation in addition to regular wage and bonuses. This system mobilizes workers to play a dominant role in capital accumulation, and empowers them to benefit more from capital accumulation based on their contribution, which accelerates capital accumulation. Implementing a profit-sharing system in an enterprise helps resolve the conflict between capital (the employer) and labor through distributing the interests and risks between them. This approach can mobilize capital owners to invest more and employees to work harder. The shift from fighting for surplus value to sharing profits reflects the basic relationship between ownership and the distribution mode. Under socialist public ownership, China’s distribution system has been renewed through learning from developed countries and combining international practices with China’s nation conditions. China has established a sound legal system so that socialist capital and capital accumulation can benefit and motivate workers. The sharing of profits by enterprise owners and employees is yet another Chinese innovation of Marxist political economy.

7.2 Income Distribution Theory with Chinese Characteristics and the Neoclassical Distribution Theory Neoclassical economics has always kept a strong faith in the Kaldor’s law and his “stylized facts”. In the marginal productivity theory of distribution, the contribution of a factor is measured by its marginal productivity, which determines its share in the distribution, in which conflicts between labor and capital at the level of social relations are covered up. However, in the development of modern economy and society, stylized facts have occurred in the field of income distribution that transcend neoclassical economics, which has driven the development and innovation of income distribution theory.

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7.2.1 Combination of Distribution According to Work and Distribution According to Factors and the “Kaldor Facts” and the Marginal Productivity Distribution Hypothesis In macro-economics, Kaldor facts are a group of stylized facts that reflect the real law and basic characteristics of economic operations. According to the Kaldor facts, the share of various factors of production in the distribution of national income is basically unchanged, and its theoretical basis is Say’s utility value theory and the trichotomy of value in classical economics.1 After the rise of neoclassical economics, the theory of marginal productivity became its cornerstone, laying down the rules for determining the remunerations of various factors of production or resources involved in the production process. In general, the remunerations of factors of production depend on the technical conditions in the production process. Whereas the number of other factors is constant, any reduction (or increase) in the value of a commodity attributed to a production factor leaving (or joining) the production process is equivalent to the remuneration of that production factor. John Bates Clark suggested the theory of marginal productivity distribution in The Distribution of Wealth. He believed that the marginal productivity of labor, land, capital, and entrepreneurs determined their value, as well as their remuneration in the form of wage, rental, interest, and profit. Marginal productivity theory holds that in a capitalist economy, “the marginal productivity of labor determines wage, and the marginal productivity of capital determines interest.” Therefore, there is no exploitation of labor by capital, and the relationship between workers and capitalists is as equal as the relationship between buyers and sellers. In other words, income distribution in a capitalist economy is governed by a natural law which regards the entrepreneur’s profit as a surplus over interest (and rent) and associated with the introduction of technological, commercial or organizational improvements into the economic process. It explains in part the long-term changes in wage differentials between industries and occupations. However, the marginal productivity theory of distribution presupposes complete substitution between labor and capital, which is inconsistent with reality in most cases. In a world heavily influenced by monopoly, the remuneration of factors of production is not equivalent to their marginal productivity. Even if capital is rewarded based on its contribution, inheritance makes distribution of property rights to individuals unethical. In fact, most schools of economics agree that “marginal productivity theory helps explain how income is distributed in a capitalist economy, but it is not adequate as an ethical explanation of the distribution as we see [3].” The combination of distribution according to work and factors in a socialist economy is a major innovation that is more practical and valid than the Kaldor hypothesis and the marginal productivity theory of distribution. The combination 1 The land owner receives rent, the capitalist receives interest income, and the worker receives wage

payment.

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helps establish a reasonable distribution system offering incentives to various production factors, which fuels the development of productive forces. The report to the 18th CPC National Congress stated that “to ensure that the people share in the fruits of development, we must deepen reform of the income distribution system. To solve the most pressing and real problems of the greatest concern to the people, we should adhere to the basic socialist economic system and the socialist income distribution system, and on this condition adjust the pattern of national income distribution and improve redistribution. We must close the income distribution gap by handling the relationship between efficiency and fairness properly. We must increase individual income in step with economic development and labor remuneration in step with improvement in labor productivity, and we should raise the share of individual income in the distribution of national income and increase the share of labor remuneration in primary distribution.” The Congress insisted that China must form a pattern of income distribution with adequate rules, effective regulation, reasonable share division, and harmonious relationships. China must also “improve the primary distribution system to allow factors of production such as labor, capital, technology and managerial expertise to have their due share of income according to their respective contribution.” China should also deepen the reform of the enterprise wage system based on market adjustment, enterprise autonomy, equal negotiation and determination, and government supervision and guidance. Collective bargaining should be implemented in wage negotiation between enterprises and workers, and the wage determination mechanism should reflect the labor supply and demand balance in the market and consider the profitability of enterprises. China should “take speedy steps to improve the mechanism of secondary distribution regulating income distribution mainly through taxation, social security, and transfer payments.” The government should be held accountable, use taxation tools reasonably, reduce the tax burden of low-income and middle-income earners, and increase taxation impact on highincome earners. The public finance system should be improved so that the proportion of expenditures on public services and social security would be increased, people’s transfer income would increase, access to basic public services would be equal, and the income level of low-income groups would increase steadily [4].

7.2.2 Unbalanced Coordinated Development and Distribution Versus Automatic Equilibrium Through Market Adjustment Neoclassical economists believe that distribution according to the marginal productivity of factors reflects the equilibrium of the interests of market participants, so this distribution approach follows the market interest orientation. The concept of equilibrium is two-fold: internal equilibrium and external equilibrium. Representing the principle of “balance of interest” in competition, equilibrium is a moderate extension of the competitive exclusion principle [5]. The principle of distributive equilibrium

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calls for suppressing anti-competitive behaviors to shape a contestable market environment and boost efficiency through competition. Orderly competition is instrumental for maximizing market benefits and rationalizing distribution. In some sense, the market interest orientation for distribution is mainly implemented by restoring damaged market interests and establishing a balanced benefit sharing mechanism. In the form of process fairness, it is embedded in the core of the market competition system design. However, the world is not as balanced as it is conceived by neoclassical economists. In terms of endowment, some are stronger and some are weaker. There are developed countries and developing countries, and there are rich regions and poor regions. Therefore, a fair process does not guarantee fair results. While the concept of balanced development emphasizes market forces, neglecting fair results may lead to unsatisfactory distribution practices. As global trade grows and international cooperation becomes more open, the market law of survival of the fittest would worsen the unequal distribution of interests between developed and developing countries, which causes global economic crises and populistic local protectionism. The imbalance in regional development will be maximized, rather than reduced, by “balanced distribution” that emphasizes “market interests”. Therefore, China’s socialist modernization program puts coordinated development ahead of balanced development. China stresses overall planning and comprehensive balance, addresses major issues through development, by which China has bridged shortfalls and gaps, and realized prosperity and development in all regions and areas. Coordinated development reflects the reality of development and is a scientific approach to improve the ability to master the law of development [6]. As President Xi Jinping pointed out, “our development must be scientific development that follows economic laws, sustainable development that follows natural laws, and inclusive development that follows social laws”, and “emphasis must be placed on improving the coordination and balance of development.” This is an innovative interpretation of the Marxist theory of development of human society, and it is an innovative theory of development in the contemporary economic and social context [6]. The concept of coordinated development is based on the Marxist theory and reflects CPC’s understanding of economic and social laws. It provides a solid basis for handling correlated issues in development, expanding the development space, and improving development efficiency. Coordinated development is also an effective way to avoid falling into the “middle income trap.” Development is systematic, involving many parties, many links, and many factors. The contradiction between infinite demand and limited supply, the combination of strengths and weaknesses, and the coexistence of slow development and fast development are stubborn issues in the course of development. To address these issues, we must promote coordinated development, and achieve overall balance in development. Dealing with China’s complex economic and social relations is like playing the piano. We must consider all aspects of development, which is like conducting a band. Coordination is a key to a symphony and the ambition to build a well-off society in all respects and bring China to a new level of prosperity [6].

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7.2.3 Fairness of Opportunities, Rights and Rules and the Traditional Concept of Fairness of Result The neoclassical utility value theory is based on individual psychology, or individuals’ own evaluation of the distribution outcome. Fairness in this sense is called fairness of result or outcome fairness. Whether distribution is fair or not does not depend on the measure of income gaps, but on whether the gaps are legal, reasonable and justifiable. Normally speaking, fair distribution is relative fairness in the income of all members of society. Distribution would be deemed as fair if income gaps are not too wide. Fairness of result is a necessary but inadequate condition for fair distribution. It means that workers have the right to receive reasonable pay for their own labor or contribution under conditions of fair opportunities and fair rules. Outcome fairness based on free competition, driven by benefits and dependent on the amount of resources often leads to disparity of distribution. Even if the results are fair, fair rules and development opportunities cannot be guaranteed. Without the fairness of opportunity and the fairness of rules, then the fairness of results is groundless. Adam Smith believed that people judge the fairness of compensation through social comparison, or comparing their own income with the income of others. Fair compensation is essential for employee satisfaction and motivation. John Rawls proposed to establish basic social institutions and design basic institutional arrangements to provide guarantees for distributive justice. In other words, the State distributes social wealth by force to ensure that each member of society has a certain level of material security. In John Rawls’s view, distributive justice has three conditions: First, distribution, as an institutional arrangement, must be recognized by all members of society and is feasible. Second, uncontrollable factors that lead to unfair distribution must be eliminated. Third, consensus must be reached among members of society on the distribution of goods. John Rawls also proposed to safeguard distributive justice through law. Amartya Sen’s theory of distributive justice advocates justice based on the equality of individual capabilities. To ensure the freedom of individuals to choose their own way of life, the equality of opportunities for personal development must be guaranteed. Each man has a different gift. Redistribution does not aim to equalize individual rights and interests caused by differences in capabilities, but to give everyone an equal opportunity so that they can use their own gift and exercise their own economic rights accordingly. As President Xi Jinping pointed out, “the Chinese people who live in our great motherland and the great era share the opportunity to lead a brilliant life, the opportunity to realize their dreams, and the opportunity to grow together with their motherland and the era.” Sharing in this context means fairness in access to opportunities. Fair access to opportunities is not only an important aspect of social justice, but also an important condition for improving the quality and efficiency of economic development. If there are unlimited opportunities to which everyone has access, individuals don’t have to compete for opportunities. If opportunities are limited and resources are scarce, rules should be put in place to ensure fair allocation of opportunities. In

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other words, an opportunity is a right. Having an opportunity is having the right to participate in an activity. This right should be distributed by rules. All-round human development is a key goal of Marxism, and a key goal of the efforts to build a socialist modern country with Chinese characteristics. All-round human development requires “new thinking”, a shift of focus from outcome fairness to fairness of opportunities for development. The 18th CPC National Congress called for “establishing in due course a system for guaranteeing fairness in society featuring, among other things, equal rights, equal opportunities, and fair rules for all.” The Fourth Plenary Session of the 18th CPC Central Committee further proposed to “strengthen the awareness of rules” and “improve the legal system that supports equal rights, equal opportunities, and fair rules.” China’s economic development in the new era needs deepened reforms to eliminate unfair rules that protect privileges, establish fair rules and ensure equal opportunities. We must stimulate the enthusiasm and creativity of all market participants in the context of fair competition.

7.3 Income Distribution Theory with Chinese Characteristics and Development Economics Development economics is a branch of economic studies that focus on how developing countries develop. In the area of income distribution, attention is paid to the evolution of income gaps in a country in the course of economic growth, and how growth affects distribution and how distribution in turn affects growth. As market economy grows, the relationship between growth and distribution has attracted more and more attention. The income distribution theory with Chinese characteristics is based on discussion about the relationship between growth, development, and distribution in development economics, gives up the development view in which growth precedes distribution, and corrects the theory that trickle-down effect occurs spontaneously. It also provides a Chinese footnote to the disappearance of the Kuznets inverted-U curve.

7.3.1 Parity of Growth and Distribution Versus Growth Before Distribution Economic growth provides the material basis for income growth and income distribution. Without economic growth, there will be no income growth, let alone income distribution. Economic growth and expansion are the prerequisites for improving income distribution, eliminating poverty, and enhancing equality in distribution. During rapid economic growth, the per capita national income of a country would continue to rise, consumer demand and investment demand would rise too, which

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will drive the growth of GDP and wage income. As a result, people’s living standards will greatly improve. Income distribution will continue to improve as economy grows. Meanwhile, total consumption and demand driven by income distribution are usually compatible with the total supply of products provided by economic growth. Therefore, the income distribution pattern can automatically adapt to economic growth and changes in the distribution pattern can help shift the gear of growth and achieve the goal of balanced growth. However, the optimizing impact of economic growth on income distribution depends on certain economic conditions; economic growth does not help improve the income distribution at any time and under any circumstances [7]. Economic growth also depends on a more reasonable industrial structure, and only rapid growth that is maintained based on a balanced structure can help improve income distribution. If the economic structure is seriously unbalanced, income distribution will worsen instead [8]. Therefore, economic growth and income distribution have interlinked under different economic conditions. On the one hand, economic growth may improve income distribution, reduce poverty and reduce income inequality, but it may also worsen income distribution under some conditions, leading to a sharp increase. On the other hand, income distribution also has a profound impact on economic growth. For instance, income distribution may promote economic growth and improve economic efficiency, but it is also likely to undermine the conditions of economic growth. Parity of growth and distribution means distribution is considered at the same time as growth. The old path of achieving growth first and then addressing distribution issues that developed countries once followed is equal to getting sick first and then curing the disease. It is not good for developing countries at least. In practice, the interactive relationship between distribution and growth is supported by real experience. The inherent relationship between distribution and growth should be discussed from the perspective of new economic conditions and interactions [9]. Income distribution can provide impetus to economic innovation and development via the provision of incentives. Innovation is a key driving force of economic development. Product innovation, technological innovation, institutional innovation, and market innovation boost economic growth, and income distribution stimulates innovation. Reasonable income distribution will motivate innovators to develop and apply new technologies. They can obtain more income from innovation, and technologies will continue to upgrade under a motivational distributional framework. An unreasonable income distribution system, such as absolute egalitarianism, or a distribution system that does not reflect labor contribution at all, will suppress enthusiasm for innovation and innovation activities, and slow down technological progress and economic growth. The primary aim of building a socialist economy with Chinese characteristics is to increase total national income, address poverty and improve people’s wellbeing. One way to improve wellbeing is to optimize the income distribution pattern through income distribution and redistribution policies that enable all members of society to share the benefits of economic development more equitably. It is especially important to use various redistribution tools and measures well, such as tax incentives, social security and social insurance, and explore ways to improve social welfare on the premise of ensuring economic efficiency.

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7.3.2 Common Prosperity Versus the “Trickle-Down Effect” Hypothesis Rapid economic growth creates innumerable jobs. Economic growth will gradually mobilize idle social resources, and increasing investment will drive employment growth, reduce unemployment, and reduce and ultimately eliminate poverty. This is the so-called “trickle-down effect”. According to the Okun’s Law, with every 3% increase in GNP and every 3% decrease in the output gap, unemployment will drop by 1%. In this way, economic growth can ultimately relieve poverty and improve the conditions of the unemployed. It can also increase the relative income level of all sectors, reduce inequality, and produce a “trickle-down effect”. In short, as economy grows, poverty decreases; lower-income people can benefit from economic growth and their income would increase. At first, the “trickle-down effect” hypothesis believed that economic growth would lead to economic expansion, and then “natural spillover” of benefits [10]. Benefits will trickle down from the high-income earners to the low-income population. Therefore, proponents of this hypothesis advocate tax cuts and encourage high-income earners to invest their income, and thereby create more jobs and income generation opportunities for low-income earners. However, economic development in the 1970s and 1990s showed that the trickledown effect would not occur “spontaneously”, and people came to realize the need to change the economic growth model rather than waiting for economic growth to reduce and eliminate poverty. New development economic theories advocate that economic growth should align with human development. For example, the 1996 Human Development Report elaborated on the link between economic growth and human development. The Report described five types of growth that do not support human development like jobless growth (that does not create enough jobs and even worsens the employment situation) and voiceless growth (that fails to enable citizens to participate in and manage public affairs and to freely express their opinions).2 Long Jingyun pointed out that economic growth and political autocracy are closely interlinked in many countries. A third type is ruthless growth that upsets and worsens the income distribution pattern. In this case, the expansion of wealth may create new poor classes. A fourth type is called “rootless growth” that would damage cultural diversity and has caused many developing countries to lose their cultural heritage. The last type is futureless growth that harms the environment and depletes resources, and therefore disrupts the sustainability of economic growth [11]. The Report concluded that economic growth may not necessarily lead to better human development. China’s development is a correction to the “trickle-down effect”. Deng Xiaoping’s proposal to let some people get rich first and finally realize common prosperity is the Chinese equivalent of the “trickle-down effect.” As the chief “designer” of China’s reform and opening-up program, Deng Xiaoping pointed out that China must “allow some regions, some enterprises, and some workers and farmers to get rich first through hard work and live a better life” [12]. Led by good practices, “the entire nation, people 2 More

details can be found in: http://hdr.undp.org/sites/default/files/reports/257/hdr_1996_en_c omplete_nostats.pdf.

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of all ethnic groups, will become richer as the national economy develops in waves [12].” This statement describes the road towards common prosperity, and defines goal of China’s socio-economic reform and development. Common prosperity is a core value of socialism with Chinese characteristics. Xi Jinping once said, “After the reform and opening-up program was launched under the leadership of Deng Xiaoping, we have, acting in line with China’s national conditions and the trend of the times, explored and blazed a trail of development and established socialism with Chinese characteristics. Our aim is to build a socialist market economy, democracy, an advanced culture, a harmonious society, and a sound eco-system, uphold social equity and justice, promote all-round development of the people, pursue peaceful development, complete the building of a well-off society in all respects, and eventually achieve modernization and ensure prosperity for all.3 ” In this light, a series of new development strategies, including targeted poverty alleviation, rural reforms, and the Belt and Road Initiative have been implemented to realize common prosperity.

7.3.3 Synchronization of Economic Growth and Distribution Improvement Versus the Kuznets Inverted-U Curve About the relationship between economic growth and income distribution, Kuznets proposed the “inverted U” hypothesis through comparative research using data from various countries, pointing out that when the economic level is low, income gap will widen as economy grows, while income gaps will narrow down along with economy growth when the economy is advanced. The Kuznets inverted-U hypothesis based on estimates and empirical studies analyzes the relationship between economic development and income inequality that primarily account for the shift from traditional agriculture to modern industry. The basic idea is that both industrialization and urbanization are parts of an economic development process, and in this process, income gaps will first expand and then narrow down [8]. Although it is only a hypothesis, the Kuznets inverted-U curve was once very popular, but after the 1980s, the inverted-U relationship between growth and distribution was challenged by development practices in many countries. It even disappeared in both developing and developed countries, leaving room for development economics. Since the launch of reform and opening-up, phenomenal achievements have been made in China. Overall, the total economic benefits to be distributed have kept growing, and the income level and distribution pattern have also changed. However, while income and living standards improve, income gaps are widening. To achieve the goal of building a well-off society in all respects, the Chinese government has implemented several rounds of income distribution reform. Since the 18th CPC National Congress, China has continued to advance the income distribution reform. From 2012 to 2016, the per capita disposable income grew by an average annual rate of 7.4%, 3 Xi

Jinping’s Speech at the European Academy in Bruges, Xinhuanet, April 1, 2014, available at http://news.xinhuanet.com/politics/2014—04/01/c_1110054309.htm.

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keeping pace with economic growth. Income gaps have gradually narrowed, and large-scale poverty alleviation is going on around the country. Meanwhile, services accounted for over 50% of China’s total GDP in 2015, and the industrial structure has undergone major changes. Industrialization and urbanization, the assumptions under which the Kuznets proposed the inverted U-shaped curve, have been replaced by services and urbanization. Because of technological progress, industrial upgrading, flexible employment, and the polarization effect of economic development in urban areas, the second half of the inverted-U curve has not appeared. China’s income distribution reform faces huge challenges in the new era. To address the challenges, the 19th CPC National Congress in 2017 stated that China “will work to see that individual incomes grow in step with economic development, and pay rises in tandem with increases in labor productivity.” This effort aims to synchronize economic development with growth in personal income, so that the improvement of labor productivity will benefit workers. The income distribution theory based on this synchronizing attempt is a key approach to dealing with the interrelationship between China’s economic growth and income distribution in the era of service economy and urbanization. It is good for improving income distribution, further improving resource allocation efficiency and accelerating economic growth, and therefore shaping a virtuous cycle of distribution and growth in the process of economic development. This distribution theory and practice of China have proved that income distribution and economic growth are not incompatible to each other, as people believe fairness and efficiency are. In fact, income distribution and economic growth can enhance each other. Economic growth is the material basis of income distribution, and income distribution is an important condition for economic growth. A reasonable income distribution regime can not only accelerate economic development, but also address unfairness in income distribution. Any imbalance would harm sustainable economic and social development. In practice, the key links for allocating resources and factors, such as the capital market, the political system and the social environment, can be reformed to ensure the effectiveness of institutional arrangements, economic structure, and government redistribution policies, so that all people have fair opportunities (such as educational opportunities, loan opportunities and insurance) to earn higher incomes and improve their wellbeing and conditions through their own hard work.

7.4 Key Dimensions of the Income Distribution Theory with Chinese Characteristics The income distribution theory with Chinese characteristics is based on the beliefs that the theory of value determines the theory of distribution and that the theory of the primary stage of socialism is aligned with the basic principles of Marxist political economy. It has developed by absorbing the advanced ideas of neoclassical economics and development economics. It is an open and evolving system of concepts

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and has played a positive role in guiding the development of the socialism with Chinese characteristics, advancing China’s income distribution reform, and shaping a rational and orderly pattern of income distribution in China [13]. It has several key dimensions as follows.

7.4.1 The Basic Socialist Economic System The 15th CPC National Congress established the principle that public ownership took the central position and other forms of ownership developed together, and this principle has become a basic economic principle of China and has kept deepening while the orientation remains consistent. This principle reflects the basic social and economic conditions of China which is still at the primary stage of socialism and will remain at this stage for a long time. As a long-term policy of the Communist Party of China, this economic principle forms an important component of socialism with Chinese characteristics and will be a major guideline for further developing the socialist market economy. The 19th CPC National Congress restated that China “must uphold and improve China’s basic socialist economic system and socialist distribution system. There must be no irresolution about working to consolidate and develop the public sector; and there must be no irresolution about working to encourage, support, and guide the development of the non-public sector. We must see that the market plays the decisive role in resource allocation, the government plays its role better, and new industrialization, IT application, urbanization, and agricultural modernization go hand in hand. We must actively participate in and promote economic globalization, develop an open economy of higher standards, and continue to increase China’s economic power and composite strength.” This new statement reflects new development realities and concepts, especially the belief that development is the foundation and key to solving all problems in China and that China’s development should be scientific development based on innovation, coordination, environmental justice, openness and sharing. To fully realize this scientific concept of development, China must further advance the concept of distribution, and establish a scientific concept of distribution that embraces fairness, justice and free development. While adhering to the distribution system in which distribution according to work plays the dominant role and various other modes of distribution coexist, China must let factors of production such as labor, capital, technology and management participate in distribution to form an advanced distribution system: distribution according to contributions, with the faith that this distribution system will foster fairness, justice and free development.

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7.4.2 The Primary Stage of Socialism The recognition that China is at the “primary stage of socialism” is a major theoretical innovation of Marxism in China. It accurately reflects the development level and historical position of socialism in China, and offers an ideological basis for CPC to maintain the stability and continuity of its policy line and development strategy in the new era. The report to the 19th CPC National Congress mastered the new features of China at the primary stage of socialism. “As socialism with Chinese characteristics has entered a new era, the principal contradiction Chinese society facing has evolved”, and yet “the basic dimension of the Chinese context, that our country is still and will long remain in the primary stage of socialism, has not changed. China’s international status as the world’s largest developing country has not changed.” These statements form a clear judgment of the historical stage of socialism in China, and convey a basic message that, in order to build a well-off society in all respects and to win a great victory of building socialism with Chinese characteristics in the new era, the entire Party and the entire country should firmly grasp the basic reality of the primary stage of socialism, and adhere to the Party’s policy line that is firmly based on this reality. It is the “lifeline” of the Party and the country, and the only path to improve the wellbeing of the people. This is a fundamental guarantee that socialism with Chinese characteristics always moves in the right direction in the new era. The distribution system in which distribution according to work plays the dominant role and various other modes of distribution coexist, or the combination of distribution according to work and distribution according to factors of production, is an inevitable choice of China at the primary stage of socialism. After the implementation of reform and opening-up, in order to stimulate economic growth, China took a bold measure to adjust the income distribution regime to offer incentives. The government allowed some people and some regions to get rich first and help bring others towards common prosperity. After the implementation of this growthoriented policy which gave priority to economic efficiency, China’s income distribution system gradually changed from the equalitarian distribution system under planned economy to a distribution system in which distribution according to work was central while various other modes of distribution coexisted. The Report to the 16th CPC National Congress further proposed to “establish the principle that labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their respective contributions, thereby improving the system under which distribution according to work is dominant and a variety of modes of distribution coexist”, and combine distribution according to work with distribution according to production factors. This innovative statement marked the shift from stressing growth only to giving equal weight to efficiency and fairness in the income distribution system. The implementation of multiple distribution methods and distribution according to production factors at the primary stage of socialism is good for mobilizing all elements that can create social wealth, including labor, knowledge, technology, management and capital. The result was much higher productivity and efficiency and the formation of an inexhaustible power that drives

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and accelerates China’s modernization. It promotes fair competition and common development between public economy and private economy, as various owners of means of production play their own roles in the socialist market economy at the primary stage of socialism. It also shapes the rational flow of various production factors and the optimal allocation of resources, delivers production factors to the Middle and Western regions, and coordinate the regional development of economy. Other benefits include: the establishment of a human capital mechanism that improves workers’ quality; facilitated industrialization of R&D outcomes that mobilizes scientists and R&D personnel; the improvement of labor productivity; respect for civil rights, equality, labor and creativity, and the development of a righteous socialist political environment.

7.4.3 Coordinated and Inclusive Development For a long time, the Kuznets inverted-U curve has been very popularly used in the world as a major analytical tool. The hypothesis is that at an early stage of economic growth, income inequality expands as economy grows, but as the economy is advanced, the income gap will gradually shrink. This hypothesis was once deemed as a universal law. However, since the early 1980s, the United States and Europe have shown an opposite relationship between economic development and income distribution. Since the 18th CPC National Congress, in order to adapt to the new normal state of economy and address the long-standing imbalances in economic and social development, China has implemented people-centered development approaches and new concepts of coordinated development. As Xi Jinping stressed, the new normal state is a new reality and an inevitable state of economic development at this stage, so China must make decisions based on this reality, act and make progress by mastering the new trends. Coordinated development means to firmly grasp the overall development and conditions of socialism with Chinese characteristics, correctly handle the major relations in development, and promote sound development of the entire society in all respects. To realize coordinated development, in distribution, the relationship between allowing some people to get rich first and realizing common prosperity must be very well coordinated. The key rests with the system in which distribution according to work is predominant and various other modes of distribution coexist. First, distribution according to work must keep its central position in the public sector of economy. Second, the government must play its role better in regulating wealth and income. In primary distribution, the government must rationalize the distribution of income and wealth through enacting, amending and implementing relevant laws and regulations. In redistribution, the government must regulate the excessive incomes of high-income groups by improving the taxation regime, raise the income of low-income groups by improving government transfer payments, and ban illegal incomes by improving the legal system.

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7.4.4 Primary Distribution and Redistribution in Socialist Market Economy The concept of socialist distribution with Chinese characteristics is based on the development of socialist market economy, highlighting the coordination between primary distribution and redistribution, and that between fairness and efficiency. Essentially, the relationship between primary distribution and redistribution of national income is equivalent to the relationship between efficiency and fairness. Primary distribution of national income should give priority to efficiency, but also emphasize fairness, especially the fairness of opportunities. Secondary distribution of national income (redistribution) should first consider and ensure fairness, but should also emphasize efficiency, especially the efficiency in using public finance. It should be noted that primary distribution should guarantee efficiency but has failed in some areas. A fair market competition environment must be created to provide equal opportunities, but this system should also boost efficiency, maximize incentives for economic growth. Attention must also be paid to the failure of secondary distribution to ensure fairness.

7.4.5 Functional Distribution and Size Distribution Functional distribution and size distribution are two aspects of distribution according to work and distribution according to production factors. The scientific concept of distribution with Chinese characteristics pays close attention to the relationship between functional distribution and size distribution. In theory, size distribution involves the relationship between an individual or a household and their total income, but it considers the amount of income earned by each person or household, regardless of how income is earned, whether it comes from wage, interests, profit, rental, gifts or inheritance. Functional distribution, or distribution according to production factors, refers to the share of each production factor in the total income distribution. Size distribution mainly reflects the fairness of income distribution, while functional distribution is more about the contribution of factors and efficiency in income distribution. Therefore, functional distribution and size distribution are two sides of income distribution. When the emphasis is put on distribution according to how much contribution a factor has been made, emphasis is also placed on fairness of income distribution. In this sense, the two aspects are connected and aligned.

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7.4.6 Income Fluidity with Chinese Characteristics Income distribution is not only about the income gap, but also the relationship between equality and efficiency. It is also about whether people can get fair opportunities of participation in social development. In a sense, income fluidity is as important as income distribution or the income gap. Income distribution refers to the static results of the overall income distribution in a particular period, and income fluidity reflects whether there is sufficient liquidity between income groups and whether people on low incomes have access to the same development opportunities as those earning high incomes, so they can move up on the income ladder. Higher income fluidity means that different income groups in the society have equal rights, equal opportunities of participation and development. Therefore, the Chinese concept of distribution not only cares about income distribution and the income gap, but also pays close attention to the income fluidity among different income groups. By considering both income distribution and income fluidity, a comprehensive judgment can be made of the income gap and development opportunities in a society.

7.4.7 Existence of Appropriate Income Gap and Unfairness of Distribution The scientific concept of distribution with Chinese characteristics recognizes the diversity of sources of income and the resulting income gaps. The income gap within a certain range should not be a very big problem; more attention should be paid to what has caused the gap and to what extent the gap is unreasonable. In other words, the income gap must be divided into reasonable parts’ and unreasonable parts, and their respective causes must be identified. It should be noted that, since the launch of reform and opening-up, under the diversified income distribution system that combines distribution according to work with distribution according to factors, and as production modes diversify, Chinese people are now able to earn income from many sources, not only from labor but also from various non-labor factors. In addition to labor remuneration and operational income, there are sources of income from ownership of capital and property, including financial assets. People also receive social security income like minimum wage guarantee, and various transfer incomes. In this way, the diversified sources of income have improved the living standards of all the people. However, while there are diversified sources of income, there is also illegitimate income, or income from illegitimate sources, earned by illegitimate means, and it exists beyond regulation. Moreover, the illegitimate income accounts for the unreasonable parts of the income gap. The scientific concept of distribution notices the relationship between income source diversification and income regulation, and tries to guarantee the diversification of income sources and the legitimacy of income.

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7.4.8 Relationship Between the Government and the Market In the Chinese concept of distribution, the government is obliged to maintain social justice in the income distribution system. Both theoretical research of macroeconomics and the experience of income distribution in developed countries clearly show that maintaining social justice and maximizing employment are the basic duties of a modern government in the market economy. It is an essential aspect of good governance. It should be noted that, at present, China’s income distribution is a bit distorted and income fluidity is not smooth, and a major reason is the unclear duty division between the government and the market for income distribution. The relationship between distribution by government power and distribution according to the contribution of factors has not yet been set apart cleanly. Government power that has participated in distribution and in many cases becomes a “capital”, which has distorted the order of income distribution and damaged fair competition in the market. To solve this problem, the scientific concepts of development and distribution with Chinese characteristics require a new definition of the powers and duties of the market and the government. The government should withdraw from resourceintensive areas and primary distribution, while market forces should determine the allocation and flow of production factors and resources, and the price of production factors should be realized through the market. The government should focus on regulation and improving rules, and focus on distribution to ensure social justice and fairness, mainly through taxation, social security, old-age care, and provision of education and other public services. Therefore, the relationship between the government and the market in income distribution is a key element of the scientific concept of distribution with Chinese characteristics.

References 1. Lenin, V.L. (USSR) (1976). Selected works of V. I. Lenin (Vol. 2, p. 588). Beijing: People’s Publishing House. 2. Han, P. What role can the Marxist labor value theory play in modern times?—Thoughts on the significance of labor value theory. Inner Mongolia Daily, 2015-4-30. 3. Stanley Brue (2008: 213), quoted from Zhu, F. (2013). The history of economic thought (p. 213). Tsinghua University Press. 4. (2013). Preface, deepening the income distribution reform. Shandong Journal of Human Resources and Social Security, 1. 5. Jiao, H. (2006). An analysis of competition laws based on the concept of equilibrium. Journal of Political Science and Law, 6, 74–79. 6. Ren, L. Seeking coordinated development: An interpretation of five major development concepts. People’s Daily, 2015-12-21. 7. Chen, X. (2008). An analysis of income distribution amid the continuous growth of China’s economy. Modern Business Trade Industry, 11, 14–15. 8. Quan, H., et al. (2017). The economics of income distribution (p. 100). Shanghai: Shanghai People’s Publishing House.

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9. Quan, H. (2017). A modern analysis of “Income distribution-economic growth”: China’s experience and theory in the transitional period (pp. 1–13). Shanghai: Shanghai People’s Publishing House, Shanghai Academy of Social Sciences Press. 10. Zhou, X., & Liu, W. (2012). Theoretical discussions on the measurement and evaluation of inclusive development. Sociology Research, 2, 1–8. 11. Long, J. (2012). Shared growth and elimination of the poverty of rights. Philosophical Research, 11, 113–119. 12. Deng, X. (1993). Selected works of Deng Xiaoping (Vol. 2, p. 152). Beijing: People’s Publishing House. 13. Quan, H. (2017). On the scientific concept of distribution based on equitable development. Research on Socialism with Chinese Characteristics, 2.

Chapter 8

China’s Income Distribution Reform in the New Era: New Problems and Challenges

The report of the 19th CPC National Congress promised that, from 2020 to 2035, the Chinese people will lead a more comfortable life, the size of the middle-income group will grow considerably; the development disparity between urban and rural areas, the development disparity between regions, and the disparity in living standards will be significantly reduced; equitable access to basic public services will be basically ensured; and progress will be made toward prosperity for all. To date, however, some outstanding problems like unbalanced and inadequate development remain unresolved. There are still many challenges to be addressed concerning people’s livelihood. The goal of poverty alleviation is still far ahead of us. The gap between urban and rural development and income gaps are still wide open. People are facing problems in employment, education, healthcare, housing and pension. Under the overall strategy of the Party and the State, China’s income distribution reform has also come to a critical point, and the above-mentioned problems must be addressed. Over the past 40 years of reform and opening-up, China’s income distribution reform has solved many major problems, but has also created some new conflicts and problems. It is time to look back at the past and get ready for the future. It requires further deliberation and research to come up with solutions for the new problems and challenges in China’s income distribution reform in the new era.

8.1 Major Issues Already Resolved by China’s Income Distribution Reform over the Past 40 Years Before analyzing the main problems and challenges in China’s income distribution system in the new era, it is highly necessary to go over the key issues that have been resolved or alleviated by the reform over the past 40 years. Looking back, the important issues that have been resolved or alleviated are as follows.

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8.1.1 Egalitarianism In the early years of reform and opening-up, China made drastic adjustments to its income distribution policy, which mobilized hundreds of millions of farmers. Later, a series of transformative policies were adopted to improve the performance of enterprises, the reform of SOEs was steadily advanced, and then the wage system of government organs and public institutions was reformed. As a result, the egalitarian tradition of eating from the same pot came to an end, which mobilized the people to create wealth and significantly raised the efficiency of the Chinese economy at the micro level. The income distribution reform and the popularization of the policy allow some people to get rich first have aroused a lot of enthusiasm and injected new impetus into China’s economic development, as well as into the reform and opening-up program.

8.1.2 Low National Income Levels Over the past 40 years, market forces have come into play. In the market, resources can be allocated more effectively, so the total national income has increased significantly, from 367.87 billion RMB yuan in 1978 to 74,114.04 billion RMB yuan in 2016.1 It is a phenomenal 200-time increase since the start of the reform and opening-up. In terms of GDP, China surpassed Japan in 2010, becoming the world’s second largest economy after the United States, and a very important part of the world economy. China’s market-oriented reform has made distribution according to work, or more pay for more work, attractive to laborers. Benefitting from the expanding employment and development opportunities, people have earned considerably more income through the market and participation in economic activities. Urban residents’ annual income per capita jumped from 343.4 RMB yuan in 1978 to 31,790.3 RMB yuan in 2015; the per capita net income of the rural population rose from 133.6 RMB yuan in 1978 to 10,772.0 RMB yuan in 2015.2 It is worth mentioning that some people have become rich first. Ten persons from China’s mainland appeared on the list of Forbes World’s Billionaires 2018.3 Economic growth and income distribution reform have enlarged the “cake”, which has in turn made sharing simpler.

1 Source:

China Statistical Yearbook 2017. China Statistical Yearbook 2017. 3 https://www.phb123.com/renwu/fuhao/20802.html. 2 Source:

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8.1.3 Unreasonable Distribution Mechanisms Income distribution reform is a very important link of China’s overall reform. With distribution rules and regulations been passed and implemented, the income distribution reform has advanced steadily. The legal system governing income distribution has been improved and updated from time to time. The Labor Law has taken effect, the Provisions on Minimum Wages have been enacted and amended, the personal income tax threshold has been raised, and rules have been put in place for endowment insurance, unemployment insurance, and civil service wage payment. Rules and policies to combat corruption and prohibit illegal gains have been implemented. All this has delivered a strong support for the evolution of income distribution mechanisms.

8.1.4 Inadequacy of Public Services In the course of reform and opening-up, China has given a strong boost to old-age care and social undertakings like education, healthcare, culture, environment, sports, and public facilities construction, amid the rapid growth of economy. Public services have improved and become more adequate, and various insurance programs such as medical insurance have achieved full coverage, putting hundreds of millions of farmers under the umbrella.

8.1.5 Poverty-Stricken Population Over the past 40 years, the Chinese poverty population has dropped sharply, and China’s poverty alleviation has won worldwide recognition. According to the Annual Report on Poverty Reduction in China 2016, given the poverty line of 2,300 RMB yuan in per capita annual net income for farmers (366 US dollars), China’s rural poverty population declined from 770 million in 1978 to 55.75 million in 2015, down 92.8%.4 In a sense, China is the most successful case of poverty reduction, having lifted the largest number of people out of poverty in the world. China is the first country in the world to realize the United Nations Millennium Development Goals [1].

4 Annual

Report on Poverty Reduction in China 2016: Poverty Population Cut by over 90% since Reform and Opening-up [N]. People’s Daily, 2016—12–28 (02).

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8.2 New Issues in the New Era: Imbalances in National Income Distribution Although the reform over the past 40 years has solved many income distribution problems, there are still challenges to be addressed. In the new era, as the domestic and foreign situations become more complex, the challenges demand more attention and efforts. The imbalance of national income distribution has shown up in ways as follows:

8.2.1 Unreasonable Pattern of National Income Distribution Compared with many developed countries, China assigns a rather small share of its national income to labor remuneration. Since the mid-1990s, China’s distribution pattern has been biased in favor governments and enterprises, with personal income remaining seriously low. Unbalanced national income distribution has created several problems. First, most people rely on labor remuneration, but their income has not grown in step with the profitability of enterprises and the ballooning of government revenues. The people have a small share of the national wealth. The low share of labor remuneration in GDP makes it difficult for workers to increase their income significantly and widens the income gap between laborers and asset owners. Second, the growth of laborbased personal income has been left behind GDP for a long time. Meanwhile, the growth of government revenues has outpaced personal income and GDP growth by a big margin. Under the current fiscal and taxation regime, the tendency will remain in the short term, so China’s national income distribution will remain biased. Third, in recent years, China’s economy has entered a new normal state and suffered from external economic shocks. Unemployment rates in traditional sectors have increased, and personal income growth faces more uncertainties. As a result, the share of labor remuneration in national income will not rise in the short run.

8.2.2 Disparity Between People’s Personal Income and Economic Development The report to the 19th CPC National Congress in 2017 stated that the Party will work to synchronize personal income and economic development, and correlate pay rise with productivity. However, this goal is hard to realize under China’s current circumstances. As mentioned above, labor remuneration is too low as a share of national income distribution, while government revenues are too high, so most people cannot share in the fruits of economic development. Over the past 40 years, China’s economy

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has grown rapidly, and now Chins is the second largest economy in the world. However, domestic personal income has not grown in step with economic development. Personal income has remained low, especially farmers’ income. Low-income groups have been neglected and their satisfaction has remained low. Since the 18th CPC National Congress, the Party has insisted that economic development should benefit all people, and the well-being of people must be improved as economy grows. At present, however, the growth of personal income is often 2–3% points lower than GDP growth. The income of the lower income groups of the urban population and the rural population has grown by about 3–4% only.

8.2.3 Disparity Between Growth of Labor Remuneration and Productivity Improvement To synchronize the growth of people’s personal income with economic development, the key is to correlate labor remuneration with productivity increase, which is also a means to increase income as a share of national income. Empirical research in many countries has shown that higher individual labor productivity would generate higher income, and the increase in labor productivity will drive economic growth and social development. However, for a long time in China, labor remuneration has stayed below the marginal output of labor, and the growth of labor remuneration has fallen behind productivity. On the one hand, the effect of labor productivity on labor remuneration depends on the bargaining power of laborers. At present, China’s labor legislation is still rather weak. Laborers are still under-privileged and many issues limit their bargaining power. On the other hand, changes in labor remuneration as the price of labor directly reflect changes in labor productivity. However, due to fragmentation and frictions in China’s labor market as well as government protection, the changes in labor remuneration cannot keep pace with the changes in labor productivity. Especially in the new normal state, the withdrawal of capital, job cut and investment reduction have caused a decline in labor productivity, but some policies that aim to protect the interests of workers, such as the Labor Contract Law and the minimum wage standards, do not allow labor remuneration to go down. Such excessive protection will result in the loss of employment opportunities. It seems fair in the short term, but it will affect income fairness in the long run.

8.3 New Issues in the New Era: Towards Common Prosperity After 40 years of development, China has shaped an imperfect olive-shape income pattern, but the proportion of middle-income groups is still not high and there are

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still large income gaps. China still faces big challenges on the road towards common prosperity.

8.3.1 Common Prosperity In the early years of reform and opening-up, Deng Xiaoping proposed to “let some people get rich first”, which quickly transformed into an overarching policy with extremely wide-reaching and profound implications. As reform and opening-up advanced, this policy played an important role in resolving egalitarianism and mobilizing market forces. However, while income levels rose, various problems have occurred to the implementation of this policy. The main problems are as follows. First, there were misunderstandings of the policy. Some people split the link between “let some people get rich first” and the realization of “common prosperity”, which upset the original purpose of the policy, and undermined the socialist roadmap of eliminating exploitation, eliminating polarization, and finally achieving common prosperity. It also weakened people’s confidence in the prospect of common prosperity. Second, the policy of letting some people get rich first has given rise to a pyramidshaped income distribution pattern in China. The income of the richest people has risen rapidly while the low-income people are left behind. Income gaps are expanding between urban and rural areas, between regions and economic sectors. The employment rate of low-income families is low, and even if they’re employed, they are mainly doing low-paying jobs in low-paying industries. Third, most of the people who have got rich first earn legitimate incomes, but there were still many people who grab illegitimate incomes. Some people who became rich first have got rich by earning “grey” incomes or even illegal incomes. Also, the prospect of common prosperity is not clear. Although some people in some areas have got rich first, most other people have failed to catch up. Some people are even sliding back into relative poverty and income gaps continue to widen.

8.3.2 Balance Between Fairness and Efficiency The balance between fairness and efficiency is one of the trickiest issues in income distribution. It is a big challenge to achieve both efficiency and fairness. Efficiency provides the material conditions for fairness. Continuous improvement of efficiency and increase of social wealth are prerequisites for fair distribution. Fairness is a guarantee of efficiency. If income distribution is not fair, people’s labor enthusiasm would be dampened, and it would be difficult to optimize the deployment of the two major factors of production: manpower and materials. Hence, it is nearly impossible to improve efficiency without fairness. Despite the goal to achieve both, it is not easy to strike a balance between efficiency and fairness through compulsory

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transfer payment. Compulsory transfer payment which intends to improve distribution through growth must be considered with care and amended as circumstances evolve. Highly probably, compulsory transfer of income or assets from the highincome population to the low-income earners would discourage the high-income earners and weaken the motivation of the middle-income earners. As far as the distribution of human capital is concerned, middle and high-income earners often have a higher level of human capital accumulation than low-income earners. The inaction of middle and high-income earners could undermine economic efficiency and affect overall economic growth or wealth creation. In other words, the benefits that each person receives under equalitarian income distribution would be smaller than the economic benefits that the lowest income earners obtain through transfer payments, considering the loss to the total. China is still at the primary stage of socialism. For a long period of time, productivity growth is still a major goal. In income distribution, efficiency must be given enough weight in order to mobilize production forces and secure long-term stable development of economy. Meanwhile, fairness must also be considered, with income gaps kept within a reasonable and manageable range and all people empowered to share in the fruits of reform and development. Considering China’s realities, it is difficult to improve efficiency and achieve fairness simultaneously. Trade-offs are inevitable, during the usual practice over the past 40 years. On one hand, efficiency underlies economic growth, productivity growth, and wealth creation that meets people’s needs. Stressing efficiency is somehow equivalent to facilitating market competition, which is the essence of market economy. Competition to pursue maximum efficiency drives up the productivity of the entire society. However, every competitor may succeed or fail, which will lead to unbalanced income and property distribution and widen the gaps between people or even polarize income distribution. On the other hand, reform efforts to achieve fairness can promote justice in the market, and measures of redistribution and social security guarantee can help alleviate the pains of income gaps. However, the balance between equity and efficiency is still a great challenge for China in the new era. First, the market mechanism is imperfect, which to some extent reduces the opportunities for the low-income population to legally raise their income. Second, the labor market reform has not been enough yet. The duality between the rural and urban areas and the duality within the city, which is a new issue, have made access to development opportunities inequal. Third, the design of the wage payment system is not scientific enough. The basic principle of remuneration design should be paying wages fairly according to the value of labor, so the remuneration should be directly proportional to the employee competence, the quantity of labor, the quality of labor, and the outcome of labor, so that most people would feel “fair” and would be motivated to work better. However, some enterprises and public institutions have failed to design a reasonable wage system, with many workers treated unfairly in terms of wage payment.

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8.3.3 Targeted Poverty Alleviation The report to the 19th CPC National Congress stressed the need to “win the battle against poverty”, “mobilize our whole Party, our whole country, and our whole society, and continue to implement targeted poverty reduction and alleviation measures. We will operate on the basis of a working mechanism whereby the central government makes overall plans, provincial-level governments take overall responsibility, and city and county governments ensure implementation”, and “continue to advance poverty reduction drawing on the joint efforts of government, society, and the market, especially helping people increase confidence in their own ability to lift themselves out of poverty and see that they can access the education if they need to do so, strengthen collaboration on poverty alleviation between the Eastern and Western region, and provide focused assistance to areas of extreme poverty”, so that “by the year 2020, all rural residents living below the current poverty line will have been out of poverty, and poverty is eliminated in all poor counties and regions. Poverty alleviation should reach those who truly need it and deliver genuine outcomes.” However, China’s poverty reduction and relief program still has many problems. First, taxation and transfer payments are not reasonable enough and lack nationwide coordination. Taking a closer look at the income mix of people at various income levels in the Western regions, it is easy to find that the absolute amount of transfer payments to high-income households is large, while payments to low-income households are relatively small,5 which runs counter to the purpose of transfer payments. Second, the poor people that the government mainly targets are mostly ethnic minorities living in remote mountainous areas. Most of them are unwilling to leave their home to find employment in cities and towns, so it is difficult to help them increase their own income through employment incentives. Third, non-governmental aid has not been advanced in China yet. The scale of social donations is small, especially as a percentage of GDP. Moreover, practices are not mature and trust is low. Last, funding is insufficient for poverty alleviation and assistance programs. Taxation is not playing a strong role in adjusting income distribution, due to unreasonable design of tax types and rates, and backward tax collection and revenues management tools. Low income tax rates are levied on property-based income such as income from investment and house rental. The current taxation system cannot support transfer payments to the poor population.

5 Calculation

is based on data from China Statistical Yearbooks.

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8.4 New Issues in the New Era: Equity and Justice 8.4.1 Income Distribution to be Further Regulated Fair and just income distribution is critical to improve people’s wellbeing and advance social development. Fair and just income distribution, however, is not synonymous to income equalization, but it means the income distribution process should be fair, including fair opportunities (or fair start), fair rules (or fair process), and fair results. Fairness of opportunity is the most important of all. Fairness of opportunity refers to the equality of conditions for participation in certain activities, when opportunities are limited. It means that people have equal opportunities to engage in various economic activities [2]. Fair process means that the rules and process of economic activities must be fair for all participants, and the key of all keys is that the property rights and other related rights arising from participation in legitimate economic activities must be safeguarded. However, income gaps would still exist due to differences in the ownership of the factors of production, the input of efforts, and choices made in production. Anyway, the applicable rules and process should be equal for all members of society. Ownership of production factors should be confirmed, individual physical strength, intelligence and wealth should be acknowledged, and individuals should be able to exchange their possessions on a voluntary and honest basis. Fair results refer to the equal distribution of production results, stressing the relative share of income among members of society. A large income gap between the rich and the poor means that the distribution of results is unfair. Given fair opportunities and fair process, differences in personal efforts, talent and luck may still cause differences in income, which could also explain unequal results to some extent. In this context, excessive emphasis on equal results would have to sacrifice the fairness of rules. In other words, fair results may defy fair rules. Therefore, there are contradictions between fair start, fair rules and fair results. For individuals, fairness and justice of distribution also include self-fairness, internal fairness and external fairness. Among them, selffairness refers to the personal judgment of whether an individual’s remuneration for his or her work is fair. If one reaps less than satisfactory benefits for his or her efforts, he or she would think that it is unfair. One may compare his or her work and remunerations with other employees’ in the same work unit. In this case, internal fairness means more income from more work, and higher returns for higher risks. External fairness emphasizes the comparison with people doing the same or similar jobs. Fair and just income distribution is a guarantee for equal opportunities and the right to free choice in terms of the access and use of resources, the most important of which are equal access to education, equal healthcare opportunities and health rights, equal rights to pension, unemployment benefit and child bearing, and the freedom of movement. However, the income gaps and unfairness of distribution in China have led to unfair access to investment, resources, education, employment, and even information. That means members of the society do not have equal opportunities of participation or benefits.

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The report to the 19th CPC National Congress stressed that China will continue to follow the principle of distribution according to one’s work while improving our institutions and mechanisms for distribution based on factors of production, to make income distribution fairer and more orderly. However, unfair distribution still exists, to some extent due to the poorly managed income distribution order, the weak and imperfect system, and the existence of gray income. To solve the problem, the key measures are as follows. First, classified reform. At present, there is no scientific classification of issues concerning income distribution. Many issues are put together without scientific and reasonable classification, which makes it difficult to calibrate distribution policies. In China, the definitions of civil servants, public institutions, SOEs, private enterprises, managers, enterprise employees, farmers, low-income earners and vulnerable groups are rather ambiguous, which undermines the relevance of income distribution policies. Second, institutional environment. In terms of income distribution order, the reform of the income distribution in government organizations can be a benchmark for the income distribution reform of public institutions and business enterprises. However, the income reform covering civil servants in government units has not been complete yet. Their income levels are not high, the mix of their incomes is unreasonable, and their incentives and disincentives are not mature, let alone perfect. As a result, civil servants’ incomes send a wrong signal to the labor market and confuse the allocation of resources, which also upsets public spending administration and the reform of government functions. The inadequacy of incentives in governments is a serious problem. To reshape the institutional environment, the legal framework is still inadequate and enforcement is weak. The problems with “equal pay for equal work” and labor dispatch are still serious. Income distribution is far from fair in the eyes of the public. Third, addressing administrative monopoly and unfair income distribution between industries. Natural monopoly exists in some economic sectors, such as water and electricity supply, while some other sectors have reduced monopoly to a certain extent, such as petroleum companies and banks. The excessively high incomes in industries with administrative monopoly have caused discontents or at least confusion, because their employees are not necessarily more competent than people working in other industries.

8.4.2 Equal Access to Public Services Inequal access to public services directly leads to inequal development opportunities between individuals, between urban and rural areas, and between regions. The provision of public services must be transformed. It is worth noting that the shortage of public service resources in rural areas has restricted agricultural restructuring, hindered the transfer of farmers to the manufacturing and service industries, and slowed down the process of urbanization, which in turn limits the chance of rural

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residents to find their way into urban high-income classes and weakens the competitiveness of the rural economy. If public services in rural areas remain weak, the income gaps between urban and rural areas will not narrow down in the short run. As local government budget is the main source of funding for public services, and given the large economic gap, measured by taxation revenues, between the central and western regions and the eastern coastal regions, there is significant disparity between different regions in public services provision, especially education and healthcare services. The specific problems with public services equalization are mainly the following. First, allocation of education resources is uneven between the rural and urban areas. In rural areas, education infrastructure is weak, teachers are poorly trained, funding is limited, and administrative services are inadequate. As a result, education quality in rural areas clearly falls short of the standards in cities. Education disparity between urban and rural areas is often cited as a reason for the widening income gap between urban and rural areas. Although compulsory education is free in China, income gaps will seriously limit the access of the lower income people and their children to higher education, affecting their ability to move up into the middleincome groups in the future. The regional disparity in terms of higher education also underlies the regional differences in human capital and the regional income gaps. Second, access to healthcare services is uneven between urban and rural areas. The distribution of public healthcare resources is uneven. The rural public healthcare system is inadequate and medical conditions are poor, which hampers the improvement of the physical fitness of farmers, and thus limits rural labor productivity. The availability of healthcare resources varies greatly from region to region. The Eastern regions have much bigger numbers of healthcare institutions, hospitals, health technicians, doctors, and beds in medical institutions than the Middle, Western, and Northeastern regions. Third, there is disparity between urban and rural areas and between regions in terms of social security. China implements an urban-oriented social security policy, with the expenditure of fiscal funds tipped towards urban residents. The economic power of local governments also varies between regions, which results in disparity in the amount of transfer payments. Poor places can only offer low levels of social security, and residents have inequal development opportunities and different chances of earning higher incomes.

8.4.3 Imperfect Taxation Regime and Legal System The imperfect legal system fails to guarantee the normal operation of the market economy, giving rises to, among other things, serious tax evasion and tax frauds. It is worth mentioning that the process of legal system reform, or its evolution process, will involve changes and amendments to many laws and regulations, so that long-term stable expectations are unlikely, and investment and even employment behaviors will be short-termed. In this sense, the imperfect legal system still poses a tough challenge

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for China in the new era. Even if the laws and regulations become mature and the legal framework is complete, weak enforcement would leave the existing income distribution problems arising from legal perfections unresolved. Corruption and gray income are also urgent problems that affect income distribution. For this purpose, the relations between the government and the market must be well defined and regulated. So to speak, public power must be “cage”. Or otherwise, fairness and justice would be elusive, market mechanisms would be distorted, the allocation of resources would be monopolized, fiscal budgets would be unreasonable and wasted, and embezzlement and other corrupt practices would persist.

8.4.4 Rural Migrant Workers and the Household Registration System In the early years of the People’s Republic of China, a duality structure of economy was established that included a unified purchase and supply system, a household registration system and an employment system that gave priority to heavy industry and promoted growth in cities with the support of rural resources. Since 1958, China has implemented a strict household registration system which strictly divided the population into urban and rural residents. The household registration system has played a positive historical role. For instance, it created conditions for the growth of China’s heavy industry. Amid the rapid development of economy and accelerated urbanization and industrialization, the negative effects of the system have gradually shown up and even expanded. For one thing, the household registration system restricts the free movement of labor, limiting the transfer of rural surplus labor, so China’s urbanization has fallen behind economic development and industrialization. Another consequence is a huge divide between rural and urban residents in terms of their access to employment, social security, education, and public services, and then all-round inequality in economic and cultural rights, which has further led to slow rural development and income disparity between urban and rural population. Although the household registration system has undergone many years of reform, it still causes serious urban–rural and regional differences, and limits equal access to public services. It means welfare benefits based on household registration will not become inclusive in the short term. The rise of rural migrant workers in the process of urbanization has somewhat eased China’s urban–rural duality, and created three demographic groups: urban residents, migrant workers, and rural residents. China has become a ternary society. Rural migrant workers live in cities, but they do not have urban residency (hukou) and corresponding welfare benefits like access to public services. Migrant workers are often subject to discrimination in education, employment, and healthcare. In employment, they don’t enjoy equal pay for equal work, or equal rights for equal work with urban workers. The absence of formal labor contracts also makes it difficult for migrant workers to claim their labor rights and interests in cases of dispute. On the

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other hand, it is difficult for migrant workers to be registered as urban residents, no matter how long they have worked and lived in a city. That means they won’t secure education access for their children, and their children can at best receive sub-standard compulsory education in the city.

8.5 New Issues in the New Era: Widening Wealth Gaps 8.5.1 From Income Gaps to Wealth Gaps Due to the rapid income growth of high-income earners and the slow growth of low-income earners, income gaps are widening among urban residents, as shown by the income gaps which are more and more obvious between industries, between executives and employees, and between personnel of government bodies and public institutions and enterprise employees. Some monopoly industries, such as finance and electricity, have long been the most generous wage payers. Knowledge-intensive industries, such as IT and technology R&D, have gradually emerged as high-paying industries. The wage of workers in the wholesale, retail and catering service industries is relatively low. The compensations for business executives are often dozens of times higher than ordinary employees’ wage. The extra-wage income of the personnel of government bodies and public institutions, such as subsidies and perks, is increasing significantly, which has aroused widespread concern. Income gap is a serious problem, and the accumulated wealth gap is even more serious. About the property-based income, the bubble and risks in the real estate market and capital market in recent years, such as skyrocketing housing prices in major cities, the wealth miracle of the stock market, and the unregulated growth of P2P credits, have upset China’s wealth distribution. Some people become wealthy very soon or even overnight, which has worsened the imbalance. It is worth mentioning that wealth often turns itself into capital and generates investment returns. Excessive wealth gaps will affect income distribution and accelerate the widening of income gaps. High-income earners can reinvest their income to achieve further wealth accumulation, creating a virtuous circle from investment and returns to reinvestment and higher returns. On the other hand, low-income earners have barely any wealth to invest, so they are unlikely to earn investment gains. In this way, the wealth gap between high-income and middle-income population would widen further, which will remain an obvious trend in the long run.

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8.5.2 Intergenerational Injustice: A New Challenge Brought by the Widening Wealth Gap Intergenerational justice means present and future generations having equal rights to use natural resources to meet their own needs and interests and to support their own development and prosperity. Intergenerational injustice means the inequality of such rights. Income gaps and unfair distribution would be passed down to next generations through wealth accumulation and affect the fairness of opportunities for future generations. For example, a high-income family may accumulate a lot of wealth, and a considerable part of the wealth would be passed down to the next generation, creating a huge initial wealth difference between successors. As said above, wealth can create investment gains and property-based income, which worsens the inequality of personal income opportunities for future generations. Income gaps are widening and social class mobility is weakening in China. It is difficult for low-income people to move up into the high-income population, and it is difficult to reverse the trend in the short term. Intergenerational injustice with personal income caused by wealth gaps is likely to polarize income distribution. In other words, while some people are accumulating wealth rapidly, extreme poverty is increasing. This runs against China’s development goals in the new era. People in the Middle and Western regions and remote mountainous areas suffer from low income levels and are struggling to survive. They often try to meet their immediate needs by unsustainable ways, such as excessively exploiting natural resources. That would deplete non-renewable resources and cause environmental destruction. In short, they depend heavily on inefficient growth with high emissions. It means a great disaster for future generations in the region. To put it plainly, large income gaps would weaken the ability of future generations to utilize natural resources to meet their own needs, and squeeze the space of future generations for survival and development. That’s what intergenerational injustice means. Considering China’s commitment to green development in the new era, intergenerational injustice caused by regional wealth gaps has become a tough and pressing issue. It is a high obstacle on the road towards our sustainability goals.

8.6 New Challenges in the New Era 8.6.1 Widening Income Gaps and Long-Term Economic Prospect: Constraints on Consumption-Driven Growth In theory, there is an optimal income gap. A reasonable income gap is necessary for economic growth, while an income gap above or below a reasonable width is not good for growth. In Keynes’ consumption function, consumer demand is affected

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by income and the marginal propensity to consume. When the economy takes off, a developing country often relies on capital accumulation to realize expansion and reproduction, and its growth is mostly investment-driven and export-oriented. After several years of development, however, investment-driven development will face the problem of diminishing marginal capital returns, so a consumption-driven model would be needed to sustain an economic growth and improve people’s wellbeing. In a developing country, if the personal income level is generally low, the demand would take two extreme forms. On one hand, the low-income people have very limited consumption expenditure, and most of their income is spent on necessities, which would mainstream the production of low-quality products. On the other hand, the rich people have super strong buying power and prefer luxury goods and services from developed countries, which would lead to capital outflow, thereby further weakening the demand for domestic products and services. In China, personal income is not high as a proportion of national income, people’s disposable income is limited, and consumer demand is stagnant while production is excessive. The stability of investment and exports has sustained China’s development. As a “world factory”, China exports a huge number of products, turning the consumer goods market across the world from a seller’s market to a buyer’s market. In addition, the widening income gaps between urban and rural populations, regions, and industries in China have strained the people, affecting people’s propensity to consume, raising their savings rates, and further weakening domestic demand. However, in the new normal state, consumption-driven growth depends on domestic demand, and excessive urban–rural income gaps may suppress the marginal consumption propensity of farmers, which will affect the prosperity of the rural market. In the same fashion, excessive income gaps within the urban population affect the demand for high-quality agricultural products and industrial products.

8.6.2 Income Gaps and Economic Transformation: Constraints on Economic Structural Adjustment As industrial structure is affected by consumption structure, and consumption structure directly depends on personal income, insufficient consumption will deter the demand for high-quality goods in the market, which is not good for technology and product innovation. In this context, enterprises tend to reduce investment in research and development, thereby delaying product upgrades. The world economy is shifting towards innovation-driven development. Domestically, under the new normal state, the Chinese economy needs to accelerate economic transformation and upgrading, and adapt to the evolving global value chain and the new international division of labor. However, China’s economic transformation is restricted by the current problems in China’s income distribution system. First, the low proportion of personal income in national income deters the expansion of domestic demand and the structural adjustment and upgrading of the national

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economic. Consumption of high-quality services is unlikely to rise very fast. Second, low-income population in China has a large proportion of the total, so necessities such as clothing and food account for a larger proportion of total personal consumption expenditure. Insufficient consumption in other areas like education, telecommunication, tourism, entertainment and sports, hinders the upgrading of the overall consumption structure, and thus the industrial structure. The negative impact will find its way to the renewal of products and services. Third, as the Chinese economy transforms, the contradiction between the decline of labor productivity in traditional industries and the increase of minimum wages is becoming more serious. Companies that fail to update their technology or products must cope with overcapacity and the decline in profitability. Furthermore, there is a mismatch between the knowledge, skills, awareness and regional distribution of labor force and the employment needs of the market, causing structural unemployment which in turn makes structural adjustment and transformation more difficult. Fourth, the low proportion of personal income in national income also affects the adjustment and improvement of the investment structure. This is because if people cannot afford high-quality products and services, investment opportunities will concentrate in the lower end of the product and service spectrum. The investment opportunities for innovative products and services would be limited, suppressing the increase in the productivity of the entire economy. Fifth, the high proportion of government revenues in the national income would encourage the government to spend more on national defense, and civilian investments would be crowded out on the other hand. In this way, the investment structure would be unbalanced, and structural adjustment and transformation would be hindered.

8.6.3 Income Gaps and Their Impact on Social Progress China is committed to reaching a well-off society by 2020. It is particularly important to point out that no one should be left behind in this endeavor. The 18th CPC National Congress in 2012 raised clear requirements for building a well-off society in all respects, insisting that China is in the last mile of the journey towards a well-off society. The development efforts depend to a great extent on income distribution. However, the current income distribution pattern does not help. The issues of income distribution affecting the goal are as follows. First, to build a well-off society in all respects way requires a more equitable system of income distribution. However, the widening income gaps and increasing inequality in distribution have upset the people and created widespread grievance. For example, some corrupt government officials, as well as their friends and relatives, have conducted illegal “power-for-money transactions”, seeking economic gains with the public power they hold, especially in land lease, project bidding, enterprise restructuring, debt-to-equity swaps and IPOs. Their misconducts include transferring, wasting and squandering state-owned assets. Some authorities have imposed

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arbitrary penalty and charges for their own benefit. Some businessmen have cheated in taxation affairs, and some become rich fast by illegal means. Second, a well-off society should have both fairness and efficiency, and a better market mechanism is needed to guarantee the balance. However, the current market mechanism is not perfect enough, price distortion and misallocation of resources are widespread, and the income distribution order is well below the desired standard. In many cases, market forces have not played their role in boosting the fair and rapid growth of economy in China. Third, building a well-off society in all respects is the first step towards common prosperity, so it entails a better match between fiscal revenues and public service duties, reducing urban–rural and regional differences, and promoting equitable income and welfare for all people. However, the government has not fulfilled its mandate to control income gaps and strike the balance between fiscal revenue and expenditure and public services. The income gaps and the disparities in access to public services are serious challenges to the goal of common prosperity. Fourth, the middle class is a key factor for China to avoid the “middle income trap”. To build a well-off society, China must cultivate a strong middle class in order to overcome this global trap. Expansion of the middle-income group has been made a statutory goal by the 16th CPC National Congress, but the current policies and mechanisms are not conducive to this goal. The goal to promote common prosperity through letting some people get rich first is still elusive. Without effective remedies, this issue will become a stumbling block on the road towards a well-off society and common prosperity.

8.6.4 Income Gaps and Their Impact on Socialist Core Values The report to the 18th CPC National Congress insisted that we should promote prosperity, democracy, civility, and harmony, uphold freedom, equality, justice and the rule of law and advocate patriotism, dedication, integrity, and friendship, to shape and practice core socialist values. The current problems with income distribution, however, will undoubtedly undermine our efforts to shape socialist core values. First, the issues with income distribution affect the belief in prosperity, democracy, civility, and harmony. Excessive income gaps and distribution inequality will inevitably cause widespread discontents, especially among the disadvantaged population. The negative impact is even stronger when the problems are caused by corruption and illegal wealth accumulation, which will ultimately shake China’s social stability. Only when people enjoy high living quality can the society realize social stability, guarantee democracy and civility. Serious income distribution issues directly affect social stability, and threaten the values that depend on social stability. Second, income distribution problems also affect the core values of freedom, equality, justice, and rule of law. The problems in income distribution, like excessive income gaps, discriminations in the labor market, and unfair distribution, will divide the society, weaken social identity and damage social cohesion. Given the same level

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of income, people care about their own input of efforts and resources. If they find that they have spent more efforts and resources to gain the same income, they would feel unfair. This sense of injustice would be worsened when someone receives illegitimate benefits. In this context, some people may try to generate illegal gains at the expense of morality, which will affect social integrity and the authority of social systems. Then, freedom, equality, justice, and rule of law cannot be achieved on this ground. Third, the problems of income distribution affect the belief in patriotism, dedication, integrity, and friendship. When income gaps get too obvious, people earning a relatively low income would feel unhappy [3]. In this case, even though the economy keeps growing, the general level of happiness would not increase accordingly. This is how the Income-Happiness Paradox is created [4]. In terms of social psychology, when income gaps are wide and obvious, the society would be divided into two groups: the high-income earners and the low-income earners, who do not trust each other.

8.6.5 Income Gaps and Sustainable Development The Fifth Plenary Session of the 18th Central Committee of the Communist Party of China emphasized that the development concepts of innovation, coordination, sustainability, inclusiveness, and sharing must be firmly established and practiced in China. However, the widening income gaps and unfair distribution have undermined efforts to promote these development concepts. First, low labor remuneration challenges the realization of innovation-driven development. People are a critical factor for innovation. In fact, innovation is a mental labor. At present, however, the compensation for mental labor still lacks a scientific payment mechanism. It is often realized in the form of property-based income, like payment in stock option. The problem is that brain-workers are at a disadvantage in negotiation with their employers, so they are generally underpaid, which affects their passion for innovation to some extent. Second, the income gaps between urban and rural population and between regions challenge the comprehensive implementation of coordinated development. The principal contradiction the Chinese society facing in the new era occurs between unbalanced and inadequate development and the people’s ever-growing needs for a better life. The obvious urban–rural and regional developmental disparities and income gaps, however, have created one of the imbalances that impede China’s present and future development, affecting the realization of the coordinated development. If the urban–rural and regional income differences cannot be significantly reduced in the short term, coordinated development won’t be possible. Third, intergenerational injustice challenges the full implementation of sustainable development. Behind intergenerational injustice, long-term low levels of economic development and low levels of income limit the ability of people to substitute other means for natural resources to achieve growth. Dependence on natural resources does not produce significant economic benefits but exhausts natural

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resources and pollutes the environment. Non-renewable resources are depleting and the regeneration of renewable resources cannot keep up with consumption, and the natural environment is being irreversibly damaged, which deters the implementation of sustainable development. Fourth, labor conflicts challenge the full implementation of inclusive development. Low labor remuneration harms the labor-capital relationship. Labor has remained under-privileged, and even labor-oriented technological innovations are at a disadvantage in comparison with capital-oriented innovations. Over time, a vicious circle has taken shape. Capital returns are increasing, while labor remuneration is on the decline, which further aggravates labor conflicts and may trigger strikes. If anything like that happens, China’s social stability and international investment attractiveness will decline, and inclusive development would suffer. Fifth, low personal income as a proportion of national income challenges the goal of inclusive development. The past 40 years of reform and opening-up have brought tremendous changes to China, but the increase in personal income has not synchronized with the rapid increase in the total national income in China. The national economic growth has not benefited all the people. One of the reasons is that personal income as a proportion of the national income is too low and the proportion of government revenues is too high. This phenomenon goes against our goal of inclusive development and must be addressed as soon as possible in the new era.

References 1. Jiangang, W., & Erwen, B. (2017). Poverty reduction in China: The biggest contribution to the world poverty reduction. Xinhua Daily Telegraph, 2017(07), 6–15. 2. Wen, Z. On the reality of fairness and the way to realize it. https://theory.people.com.cn/GB/ 49154/49156/4347239.html. 3. Guoqiang, T., & Liyan, Y. (2006). An answer to the “happiness-income riddle.” Economic Research Journal, 11, 4–15. 4. Easterlin, R. (1974). Does economic growth improve the human lot? Some empirical evidence. In P. David & M. Reder (Eds.), Nations and households in economic growth. Academic Press.

Chapter 9

Further Income Distribution Reform in the New Era

China has entered a new era, and China’s economic growth has come to a new normal state. An income distribution system that embraces both efficiency and fairness is also an important goal of building a modern economic system. As the Chinese economy enters a new normal state in the new era, income distribution will become even more important in China and will attract more attention. In the new normal state of economy, the growth rate changes, the structure optimizes, and the engine shifts. These trends will exert a positive and profound impact on income distribution. The new normal state raises higher goals and requirements for income distribution reform, and deepening the income distribution reform would help the economy adapt to the new circumstances. One basic implication of the new normal state is that further income distribution reform should not only narrow down the income gaps, but also stimulate the power of innovation to drive economic development. The goal is an optimized pattern of income distribution with a perfect combination of economic incentives and disincentives, creating a new driving force for economic growth in the new normal state, and finally generating equitable benefits for all.

9.1 China’s Economic Growth in the New Normal State 9.1.1 Growth in the New Normal State: Medium-to-High Speed The new normal state is a transitional period when China experiences a bit of slowdown growth and structural adjustment. Economic growth, industrial product prices, real corporate profits and government revenues fall, while economic risks rise. In this context, the task is even tougher to ensure that personal incomes grow in step with national economy. In order to address disparities and imbalances in economic development, we must handle well the dynamic relationship between distribution © Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_9

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and development amid economic slowdown while maintaining synchronized growth in both labor remuneration and productivity. People must be able to share the fruits of reform and development, have a clear sense of gain, and enjoy improved quality of life. Since the global financial crisis broke out in 2008, China’s economic growth has remained below 10%, down from the previous years. In 2012, China’s GDP growth rate was 7.9%; in 2015, the rate was 6.9%. In the first three quarters of 2016, the annualized growth rate further declined to 6.7%. All this indicates that China has entered a new normal state of economic development, and a medium-to-high speed growth of 5–7% will persist for a rather long period. According to the October 2016 forecast of the International Monetary Fund (IMF), China’s economic growth during the Thirteenth Five-year Plan period from 2016 to 2020 will slow down from the 2011–2015 period, with an average growth rate of about 6.1%. The World Bank’s analysis report released in June 2016 gave very similar results. It estimated that China’s economic growth rates from 2016 to 2018 will be 6.7%, 6.5% and 6.3%, respectively. According to the report entitled China in 2030 jointly issued by the Development Research Center of the State Council and the World Bank, China will maintain medium-to-high growth in the next 10–20 years. China’s annual growth rates will be 7.0, 5.9, and 5.0% for 2016–2020, 2021–2025 and 2026–2030 (see Fig. 9.1). In the new normal state of stable medium-to-high growth, the Chinese economy will continue to catch up with advanced economies. Decades of rapid growth since reform and opening-up have not only expanded the total size of Chinese economy, but also significantly raised the level of GDP per capita. From 1995 to 2015, the real growth of GDP per capita after inflation was 8.7%, slightly lower than the GDP growth rate (9.4%) in the same period. The curves are similar, both slowing down

Fig. 9.1 Forecast of China’s real GDP growth. Source China Statistical Yearbooks published by NBS; World Economic Outlook published by the World Bank in June 2016, & IMF World Economic Outlook (WEO)

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Fig. 9.2 Forecast of China’s per capita GDP growth. Source IMF database. The value for 2016– 2021 is a forecast value; the per capita GDP values of China and the United States are PPP-based, and the growth rates are actual values

after 2010. However, the medium-to-high growth rate of 5–8% is still competitive internationally speaking. China is still advancing very fast compared with other developed countries. To get a better view of China’s development at the current stage, we use the United States as a benchmark and compare the per capita GDP value at purchasing power parity (PPP) between China and the United States. In 1996, 2005, 2010, and 2015, China per capita GDP as a percentage of the United States is 6.9, 11.9, 19.2, and 25.6%, showing a rapid rise. According to the IMF’s forecast of China-US growth rates, by 2020, China’s per capita GDP will be 2/3 of the United States (see Fig. 9.2).

9.1.2 Structural Transformation Driven by Urbanization in the New Normal State After decades of rapid development, China’s economic structure has taken a new look. Agriculture has the lowest proportion of employment, employment in manufacturing has stabilized, while the services sector is booming and will absorb most of the surplus agricultural labor in the future. In 1990, agriculture, manufacturing and services accounted for 60, 21 and 19% of the total employment in China. By 2014, the shares had changed to 30, 30 and 41%, with services going ahead of two other sectors (see Fig. 9.3). According to the World Bank, during the “Thirteenth Five-year Plan” period, agriculture will drop to about 23.7%, and services will rise to 48%. By 2030, agriculture will further decline to 12.5%, and the proportion of services will rise to 59%.

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Fig. 9.3 Employment in three sectors of China (1990–2014). Source NBS

The shift of the industrial structure has been driven by China’s massive migration from rural to urban areas. Although over 50% of China’s permanent population has been urbanized, the urbanization rate of the registered population is only 1/3, which is not only far below the average level of developed countries (about 4/5), but also lower than the population urbanization rate (about 60%) in developing countries whose per capita income is close to China’s level. Only by accelerating urbanization can we unleash domestic demand and address the economic challenges in the new normal state. In the medium-to-long term, accelerated urbanization can consolidate the economic foundation, optimize the consumption environment, transform the economic structure, alleviate the urban-rural duality, and help improve relevant institutional mechanisms [1].

9.2 Income Distribution Reform in the New Normal: New Thinking and New Paths [2] 9.2.1 Changes in the Speed, Structure, and Dynamics of Economic Development and Their Impact on Income Distribution 1. Understanding the new normal state of economy: Catch-up growth in the new stage The coming years will be a crucial period for China’s development in the new era. In the new normal state, the income distribution reform must improve the circumstances of economic development in the new era.

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China’s current income distribution system still has many problems, especially various income gaps which have caught the attention of the entire society. The rapid economic growth brought about by reform and opening-up has pushed China into a new era. To further advance the income distribution reform and adapt the income distribution system to circumstances in the new era, it is very necessary to review and renew the strategies and ideas of income distribution reform. We believe that the key is to identify the new characteristics of the Chinese economy in a new stage of development. In other words, while observing the economy in the new stage of development and figuring out the new characteristics, we must find out whether the long-term trends of the Chinese economy have shifted. We must track down the way in which the laws of China’s economic development will function in the new era, as the circumstances have changed. Furthermore, we need to think about how the Chinese economy has changed in the new normal state. What has changed or what will change? And what has not changed or will at least remain effective in the future? Such considerations are critical for a deep and accurate understanding of the new normal and our future needs. I believe that the new normal state of the Chinese economy must be understood in the following ways. Slowdown has become a reality in the new normal state. The question is how to explain the slowdown that has lasted for years and will continue. Scholars have proposed a host of explanations, like the crisis impact, the policy control, the structural dilemma, the total factor productivity (TFP) decline, and economic growth convergence. I believe that to understand China’s economic growth, we must combine the general laws of economic growth with the characteristics of Chinese sharp rise and its actual process. First, in the long run, China’s economic growth will follow the path suggested by the “convergence hypothesis”. After per capita income level reaches a high level, the economy will slow down due to the convergent effect. On the other hand, factors of production will follow the mechanism of diminishing returns, so TFP will decline gradually, and economic growth will decline to the equilibrium rate. This is based on the logic and analysis of the neoclassical economic growth theory and the growth experience of developed countries and the “Four Asian Dragons”. The problem is that each economy converges and slows down at different speeds. However, China’s per capita income level is still at an upper-middle level and below the level in developed countries. It still takes a long time for China to catch up with developed economies and high-income economies. China’s economy is far away from the state of convergence or equilibrium. Therefore, it must be noted that in the new normal state, the basic dynamics of China’s catch-up growth have not changed, and China’s GDP growth still has a huge potential. Considering the irrationalities in the economic structure and overcapacity that distorts the allocation of resources on the one hand, and the prospect of technological progress and human capital development on the other, there is a large gap between China’s actual and potential economic performances. If we can optimize resource allocation and increase the efficiency of resource allocation through institutional innovation and structural adjustment, we can unleash the potential growth momentum.

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Second, the recent slowdown means that the catch-up growth has come to a new stage, not a stage in which the economy has entered a decelerating track or has long-term low-speed growth like developed countries. Based on the standard theory of economic growth and China’s experience of catch-up economic growth, an emerging economy which has been trying to catch up for a long time is still subject to economic cycles and growth fluctuations; it cannot realize straight forward catch-up. It is impossible to maintain high-speed catch-up growth forever. The catch-up growth of a large economy also has stage-by-stage characteristics. As the input of factors, the economic structure, and the modes of resource allocation change, high-speed growth would slow down to medium-to-high growth at a certain point of time; highspeed growth will not last forever. This awareness is critical for understanding the Chinese economy. The extraordinary catch-up growth of the Chinese economy is a miracle, but the pillars supporting this miracle, like the supply and demand balance, the economic structure, institutional mechanisms, and domestic and international environments, have undergone profound changes. China’s catch-up growth has come to a new historical stage. The super high-speed growth that has been maintained for over 30 years is slowing down to a medium-to-high speed. The essence and the most prominent characteristic of this stage are that the Chinese economy needs to shift its gear, adjust the structure, and change its dynamics to support the catch-up goals in the new era. In other words, China is still on the road to catch up with high-income economies, but it will not go straight forward at the super-fast speed of the past, or enter the equilibrium state like developed economies. It will need to shift the mode of growth, from the factor-driven growth to the innovation-driven growth. In the new era, China will pay more attention to the quality, efficiency and environment benefits of economic growth, and focus on fair distribution and inclusive development. More emphasis will be placed on sustainable economic development and social progress. As said above, the new normal state is an innovative combination of the catch-up economic growth of China and the standard theory economic growth. 2. Income distribution in the new normal state: Impact of gear shift, structural optimization and shift of dynamics The catch-up growth in the new normal state is different from the traditional catch-up economic growth. In particular, the changes in speed, structure and growth dynamics will exert wide-ranging impacts on income distribution and its reform. First, the growth speed has changed. In the new normal state, the Chinese economy will slow down gradually from super-high-speed to medium-to-high speed, as said above. That would spell into changes to the income distribution system. The critical issue is what medium-to-high growth means for income distribution. In theory, economic growth determines income distribution, as economic growth provides the material basis for income distribution. The change in the growth speed affects primary distribution, as it will cause changes to the income levels of urban and rural residents via economic performance and employment. It will also affect redistribution. Speed change will also affect government revenues through taxation and hence the government transfer payment.

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Second, structure is different. In the new normal state, the Chinese economy needs to accelerate its structural adjustment, upgrading and transformation, or “structural shift” in short. In the context of structural shift, the employment pattern, including the amount of employment opportunities, human capital requirements, and the demand for knowledge and skills, will be different from the era of labor-intensive growth. Therefore, structural shift will have a profound impact on employment, wage allocation and income distribution. In theory, the process of economic growth is also a process of economic structure adaptation and transformation. A major task in the new normal state is to advance the structural transformation. For this purpose, the labor market and human capital development must adapt to the evolving trends of industrial transformation, boost the labor productivity, and create a favorable condition for work compensation and employee income to rise. However, structural unemployment is rather common in the course of structural transformation, which has a profound impact on income distribution. Meanwhile, as the economy grows rapidly, China’s services industry has also undergone a major change as a share of the total economy. In 2015, China’s three economic sectors accounted for 8.8, 40.9, and 50.2% of the total added value, and the shares of employment were 28.3, 29.3, and 42.4% (Figs. 9.4 and 9.5). Obviously, services claim the largest proportion of employment and added value. In addition, in the context of raising labor costs, all economic players in China are trying to move from lower-end traditional labor-intensive sectors to higher-end technology, capitalintensive manufacturing and service sectors to create more value. However, this will cause a labor imbalance in the short term. Unskilled workers will face imminent unemployment risks. Skill training and human capital accumulation will be needed to resolve frictional unemployment. Industrial upgrading may bring pains in the short term, like income gap expansion, but in the long run, as more workers take highproductivity jobs, work compensation will increase accordingly, which would help alleviate income disparities between economic sectors and between urban and rural populations. Third, the growth dynamics are different. In the new normal state, the Chinese economy needs to shift from the factor-driven growth to the innovation-driven growth. In this case, the innovation as a driver requires higher labor productivity and total factor productivity. Meanwhile, incentives from income distribution would create the internal driving forces for the innovation, which in turn accelerates the formation of new driving forces for innovation-driven development. The core of innovation-driven development, to a great extent, is an innovation-oriented income distribution and remuneration system. The income distribution system should contain incentives for entrepreneurship and innovation, and support the effective allocation of talent, technology, capital and other factors in the real economy and economic activities. An innovation-oriented economic structure would make catch-up growth more resilient and sustainable. On the contrary, if an economy fails to form a motivating distribution system that encourages innovation, and production factors are allocated to non-economic activities, the economy structure would be lopsided or even emptied out. At present, a key task of China’s economic structural reform is to address such structural issues. Accordingly, the structure and system of income

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distribution must be reformed, otherwise there would be no incentives or internal motivations to drive the economic transformation [2]. For a long time, China’s economic growth has been mainly fueled by factor inputs. As Table 9.1 shows, from 1978 to 2014, the contribution of capital growth to overall GDP growth was about 68%, and the contribution of labor growth was 14%, while technological progress, or TFP, contributed less than 20%. However, over time, the traditional factor-driven model would lose its effectiveness. The arrival of the

Fig. 9.4 Employment in three economic sectors in China 1996–2015. Source NBS

Fig. 9.5 Output from the economic three sectors of China 1996–2015. Source NBS

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Table 9.1 Contributors to China’s economic growth Period

Contributors GDP growth (%)

Capital growth (%)

Labor productivity growth (%)

TFP growth (%)

1978–1984

9.22

8.61(55.26)

3.53(32.65)

1.11(12.10)

1985–1992

9.03

9.17(59.91)

2.15(20.43)

1.75(19.66)

1993–2007

10.18

12.15(69.80)

0.88(7.50)

2.27(22.71)

2007–2014

8.66

13.87(92.24)

0.37(3.65)

0.39(4.11)

1978–2014

9.71

11.24(67.79)

1.54(13.66)

1.78(18.55)

Source The author’s own calculation. The figures are based on 1990, and the capital stock is calculated using the perpetual inventory method. The depreciation rate is 5.47% as proposed by Chen [3]. GDP and employment figures come from the website of NBS. TFP is measured using the Solow residual method, with the elasticity of capital output being 0.59, and the elasticity of labor output being 0.83

Lewis turning point in the early 21st century restricts China’s continued labor growth, while the high investment rate in China limits rapid capital accumulation in China. China urgently needs to switch its growth dynamics to maintain the medium-to-high growth in the long-term future. As can be seen from Table 9.1, the contribution of technological progress to China’s economic growth has been on the rise, from 12.1% in 1978–1984 to 22.7% in 1993–2007, reflecting China’s late-mover advantage on the technology curve. According to Penn World Table, China’s TFP was about 31.1% of the United States’ level in 1978, and the percentage reached 43.2% in 2014. In the foreseeable future, the contribution of innovation and technological advancement to China’s economic growth will increase further. Income distribution reform needs to create appropriate incentives for R&D personnel and entrepreneurs, by safeguarding property rights, encouraging business start-up, and increasing rewards for new tech-outcomes. Technology researchers should be encouraged to engage actively in innovation, and appropriate incentive mechanisms should be implemented to stimulate the potential of China’s economy and the popular enthusiasm for innovation, and further increase personal income.

9.2.2 Global Rebalancing and New Challenges for China’s Income Distribution System 1. Increasing global inequality While the Chinese economy enters a new normal state, the external environment has also changed. In a sense, the world economy has also entered a new normal state, or a new stage of structural adjustment and innovation-driven development. An antiglobalization movement has risen amid the serious concerns and discontents about

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increasing income inequality in the course of globalization. The anti-globalization movement, however, does not really aim to put an end to globalization, but demand response to the rising inequality, labor-capital conflicts, unemployment, and the dwindling middle class [2]. This movement also raises concerns about income distribution. In the past decades, driven by the advancement of technologies in communication, transportation, and warehousing, accelerated globalization has basically torn down the restrictions of national borders, allowing companies and individuals to allocate resources globally and maximize their production efficiency. While production and investment globalize and international trade prospers, globalization has created great benefits, boosting the rapid growth of the global economy, allowing countries to utilize their comparative advantages, and promoting the cross-border flows of technology. Globalization has also caused a series of social and economic problems, such as the widening gaps between developed and developing countries and within countries. The transfer of low-end industries from developed countries to developing countries to cash out comparative advantages, as a result of globalization, will lead to unemployment of low-income and middle-income workers in developed countries. Economies would also be exposed to external shocks. Therefore, protectionism and populism rose in many countries after the global financial crisis in 2008, especially because the global economic recovery was slow. A series of anti-globalization events happened, such as the Brexit referendum, Donald Trump’s trade attacks, and Italy’s referendum on constitutional reform. The increasing income inequality in the course of globalization means that the current global governance system and mechanisms need further shakeup, but does not override the positive impacts of globalization. 2. Global value chain transformation After the 2008 global financial crisis, global investment and trade rules have been shaken up. TPP, TTIP and other regional investment and trade rules will force China to innovative modes that will have to be substituted for the current ones. The traditional system and practices of international division of labor are undergoing profound changes. The international industrial and market division based on comparative advantages is coming to a new stage where the global value chain plays the critical role and the compensations for capital, labor, talent and technology depend on their role and contribution in the global value chain. In the new normal state, especially under the pressure of the transforming industrial structure, China’s participation in the global value chain needs to be enhanced and upgraded. China should move up to the higher end of the value chain where higher added value is offered, which would drive up incomes based on labor, technology and other factors. In short, in the post-crisis era, the new trends of globalization, China’s participation in the global value chain, and the further opening-up and transformation of the Chinese economic system have profound implications for income distribution, which raises new and higher requirements for income distribution reform. The above analysis shows that, in the past 40 years of reform and opening-up, China’s income distribution system has made significant progress and achievements. However, facing the new conditions of economic development in China and outside,

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China’s income distribution reform has still a long way to go. In the future, China has favorable conditions that would help advance the reform of income distribution and unfavorable ones that would hinder the progress of the reform. Income distribution reform is even more relevant in the new normal state characterized by slower growth, structural adjustment, and innovation-driven economic development, and faces higher requirements. In turn, deepening income distribution reform will help the economy adapt to the new environment. Therefore, considering the new trends in the new normal state, a reasonable new pattern of income distribution should be shaped to create incentives for innovation and generate a driving force for sustained economic growth.

9.3 Factors and Trends Influencing Income Distribution in the New Normal State [2] As mentioned above, the new normal state has favorable factors and challenges for China’s income distribution reform in the future. At the same time, in the new normal state, China’s income distribution will acquire some new features.

9.3.1 Favorable Factors First, it has become a consensus that the government is commitment to fairness and justice in income distribution, and people place high expectations on fairness and justice. While personal income levels rise steadily, closer attention should be paid to the quality of economic growth in the new normal state, and people should be put at the center of economic development. Fair and inclusive growth is now a common aspiration and what a well-off society means. Capital in the Twenty First Century published in 2014 has triggered a new round of discussion about how to achieve fair global development, and offered clues and inspirations for China to further the income distribution reform. The strategy of building a well-off society in an all-round way by 2020 has clear goals, including fair and equitable income distribution. Second, efforts to look for new growth drivers and a new development model in the new normal state will help improve labor productivity and wage growth simultaneously. Since the global financial crisis, the traditional economic growth model that relies on low labor costs, high exports, high investment, and high pollution has been proved unsustainable. Economic transformation and innovation that promise to improve the quality, efficiency, and benefits of development will boost the growth of income and wage, while increasing labor productivity. Third, the demographic shift and the decline of the demographic bonus are conducive to improving workers’ remuneration. In the new normal state, labor supply

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and demand will undergo major changes, and factor-driven growth will suffer, especially when the working-age population was projected to stop growing around 2017. That means after the binary economic growth with Chinese characteristics, unlimited labor supply would pass into history. The shift of labor supply and demand will give labor more bargaining power, thereby alleviating labor price distortion and increasing the resource allocation efficiency to some extent. Fourth, reform of the taxation system and the public services system will help promote equal access to basic public services in urban and rural areas. The taxation reform that aims to reduce income gaps through tax cuts, transfer payments and the provision of public services has a lot of implications for the income distribution reform. At present, a new round of fiscal and taxation system reform is going on under the principle of “matching fiscal resources with governance duties”. It aims also to promote equal access to public services for urban and rural residents, which will help the government promote the reform and maintain social cohesion. Fifth, the goal of ownership reform of SOEs, driven by the supply-side structural reform, is becoming clearer, which helps to popularize employee shareholding schemes and equity-based incentives. In the new normal state of economic growth, supply-side structural reform is a must that aims to improve quality and efficiency on the supply side. The ownership reform of SOEs, or the reform to realize mixed ownership, is also critical. Now, both reforms are advancing steadily, and the distribution rules of SOEs are becoming more dependable, rational, and innovation-friendly. On one hand, a cap is put on the compensations of executives of State-owned enterprise, with their perks sorted out and well regulated. On the other hand, effective ways to implement employee shareholding schemes and equity incentives have been explored, and the distribution reform is carried out on the solid basis of ownership reform. Sixth, the time is ripe for regulating income distribution. Before the central government launched the campaign to stop formalism, bureaucracy, hedonism and extravagance (the “anti-four winds campaign”) and the “eight-point frugality code”, unreasonable and illegitimate incomes were rampant, which was an important cause of unfair income distribution. The “anti-four winds campaign” and the “eight-point frugality code” have played a key role in reducing and eliminating “gray incomes”, and thus in making income distribution fair and equitable. In the new normal state of economy, income distribution must be better regulated, income distribution rules must be more transparent, and the guarantee for fair rights, fair rules, and fair opportunities must be made more solid and effective.

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9.3.2 Unfavorable Factors Soon, China’s income distribution reform will be subject to some unfavorable conditions. First, in the new normal state, economic growth has slowed down, so has income growth. The Chinese economy has already bid farewell to double-digit growth rates of the past, and the growth rates have fallen to the 7% even 6%. Although marketoriented reforms continue to advance and a new momentum is taking shape in China, the external market is not recovering fast enough, which may drag down China’s economy in the short term and thus impact the growth of income. Second, during the economic downturn, the contradiction between the decline in labor productivity in traditional industries and the increase in minimum wage standards is getting sharp. In the current economic environment, a considerable number of companies that have failed to update their technology may face the threats of overcapacity, high costs or declining export. As the Lewis turning point comes, labor costs have risen and labor productivity has fallen, and the contradiction between the decline in expected profitability and the rise in the minimum wage is inevitable in the foreseeable future. Third, while economic transformation has come to a critical stage, structural unemployment is getting painful. Economic transformation and institutional changes have put the current conditions of labor supply, like knowledge, skills, concepts, and regional distribution, at odds with employment demand, resulting in structural unemployment, a lower employment rate and lower labor remuneration. Fourth, new demographic features, mainly the age structure, impact the laborcapital relations. In the new normal state, especially in the next five years, people born in the 1980s and 1990s will become main body of the labor force. They are quick to update their knowledge structure, have a stronger awareness of their labor rights, and generally pursue a high standard of living. This would make the labor-capital relationship more complicated and sensitive, which requires a clearer understanding and a proper response. Fifth, income distribution issues are intertwined with other social issues and become more sensitive after China enters the middle-income stage. In the new normal state, China’s per capita GDP will rise to above 10,000 US dollars, but its sustained growth also depends on the success of economic transformation, including the shift of dynamics and growth model. In this context, effective responses to income distribution issues as well as other social issues concerning employment of the lowincome urban and rural population, healthcare, and social security are crucial to avoiding the middle-income trap. Addressing inequality and various other social issues arising in the middle-income stage in the course of accelerated transformation and innovation-driven development will be a critical task in the future.

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9.3.3 New Trends of Income Distribution in the New Normal State Considering the above factors and research findings, in the new normal state of economic development, China’s income distribution in the next few years may show the following characteristics: First, the characteristics and trends of economic development in the new normal state, mainly change in growth rate, optimization of economic structure, and shift of growth dynamics, will significantly affect the income distribution pattern. Meanwhile, income distribution reform will deepen, which will help the economy adapt better to the new economic environment. Second, in the near future, socio-economic policies, especially the development orientation and policies in the new normal state, will emphasize fair growth and further reduce the income gaps between urban and rural people, but this depends on institutional mechanisms that promote more equitable income distribution. Third, the key task of income distribution reform in the new normal state will shift from narrowing down income gaps to addressing inequality in income distribution; however, the prospect of wealth growth and distribution in the future will have a significant impact on overall income distribution. Wealth distribution and wealth gaps will become a new focus of income distribution reform. Fourth, in the new normal state, as the economic structure upgrades and evolves, services will assume a key role in the economic system, which will have a further polarization effect on income distribution. The rapid development of services such as finance and information technologies will further widen income gaps in cities. The relationship between service economy development and income distribution deserves closer attention. Fifth, intergenerational income issues will show up in the future. Inheritance tax has already attracted widespread attention. We must try to prevent the intergenerational inequality from disturbing the income distribution order. New taxes such as inheritance tax, real estate tax, and gift tax are now under deliberation [2]. Sixth, in addition to the existing primary distribution and redistribution systems, tertiary distribution including charity programs and social donations will play a role in improving income distribution in the new normal state.

9.4 Relations to Be Addressed Through the Income Distribution Reform in the New Normal State As the above analysis shows, in the new normal state of the economic development, China’s income distribution reform needs to properly address six relations as follows.

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9.4.1 Economic Growth Versus Income Distribution After years of rapid economic growth, China has become the second largest economy in the world. However, income gaps have been expanding over the years. After 2003, the Gini coefficient has remained high and has no prospect of dropping. According to classic development economics, income gaps will expand first and then narrow down as economy grows. In the new normal state, China’s income distribution may be approaching the inflection point in the Kuznets inverted U curve, but we must remain cautious. Without certain institutional mechanisms, this inverted U curve will happen automatically; it is not a natural product of the new normal state. Therefore, while keeping the economic growth in a reasonable range, China needs to increase fairness and justice in income distribution, to create a stable and sustainable environment for economic development in the new normal state.

9.4.2 Top-Level Design Versus Classified Implementation China has developed a socialist income distribution system with Chinese characteristics, and the top-level design has been made for the entire system. At the implementation and operation level, however, classification is still not complete and has no scientific standards, which makes it difficult to align policies with specific needs. Some policies are formulated using a “one-size-fits-all” model. Income distribution issues are mainly analyzed from urban, rural, regional and sectoral perspectives. This approach is effective in understanding China’s income distribution, but perceptions of personal income gaps are vastly different from income disparities. Therefore, we propose to formulate classified distribution policies based on reality. Distribution policies must be aligned with industry types and realities. China should build up classified wage systems, such as a civil service wage system, a public institution wage system, and a State-owned enterprise wage system, and meanwhile we should explore how to maintain stable wage growth for shop-floor workers and develop appropriate income distribution policies aiming at farmers, low-income earners and disadvantaged groups. Classified income distribution reform with clear targets would bring people’s perception closer to reality and increase the feasibility of income distribution policies.

9.4.3 National Income Distribution Pattern Adjustment Versus Taxation System Reform In China’s macro national income distribution system, labor remuneration is relatively low as a percentage of primary distribution while government revenues are too high, which explains why urban and rural personal income growth has fallen

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behind GDP growth for a long time. In the current production-oriented taxation system, turnover tax is the main body, and the proportion of income tax is very low. Therefore, in the new normal state, it is necessary to adjust the national income distribution pattern to ensure that urban and rural personal income grows in step with the economy. It is also necessary to further reform the taxation system so that the system would focus more on income and wealth distribution. This tax system should help reduce people’s overall tax burden in China, and play a role in reshaping income redistribution, adjusting national income distribution, and reducing income gaps.

9.4.4 Labor Productivity Versus Labor Remuneration and Household Income Growth Many transnational empirical studies as well as the experience of some developed countries have shown that the higher the labor productivity of workers, the higher their remuneration. The entire economy would benefit from the improvement in labor productivity, and China is no exception. The improvement in labor productivity is the basis for any increase in personal income. In the new normal state, in addition to addressing income gaps directly, we should work to promote technology development, strengthen human capital accumulation, improve management expertise, and develop and deliver public goods and services such as education and healthcare to boost the growth of labor productivity. Based on this, workers’ remuneration and personal income can be raised.

9.4.5 Regulating Income Distribution Versus Offering Incentives It is imperative to put income distribution under regulation, but at the same time, it is necessary to offer incentives to workers. China is firmly implementing the “eightpoint frugality code” to fight corruption and advancing civil service wage reforms to address the problem that extra allowances are too high as a proportion of civil servants’ income and expenditures on civil service take up too much of government budgets, and suppress the space of government official corruption and public power abuse. China has also tried to improve the transparency of overall income distribution and solve the problem of “unequal pay for the same work” to eliminate unfair distribution and ease income gaps, thus enhancing the people’s faith in fair and equitable distribution. On the other hand, it is also necessary to offer incentives in the compensation system to shape a balanced system of incentives and restraints, for the purpose of engaging the entire society and mobilizing innovations in the new normal state.

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259

9.4.6 Government Versus Market Forces The above five issues in China’s income distribution system are mainly due to the failure to properly handle the relationship between the government and market forces in the income distribution reform and economic development. Also due to the failure, cases of injustice and inefficacy have been reported now and then. In primary distribution, the market should play a leading role to boost economic efficiency. However, the government still intervenes in the allocation of resources in some areas, which weakens efficiency. In redistribution, the government should play a stronger role to guarantee fairness across the entire society. However, the government is absent in many cases, which leaves income redistribution unable to increase fairness. Therefore, it is necessary to regulate the market to address such problems as price distortion and monopoly of resources. It is also important to accelerate the decentralization of government powers. We should build a service-oriented government, improve the public services system, shape an internationalized and rule-based economic environment, and create an institutional system that advocates fair competition.

9.5 Deepening the Overall Reform and Expected Innovations of the Income Distribution System [2] China’s income distribution system needs reform and reshaping. After so many years, China’s income distribution reform has entered a stage where major innovations are badly needed to ease the bottleneck. In the future, the focus should be on linking up innovations of the income distribution system and the advancement of the overall reform in China in order to create an environment in which people have equal rights and fair access to opportunities, and shape a reasonable new income distribution order based on fair rules.

9.5.1 Shaping a Reasonable Income Distribution Order Under the new normal state of development, the goals of solving specific problems with income distribution, the income distribution reform, and building a reasonable and orderly income distribution pattern will be integrated. Starting with solving the specific problems, China will implement necessary mechanisms to create a fair and just institutional environment. Considering and addressing the circumstances of the new normal state, China will gradually form a reasonable and orderly income distribution pattern, eliminating unfair distribution, and gradually narrowing down income gaps.

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9.5.2 Giving Full Play to the Roles of the Market and the Government For the market to play the decisive role and the government to play a more effective role, China must deepen market-oriented reforms and speed up the change of government powers and actions. As immediate interests are involved, income distribution reform hinges more than anything else on the government-market relationship. In short, primary distribution allows the market to play a decisive role in the allocation of resources. Wages, bank interests, and enterprise profits are directly determined by the market, which is partly how the market determines the allocation of resources and achieves the goals of primary distribution. In redistribution, the government plays the predominant role through taxation, transfer payments, and equalization of access to public service. The combination of roles of the market and the government leads towards the objective of social fairness and justice.

9.5.3 Aligning Primary Distribution with Redistribution Personal income distribution reform should align with the national income distribution reform to link up primary distribution with redistribution. Based on securing a steady increase in wage income, China will gradually increase farmers’ operating income through increasing agricultural investment and encouraging commercial farm operations. We will encourage innovations and entrepreneurship, and increase operating income as a proportion of the total personal income. We will increase people’s property-based income through multiple channels including the capital market; we will realize the steady increase of property-based income by ensuring the healthy development of the stock market, the bond market, and the futures market, and combat dishonesty and illegal acts in the capital market. Through the improved income redistribution, we will strengthen people’s risk resilience and steadily improve their welfare through transfer payments.

9.5.4 Integrating Top-Level Design and Distribution Reform The design of the income distribution system should reflect the reality and planning of different income classes, and the overall goal of income distribution reform should be achieved in part through implementation of classification policies and classified reform. At the macro institutional level, according to the reality and actual needs, we will design and implement a scientific and classified income distribution framework for different industries, regions, and entities. Attention will be paid to the classified reforms of the income distribution system for civil servants and State-owned enterprise employees, to create examples for other Chinese enterprises and even

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foreign-invested enterprises. We will rethink and redesign the performance-based wage system of public institutions, and explore an innovation-oriented wage distribution system. We will encourage all entities to implement a classified pay system that favors low-income workers. We will facilitate the formation of a wage growth mechanism in favor of front-line workers, as well as a compensation system for business managers with income ceiling for senior executives of SOEs under the central government to demonstrate the government’s determination and ability to deepen classified income distribution reform.

9.5.5 Building a Perfect Factors Market System Covering Both Urban and Rural Areas Income distribution reform should be combined with the development of a factor market system that covers both urban and rural areas, and initial income distribution should be integrated effectively with resource allocation through market mechanisms. Income distribution reform must aim at fairness and justice, and promote equal access to public services. On this basis, we will promote the reform of the household registration system and gradually form nationally unified labor, land and capital markets, and then advance the reform of the factor market and address the urbanrural income gaps. Ideally, the factor market should play double roles in resource allocation and primary income distribution.

9.5.6 Building an Incentives-Based Income Distribution System to Drive Innovation and Development Income distribution reform should be linked with the innovation-driven development strategy, so that innovation and income growth will enter a virtuous circle. We will seize the strategic opportunities for innovation-driven development. To fulfill our goals, we will build human capital, advance education and innovation, promote talent training and vocational education through technological innovation and upgrading. On this basis, we will improve labor and technology productivity, and reap the benefits of productivity improvement for the entire society, forming a benefit chain from innovation, labor productivity improvement, income growth and then back to innovation incentives, which will become a growth engine for economic development in the new normal state.

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9.5.7 Establishing a Well-Regulated and Transparent Income Distribution Order As part of the income distribution reform, we will eliminate unfair income practices, and strive to promote fair opportunities, fair rights, and fair rules. We will encourage business enterprises and public institutions to further improve the implementation of incentives and disincentives to strike a balance between efficiency and fairness in wage payment. Meanwhile, we will combat “black” income through market speculation and corrupt practices, and build a fair and transparent income distribution environment. We will institutionalize social security mechanisms covering the whole country, improve the level of social security, relieve the pressure on vulnerable groups, and promote fair opportunities and rights to development.

9.5.8 Accelerating the Establishment of an Income Regulatory and Supervision System We will combine income distribution reform with income regulatory legislation to enhance supervision and administration over income distribution in the new normal state. We will deploy advanced technological means such as the Internet, big data, and platform economics to improve the income distribution index system. Based on the database of wage and other incomes in various regions, industries, and categories, we will develop scientific indicators and methods to generate and oversee income statistics and evaluate income gaps. We will build a personal wealth database to advance the reform of inheritance tax that would mainly address inequalities due to intergenerational transfer of wealth. At the same time, we will fully implement the rule of law, and strengthen legislation to monitor the transfer of income through the establishment of benefit-sharing mechanisms and collective bargaining mechanisms to ensure the fairness and justice of transfer income.

References 1. Zhao, C., An, B., & Chen, W. (2014). Promoting new-type urbanization will release three new signals. Yunnan Agriculture, 12, 8. 2. Quan, H. (2017). The new normal state and income distribution: Mechanisms, trends and solutions. Journal of the Party School of the CPC Central Committee, 21(05), 39–47. 3. Chen, C. (2014). Variable depreciation estimation and capital stock calculation. Economic Research Journal, 12, 72–85.

Chapter 10

Policy Framework for Promoting Income Growth and Income Distribution Reform in the New Era

China has entered a new era. The 18th CPC National Congress called for increasing personal income in step with economic development to “ensure that the people share in the fruits of development.” The 19th CPC National Congress in 2017 stressed that the Party will work to see that “individual incomes grow in step with economic development, and pay rises in tandem with increases in labor productivity.” The goal is that by 2020 the per capita income as a percentage of GDP will double compared to the 2010 level. This ambitious plan offers a basic policy framework for China’s future income growth and income distribution system.

10.1 Disparity Between Personal Income Growth and Economic Development in China1 10.1.1 Interaction Between Personal Income Growth and Economic Development The Chinese economy has entered a new normal state. The days are gone when people’s personal income fell behind economic growth and labor remuneration grew slower than productivity. In the new normal state, personal income is growing faster than national economy, and labor remuneration is growing faster than productivity. In the context of economic slowdown and structural transformation, we must recognize the new “mismatch” in the new normal state, which is crucial for promoting sustainable economic and social development and advancing inclusive development. For this purpose, the relationships must be very well handled between the government and the market, between reform and development, and between growth and distribution. 1 Quan Heng, Li Ling, Chan Yaqing. Policy Research on Promoting the Synchronization of Personal

Income and Economic Development. A key project of Shanghai Academy of Social Sciences. © Shanghai Jiao Tong University Press 2021 263 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4_10

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1. Connotations of synchronized growth According to the 18th CPC National Congress, synchronized growth, or parallel growth, means to “increase individual income in step with economic development and labor remuneration in step with improvement in labor productivity.”2 At present, the concept of synchronized growth in the academia has two meanings: one is equal or similar growth rates, and the other is movements in the same direction. First, in terms of growth rates, personal income has been left behind national economy for a long time. However, in the new normal state when the economy is slowing down, personal income is growing faster than national economy. We may measure the growth of personal income by the per capita disposable income of urban households and the per capita net income of rural households, and measure the level of economic development by GDP per capita. After price factors are deducted, China’s per capita GDP has increased by 9.90% per year from 1996 to 2015. The annual growth of per capita disposable income of urban residents is about 8.10%, and the annual growth of net income of rural residents is about 7.58%, 1.7 and 2.3% points lower than the growth of per capita GDP. This shows that, overall, China’s personal income growth falls behind economic development (see Fig. 10.1). Urban residents’ personal income and national economy have grown in parallel, relatively speaking, but rural residents’ income has fallen behind. After price factors, the correlation coefficient between the growth of per capita disposable income of urban residents and the growth of per capita GDP reached 0.567 between 1996 and 2015, while the correlation coefficient between the growth of per capita net income of rural residents and the growth of per capita GDP was only 0.216. The period of 20 years can be divided into two halves, if we take 2012 as the midpoint. In the first half, 1996–2011, except for a couple of years, the growth of per capita income of urban and rural residents was lower than the growth of per capita GDP. In the second half, from 2012 to 2015, the economy shifted from high-speed growth to medium-to-high speed growth, and the slowdown became a main characteristic of the new normal state of economy (see Table 10.1). According to statistics released by NBS for the first half of 2016, the per capita disposable income of residents nationwide, after price factors, increased by 6.5%, while the GDP growth was 6.7%. The fact that personal income had grown slower than GDP had aroused widespread concern and debate, given that in the previous four years personal income growth was faster than economic growth. How to ensure that personal income grows in step with economic development in the new normal state once again popped up as a hot issue. All this shows the complexity and sensitivity of personal income movements in the new normal state of economy. Second, labor remuneration has grown in step with labor productivity in some sense, while both growth rates are slowing down. However, in the new normal state of economy, labor remuneration is growing faster than labor productivity. If we use the average wage of workers in urban areas to represent labor remuneration, and 2 The

report to the 18th CPC National Congress talks about “parity in personal income growth and economic growth.”

10.1 Disparity Between Personal Income Growth …

265

Table 10.1 A comparison of personal income growth and economic development (1996–2015) Indicator

Year First period (1996–2011) Second period (2012−2015)

Years when per capita disposable 1999, 2002, 2009 income of urban households outgrows per capita GDP

2012–2015

%

18.75%

100%

Years when per capita net income of rural households outgrows per capita GDP

1996

2012–2015

%

6.25%

100%

use the ratio of added value to the number of workers in the secondary and tertiary industries to represent labor productivity, then, after the price factor, we can find that from 2001 to 2014, work compensation grew slightly faster than labor productivity, but both slowed down, moving in the same direction, with the correlation coefficient exceeding 0.70. Meanwhile, after 2012, or after the Chinese economy entered the new normal state, the growth of labor productivity has declined more obviously. In 2014, it grew by 3.10% only, while the growth of labor remuneration was somewhere between 7 and 8% (see Fig. 10.2). Through the quantitative comparisons between the growth of personal income and economic development, and between the growths of labor remuneration and labor productivity, we can see that the growth of personal income is faster than economic

Fig. 10.1 Quantitative comparison between personal income growth and economic development (1996–2015)

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10 Policy Framework for Promoting Income Growth …

Fig. 10.2 Quantitative comparison between labor remuneration and labor productivity (2001–2014)

development, and labor remuneration is growing faster than labor productivity in the new normal state, which was unseen under China’s previous economic growth models. In theory, this is due to income stickiness, which means that changes of personal income, especially income through labor remuneration, always occur later than economic growth, and income growth may even cover up economic decline in the short term. Income stickiness is often attributed to institutional factors such as contract-based wage payment and imperfections in the labor market. 2. Parity issues under traditional growth models During rapid economic growth, personal income had not grown in step with economic development, the growth of labor remuneration was slower than the increase in labor productivity, income gaps continued to expand, with personal income staying too low as a percentage of the national income. Farmers’ income growth was sluggish, and some low-income groups were left far behind, unable to benefit from national economic development. The 18th CPC National Congress brought attention to this phenomenon through the statement that “personal income as a percentage of the national income is too low and work-based income is too low as a percentage of primary distribution”, stressing that economic development should benefit all people, and the well-being of people must be improved as economy grows. To synchronize the growth of personal income with economic development, the critical first step is to synchronize the growth of labor remuneration with the increase in labor productivity. This is partly because the sluggish rise of personal income as a percentage of the national income has led to imbalances in national income distribution and domestic demand. Since 2000, the proportions of labor remuneration and personal income, as well as domestic consumption, have declined. Labor remuneration as a percentage of primary distribution fell from 52.70% in 2000 to 46.81% in 2011, personal income

10.1 Disparity Between Personal Income Growth …

267

Fig. 10.3 Decline of personal income as a percentage of the national income and household consumption rate due to unparallel growths (2000–2011)

as a percentage of the national income went down from 67.07% in 2000 to 60.21% in 2011,3 and household consumption rate dropped from 46.22% in 2000 to 35.71% in 2010 (see Fig. 10.3). In some sense, labor remuneration has long stayed behind the marginal output of labor. Chang et al. [1] found that through analysis of macro-economic data between 1995 and 2000, labor contributed to 70.7% of national economic output but labor remuneration only accounted for 52.79% of national income. From 2001 to 2007, labor’s contribution to national economic output fell to 52.42% and labor remuneration fell to 49.2% as a percentage of national income. In a nutshell, labor remuneration was below labor’s contribution to economic output in both periods. Du and Qu [2] examined the data of manufacturing enterprises and revealed even greater differences. In 2000, the per capita labor remuneration of manufacturing employees was about 11,000 RMB, while the marginal labor output was 26,000 RMB yuan. Labor remuneration was lower than one half of output. By 2007, labor remuneration was 92% higher than what it was 8 years ago, while the marginal labor output had grown by 292.6% and labor productivity 321.93%. The gap between labor remuneration and labor output has widened further, with the former accounting for only one fifth of the latter. Therefore, before the global financial crisis, China’s work-based income had remained lower than labor marginal output. China’s synchronization efforts focus on further increasing personal income and institutionalizing mechanisms to increase personal income and narrow down the gap between labor remuneration and labor output (Table 10.2).

3 Calculation

based on the “Flow-of Funds Table (Physical Transaction)” in China Statistical Yearbook 2013.

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Table 10.2 Comparison between labor remuneration and labor productivity in the manufacturing sector (2000–2007) Year

Labor remuneration and labor productivity level

Labor remuneration and labor productivity growth

Labor remuneration (000 yuan per person)

Labor remuneration (000 yuan per person)

Marginal labor productivity (%)

Average labor productivity (%)

Marginal labor productivity (%)

Average labor productivity (%)

2000

11.48

25.98

42.77

2001

12.25

32.40

52.06

6.71

24.71

21.72

2002

13.09

38.61

60.41

6.86

19.17

16.04

2003

14.08

46.97

77.28

7.56

21.65

27.93

2004

15.35

56.81

95.32

9.02

20.95

23.34

2005

16.96

62.85

115.82

10.49

10.63

21.51

2006

20.74

78.23

148.96

22.29

24.47

28.61

2007

22.01

102.00

180.46

6.12

30.38

21.15

Source Du and Qu [2]

3. Parity issues in the new normal state In the new normal state of economy, the leftover issues of unparallel growth remain stubborn, while some problems hidden or covered during rapid economic growth have gradually shown up, so a new form of disparity has occurred between income distribution and economic development and hindered economic transformation and further progress. In short, the disparity has six aspects as follows. First, personal income has not caught up with economic growth. When the economy was growing fast, for example, at an annual rate of 10%, the growth of personal income was 2–3% points below, and the rate was even lower for lowincome urban groups and the rural population, which was approximately 3–4%. Since the mid-1990s, the national income distribution system has been biased in favor of governments and enterprises, and personal income as a percentage has remained low. In the new normal state, foreign-oriented economic sectors have suffered from international shocks, unemployment in traditional industries has increased, and personal income growth has met with new uncertainties. Second, China’s economic development is not inclusive enough. The income gaps have widened between urban and rural areas, between regions, and between economic sectors. Unfairness of rights, opportunities, and rules has made the distribution pattern rigidly biased, weakened income flows, and undermined social security for lowincome groups. Third, labor remuneration has not grown in step with the increase in labor productivity. In theory, labor remuneration is the price of labor and reflects changes in labor productivity. Due to labor market segmentation, market friction, and institutional protection, labor remuneration growth has failed to catch up with gains in labor

10.1 Disparity Between Personal Income Growth …

269

productivity. In the new normal state, investment reduction and the rise of unemployment have caused a decline in labor productivity. However, some institutional factors such as labor contract and minimum wage legislation that purportedly protect the interests of workers, are too rigid to guarantee labor efficiency. They seem fair in the short term, but it undermines economic growth in the longer run. Fourth, virtual economy and real economy are disconnected. In terms of propertybased income, the rapid development of real estate and financial markets has created a big bubble and uncertainties, such as the high risk of P2P, which has tipped the balance of income distribution. Some people have got rich overnight, worsening the disparity between personal income and economic development. At the same time, market conditions supporting the growth of income from business operation and encouraging innovation and entrepreneurship are inadequate, and the rapid growth of personal income of some people is not based on the development of the real economy. Fifth, the provision of public services does not match with the increase in social security demand. In terms of transfer income, government revenues and expenditures, such as taxes and transfer payments, still fall short of the need to adjust income gaps and people’s public service demand. Sixth, China’s income distribution reform is not synchronized with other reforms. Reform in income distribution falls behind reforms in other areas, relatively speaking. Land ownership reform has a long way to go, the institutional constraints of SOEs still exist, and the social security system is still fragmented, which have made opportunities and rights unfair. To advance these reforms, it is necessary to keep improving the mechanisms and institutional measures for synchronizing personal income and economic development.

10.1.2 Scientific Thinking and Awareness Needed to Realize Parallel Growths To ensure that personal income grows in step with economic development, we need a scientific approach. We don’t always expect exact synchronization, but they should move on roughly the same curve. At some points in time, personal income may increase a bit faster, while at other points, economic development can be faster. If we allow this to happen, the fact that the per capita disposable income of Chinese households increased by 6.5% while GDP grew by 6.7% in the first half of 2016 should not have caused any concern. A gap of 0.2% does not constitute an evidence of disparity. However, the imbalances covered up by rapid economic growth and the challenges created by the slowdown in the new normal state of economic growth deserve our attention. Therefore, when we talk about parallel growths, we need more than simple quantitative comparisons, and we should take a scientific and overall approach. Under the superficial issues, we must try to find the root cause through

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critical thinking, recognize and address actual needs by a dialectical approach, and implement the distribution system reform based on rules of law. First, synchronization, or parallel growth, means economic development benefits all people, including rural and urban residents. When the economy is growing fast, the government must pay more attention to social security and improve people’s wellbeing, by increasing the real income of its people, and letting them share the benefits of economic development. At present, however, personal income as a percentage of national income is too low, and the share of labor remuneration in primary distribution is too low, and the income gap continues to widen between urban and rural areas, regions and economic sectors [3]. Regional differences and interpersonal differences are still apparent in terms of basic public services provision like employment, healthcare, social security, housing and education. Farmers and low-to-middle income earners in urban areas have very limited spending power. As a Chinese saying goes, when big rivers are flowing, small rivers are full, but when big rivers dry up, small rivers dry out. In terms of income, it means personal income growth is highly interconnected with overall economic development. We should try to cope with various problems in income distribution, deepen the redistribution reform, adjust the production relations that do not support the growth of productivity, optimize the national income distribution pattern, implement policies that give priority to people’s wellbeing and benefit all people, and let people benefit from economic development. Second, synchronization entails the transformation of the mode of economic development, the improvement of the quality of economic development, and the promotion of inclusive development. “We must pay more attention to fairness and justice. While we grow the size of the cake, we must try to cut it reasonably. We must address people’s concern and meet their needs, so that they feel that they are part of it and they benefit from development.” In the new normal state, we need to guarantee people’s livelihood and try to reduce misallocation of resources through effective distribution measures and provision of incentives. Tax incentives should be implemented to promote employment, and other measures should be implemented to improve labor productivity and the quality of economic development, to create a solid long-term basis for successful reform and sustainable development. It is particularly necessary to increase the share of labor remuneration in primary distribution as labor productivity grows. At the same time, the government must “enhance its services and support for the labor market, increase investment in vocational education and on-the-job training to improve the competence of workers and the fitness to take different jobs, and uphold the rights and interests of workers by both regulating and stimulating the labor market” [4]. In addition, synchronization also covers the relationship between economic development and income distribution. We should try to build reasonable and orderly labor pricing mechanism, and strike a balance between economic development and income distribution. The key is to handle the relationship between the government and the market, and form a reasonable and orderly labor pricing mechanism. At present,

10.1 Disparity Between Personal Income Growth …

271

there are two major challenges. One is to reduce the government’s intervention in the labor market and correct labor price distortions caused by excessive government intervention. The other is to enhance market regulation and legislation to ensure fair competition in the market.

10.2 Growth of Personal Income: Influencing Factors and New Trends in the New Era In the new normal state of economy in the new era, the Chinese economy will shift from rapid double-digit growth to a medium-to-high speed of 5–7%, which will lead to a slowdown in household income growth. As the demographic bonus gradually disappears and the Lewis turning point comes near, the new supply–demand balance of China’s labor market will raise wages, and the implementation of policies such as supply-side reforms will drive up competition in the goods market and reduce excessive monopoly profit. In addition, the government is rolling out new fiscal and taxation reforms to limit the growth of government revenues, while personal income tax incentives are offered to promote fairness in income distribution. In the short term, due to wage inertia and friction in the labor market, personal income would outgrow GDP during economic slowdown; in the long run, however, personal income will eventually slow down due to the inadequate material basis. Judging by international experience, labor remuneration in China falls short of labor contribution. Therefore, to realize inclusive development, it is necessary to increase labor remuneration and household income, so that labor remuneration gets close to the marginal labor output. This is how personal income can catch up with economic development.

10.2.1 From Factor-Driven to Innovation-Driven Development: TFP and Changes in Labor Remuneration If market competition is perfect and labor remuneration remains unchanged, household income is totally determined by the marginal output of labor. In other words, industries where marginal labor productivity is higher typically offer higher labor remuneration. In the real economy, perfect market competition is hardly possible, but the increase of labor productivity still significantly affects income. Therefore, labor productivity is a key factor for the growth of household income in the new normal state. According statistics of China’s economic growth since 2000, from 2000 to 2014, the contribution of employment growth was slim (less than 1%), and GDP growth mainly came from the continuous improvement of labor productivity. Around 2010,

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labor productivity peaked, with its growth going down to somewhere between 6 and 9%, which is a major characteristic of China’s new normal state of economy. The further analysis of labor productivity shows that the slowdown of total factor productivity is primarily responsible for the slowdown in labor productivity. At the same time, capital input is always one of key drivers of China’s labor productivity growth. From 2000 to 2014, the increase in capital per labor created 6.77% increase in labor productivity, and the labor productivity growth during that period was 9.12%. In other words, capital deepening (stock of capital per labor) contributed to more than 70% of the productivity growth, far higher than total factor productivity increase, but considering that China’s investment rate (annual fixed capital formation as a percentage of GDP measured by the expenditure method, not including inventory) has grown very fast, reaching 45% in 2014 which is a high level internationally, it is not realistic to rely solely on investment to boost economic growth in the future. Meanwhile, total factor productivity still has a huge room for improvement. As data breakdown shows, TFP slowed down clearly after 2008, with the growth rates from 2012 to 2014 falling below 1% from 2–6% before 2007. This indicates the direction and potential of the future economic growth (see Table 10.3). Given the shift of growth dynamics in the new normal state, improvement of total factor productivity can be realized in two ways. The first is technological innovation and human capital enhancement. China’s 13th Five-year Plan clearly proposes the strategy to realize innovation-driven growth, particularly stressing the need to promote technological innovation, mass entrepreneurship and mass innovation. This strategy counts on the independent innovation efforts of research institutions and the capabilities of production entities to improve output efficiency. This will drive workers to renew their skills to be employable, while the improvement of worker competence reduces frictional unemployment and helps stabilize economic growth. Meanwhile, the shift of resources from inefficient sectors to efficient sectors will also boost productivity improvements, which is a major goal of the current supplyside reform. Inefficient entities will be forced out of the market by their innovative high-tech and efficient counterparts, which will promote the transfer of agricultural labor to manufacturing and services. According to our estimates, if misallocation of resources is eliminated, China can double its output while factor input remains the same.

10.2.2 Labor Supply and Demand: Limited Labor Supply and Changes in Wages China’s demographic structure is undergoing a big change. The demographic bonus is disappearing, as China’s overall labor supply dwindles. Previously, there was unlimited supply of surplus agricultural labor, but now the supply is limited, which

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Table 10.3 Statistics of GDP growth from the labor productivity perspective Year

GDP growth (%)

Employment growth (%)

Labor productivity growth (%)

In which: TFP growth (%)

In which: capital/labor ratio growth (%)

Investment as % of GDP

2000

8.4

1.0

7.3

2.2

5.1

33.3

2001

8.3

1.0

7.3

2.0

5.2

34.2

2002

9.1

0.8

8.2

2.5

5.7

35.8

2003

10.0

0.6

9.3

2.8

6.5

39.0

2004

10.1

0.7

9.4

2.6

6.7

40.4

2005

11.3

0.6

10.6

3.9

6.7

40.1

2006

12.7

0.5

12.2

5.0

7.1

39.4

2007

14.2

0.5

13.7

6.5

7.2

38.7

2008

9.6

0.4

9.2

2.0

7.2

40.0

2009

9.2

0.3

8.8

0.5

8.3

44.8

2010

10.6

0.4

10.2

2.2

8.0

45.2

2011

9.5

0.4

9.1

1.5

7.5

45.2

2012

7.7

0.4

7.3

0.0

7.2

45.2

2013

7.7

0.4

7.3

0.3

7.0

45.4

2014

7.3

0.4

6.9

0.7

6.2

44.7

Source The author’s own calculation. Capital is calculated by the perpetual inventory method. The initial capital stock and depreciation rates are based on parameters of Chen [5], and the labor input is based on Wu [6]. The annual numbers of employees between 1978 and 1990 are estimated and adjusted, while numbers after 1991 come from official statistics. TFP is measured by the Solow residual method

will drive up labor remuneration. At the same time, we need to be vigilant about unemployment risks and their impact on personal income. Surely, China is facing the disappearance of the demographic bonus and the arrival of the Lewis turning point, and the fast rise of labor wages due to the decrease in labor supply. The huge challenge China will have to address during the 13th Fiveyear Plan period is the demographic change. After enjoying the demographic bonus for a long period, China faces a challenging reality: there is a negative increase in the working-age population and a slim increase in employment. According to the World Population Prospects revised in 2015, the total working age population (15–60 years old) in China peaked (at about 940 million) around 2010, and a sharp decline followed. Based on national population census and sampling of demographic changes, Hu et al. [7] estimated that during the 13th Five-year Plan period (2016– 2020), China’s working-age population will drop by 1.28 million per year. This is the first time China has encountered with a negative growth in working population. Although the working-age population is not equivalent to the employed population, the government can also delay negative employment growth through policies that encourage fertility and postpone retirement. However, the employed population is

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growing very slow now. The national annual growth rate has dropped from 1% in 2000 to about 0.4% in 2013. According to the Development Research Center of the State Council and the World Bank, the average growth of employed population during the 13th Five-year Plan period would be −0.2%, and it will further decline to −0.4% by 2030 when China will face overall labor shortage. Meanwhile, China’s surplus agricultural labor is also becoming limited. There is still a lot of disagreement in the academia about whether China has passed the Lewis turning point, but migrant labor shortage and companies complaining about the rapid rise in labor costs have made headlines in recent years. According to a sampling survey by NBS (Fig. 10.4), the average monthly wage of migrant workers has experienced rapid growth in the new century, from 575 RMB yuan in early 2001 to 3,072 RMB yuan in 2015, up as much as 434.6%. Since 2009, the wage of migrant workers has grown much faster than that in previous years. The annual growth was 8.7% between 2001 and 2008, and reached 12.4% between 2009 and 2015. Since 2009, wage growth has exceeded the growth rate of GDP over the same period. Considering the mobility of rural migrant workers (only about 40% have signed labor contracts with their employers, and only about 20% of the contracts have a term longer than one year), China has passed the Lewis turning point. The rapid rise of migrant workers’ wages reflects the current supply–demand relationship in the labor market. On the other hand, during the economic downturn, high wage levels may cause distortions in the labor market, and wage standards must align with the conditions

Fig. 10.4 Changes in the wages of Chinese rural migrant workers from 2001 to 2015. Source The 2011–2015 data are based on the National Survey of Rural Migrant Workers published by NBS; the 2001–2010 data are based on Lu Feng, “China’s Rural Migrant Workers’ Wage: Trends from 1979–2010”, Social Sciences in China, Issue 7, 2012. The wage growth rates and per capita GDP growth rates are real

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275

Table 10.4 Minimum wage standards in some provinces and cities (2005–2015) Province

Year Minimum wage standard (yuan per month) 2005

2007

Shanghai

690

Zhejiang

670

Jiangsu Shandong Fujian Guangdong

Average growth (%)

2009

2011

2013

2015

2005–2010

2010–2015

840

960

1,280

1,620

2,020

10.2

12.5

750

960

1,310

1,470

1,860

10.4

11.1

690

850

850

1,140

1,480

1,630

6.8

11.2

530

610

760

1,100

1,380

1,600

11.7

11.7

470

750

750

1,100

1,200

1,500

13.9

10.8

684

780

1,000

1,300

1,550

1,895

8.5

13.0

Source Based on provincial governments’ online announcements. The growth rates are nominal values, before using price deflators

of economic development. In recent years, China has promulgated a series of labor legislations, including the Labor Contract Law and the minimum wage standards. Legislations provide all-round guarantees for employees, covering income, pensions, and health care, and aim to improve people’s wellbeing. However, this fuels the distortions in the labor market, because companies are less flexible to adjust their labor input according to the actual economic conditions and their own performance. When companies are forced to cut jobs to cope with raising labor costs, the workers who only earn minimum wages would be hurt, which may expand income inequality and unemployment. Studies by Bai and Qian [8] show that the elasticity of substitution of factor in China’s manufacturing sector is 1, so a compulsory increase in wages will lead to substitution of capital for labor, which will reduce employment, and overall labor remuneration won’t improve. In the current economic downturn in China, corporate profitability is suppressed. However, the minimum wage standards in many provinces are still rising rapidly. Of the six southeastern coastal provinces and cities listed in Table 10.4, between 2010 and 2015, Shanghai, Zhejiang, Jiangsu, Shandong and Guangdong raised their minimum wage standards by 10–13%, higher than the rates in 2005–2010, which is not compatible with China’s current slowdown. In the current context, the government needs to slow down the growth of minimum wages, design a more reasonable framework of minimum wage standards, and avoid “side effects” of policies on employment, so that the growth of minimum wages can really improve personal income.

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10.2.3 Future Fiscal and Taxation Reforms: Stabilizing Tax Burden and Optimizing the Macro Distribution Pattern In terms of the pattern of China’s national income distribution, as personal income declines, government revenues continue to rise as a percentage of national income. As the table of capital flow (see Table 10.5) shows, the government’s share in primary distribution increased from 13.13 to 15.22%, and its share in redistribution increased from 14.53 to 18.94% from 2000 to 2013. Meanwhile, although the share of enterprises also increased rapidly in primary distribution, its share in redistribution increased first and then declined. To a certain degree, the change in government revenues as a share is responsible for the decline in household income, which hampers household consumption and economic growth. That was totally different from the low government revenues during the last round of fiscal and taxation system reforms in 1994. At present, the growth of government revenues should be slowed down to align with the economic growth. To cope with the new economic trends in the new normal state, China is implementing a new round of fiscal and taxation reforms. For the first time, the Third Plenary Session of the 18th CPC Central Committee has adopted “stabilizing tax burden” as the goal of reform, and stressed that it would be realized through raising the weight of direct taxes, promoting VAT reform, and Table 10.5 Shares of three sectors in the primary distribution and redistribution of national income Year Enterprises

Government

Primary Redistribution Primary distribution distribution

Households Redistribution Primary Redistribution distribution

2000 19.72

17.94

13.13

14.53

67.15

67.54

2001 21.40

18.92

12.67

15.01

65.93

66.07

2002 21.57

19.34

13.94

16.23

64.49

64.43

2003 22.28

19.94

13.62

16.09

64.09

63.97

2004 25.12

22.51

13.74

16.43

61.14

61.05

2005 24.52

21.60

14.20

17.55

61.28

60.84

2006 24.74

21.54

14.53

18.21

60.73

60.25

2007 25.65

22.10

14.74

19.01

59.61

58.89

2008 26.61

22.74

14.73

18.98

58.66

58.28

2009 24.73

21.19

14.58

18.28

60.69

60.53

2010 24.51

21.19

14.99

18.41

60.50

60.40

2011 23.95

20.03

15.38

19.19

60.67

60.78

2012 22.73

18.47

15.63

19.54

61.65

61.99

2013 24.12

19.77

15.22

18.94

60.66

61.29

Source Based on the data of primary distribution of total income and disposable income in China Statistical Yearbooks 2013–2015

10.2 Growth of Personal Income: Influencing Factors and New Trends in the New Era

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simplifying tax rates. Stabilizing the tax burden means that taxation and the economy must grow at the same pace. For this end, government revenues as a proportion of GDP should not stop rising, which would help improve the pattern of national income distribution. This round of fiscal and taxation reforms, most notably the substitution of VAT for business tax, is being implemented to stabilize the share of government revenues in national income and increase household income. Business tax is levied on sales, so there is the problem of double taxation. On the other hand, VAT only taxes added value, so it can avoid double taxation. Substitution of VAT for business tax also reduces the proportion of indirect taxes. According to statistics from the Shanghai Bureau of Taxation,4 since the reform began in 2012, Shanghai has cut taxes by 118.53 billion RMB yuan. During this period, the tertiary industry in Shanghai enjoyed rapid development at higher rates than GDP growth. The share of the tertiary industry in the total economy in Shanghai increased from 57.9% in 2011 to 67.8% in 2015. From May 1, 2016, the reform officially spread all over the country. In addition to transportation, some modern services, railway, postal services and telecommunications that had already been covered in the pilot reforms, real estate, construction, finance and consumer services were also put under the new rule. Considering that the tertiary industry offers higher personal income than the manufacturing industry, the reform to reduce the corporate tax burden and promote employment in the tertiary industry will help increase personal income as a percentage of national income in the future. In addition to substitution of VAT for business tax for the corporate sector, the personal income tax reform will help reduce the income gap between the rich and the poor. At present, China’s direct taxes are levied on income flow (such as wage). Since operational income and property-based income have grown rapidly, real estate tax, inheritance tax and gift tax will help increase direct tax revenues and enhance the ability of direct taxes to moderate the wealth gap between the rich and the poor.

10.2.4 Optimizing the Market Environment: Fair Competition and Improvement of Resource Allocation Efficiency Like the labor supply–demand relationship, imperfect competition in the goods market will cause labor remuneration to deviate from marginal labor productivity, affecting the proportion of labor remuneration and personal income as a percentage of national income. In China, imperfect competition in the goods market has two aspects. In one aspect, there are companies in the market that do not aim to maximize profits, such as SOEs. In these companies, labor remuneration may remain higher or lower than marginal labor output for a long time. In the other aspect, some companies enjoy monopoly power and hence very high pricing power. They can always 4 Source:

Shanghai Taxation Authority’s Answers to Media Questions about Substitution of VAT for Business Tax, Shanghai Taxation Bureau’s website: www.shanghai.gov.cn/nw2/nw2314/nw2 315/nw18454/u21aw1115413.htm.

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reap excessive profits, in part due to administrative entry barrier or local government protection, which has led to a continuous increase in the share of corporate income in the national income over the past decade. How does imperfect competition in the goods market affect labor remuneration? Chinese SOEs have long been unofficially mandated to play social roles, including guaranteeing employment and stabilizing the society. Therefore, they tend to hire too many employees and provide higher wage growth than other companies. Excessively high pay for senior executives is a stubborn problem. Bai et al. [9] found through an analysis of the 1998–2004 data of China’s industrial enterprises that labor remuneration of SOE employees as a share of corporate profitability is significantly higher than other enterprises. It is predictable that SOE ownership reform will bring down the share of labor remuneration. The impact of monopoly on personal income is more complex. Monopoly companies can offer higher wages than their competitors, which is like the case of SOEs. However, considering that the ability to manipulate product pricing can generate higher profits (which can be considered as capital gains), the growth of labor wages still falls behind the growth of corporate profits. In other words, compared with other companies without pricing power, monopoly companies in fact offer lower compensation to their workers as a percentage of their added value [9]. According to the studies by Bai et al. [9], labor remuneration in China’s industrial sector as a share of added value dropped from 49% in 1995 to 42% in 2004. The reform of SOEs and the growth of monopoly power are key factors, contributing to 60 and 30% of the labor remuneration decline. It is worth noting that the two factors have different economic implications. The decline in the share of labor remuneration caused by SOE restructuring indicates increasing intensity in market competition and helps enterprises of different ownerships (not only SOEs) share the fruits of economic development fairly among their employees. The decline caused by the increase of monopoly power, on the other hand, indicates the worsening distortions in the goods market. Increasing monopoly not only reduces enterprise efficiency and hinders economic growth, but also increases income gaps. In the new normal state of economy, supply-side reforms will create a market mechanism by which the fittest companies will win, and ensure that State-owned and non-State-owned enterprises can compete on a fair ground, which would improve the efficiency of factor allocation in the market. Supply-side reforms will on one hand drive some companies out of the market which are inefficient and depend on government subsidies; on the other hand, reforms will encourage efficient and innovative companies to enter the market, which will intensify competition in the goods market and force incumbents to improve their efficiency. This will relieve distortions in the domestic goods market. In more detail, SOE reform will further promote the separation of governmental and corporate functions. Ridding SOEs of their social welfare burden will increase their competitiveness in the international and domestic markets, promote the convergence of labor remuneration and labor productivity, and narrow down the wage gap between SOEs and non-State-owned enterprises. In addition, if we encourage non-State-owned capital to participate in the restructuring of SOEs, and allow non-State-owned capital to invest in monopolized industries such as oil,

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gas, electricity, railways, and telecommunications, market competition would intensify, which would reduce monopoly profit, check the excessive growth of corporate profits through monopoly power, and increase labor remuneration as a percentage of corporate added value.

10.3 Policy Options for Synchronizing the Growth of Personal Income with Economic Development in the New Era During the 13th Five-year Plan period, China will become a middle-to-high income country, with its per capita GDP reaching or even exceeding 10,000 US dollars. At the same time, income distribution will become a more important and sensitive issue. In the new normal state where the economy slows down, transforms its structure and grows through innovation, it is necessary to focus on reform, development and regulation in the next five years to achieve parity between income growth and economic development, which will create a stable and harmonious environment for the whole community and promote healthy economic development. Therefore, the parity between personal income growth and economic development and the parallel growth of labor remuneration and productivity are critical for building a well-off society in an all-round way during the 13th Five-year Plan period. Here are some policy options.

10.3.1 Promoting High-Quality Employment In the new normal state, it is especially important to handle properly the relationship between growth and distribution. The key rests with high-quality and profitable development through high labor productivity. Stable operation of the macro economy will lay a solid material foundation for improving the wellbeing of all people. Any imparity would create problems such as employment friction in the labor market during industrial transformation. As economy slows down, the contradiction between the decline of labor productivity in traditional industries and the rigidly high level of wages is hard to manage in the short term. Structural unemployment is inevitable during industrial transformation because labor skills and geographic distribution of labor do not match with market demands. Meanwhile, some companies that fail to implement updated technologies will face profitability decline and business headwinds. The short-term pains caused by industrial transformation, on the other hand, would help pair up economic development with personal income growth in the long term. To ease the pains, a comprehensive vocational education and on-the-job training system is needed to improve the employability of workers on new Jobs. Employment friction can also be addressed through economic expansion.

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We suggest that, at the macro level, proactive employment measures and policies should be implemented to create adequate and higher-quality employment. The first is to improve the employment survey and monitoring mechanism. We must dynamically grasp actual unemployment rates, which is the basis for formulating targeted employment policies and improving macro-control. The second is to take advantage of the strategic opportunities popping up on the road of innovation-driven development. We must build platforms for mass innovation and entrepreneurship, crowdsourcing, crowd support, and crowdfunding. Collective wisdom and power must be leveraged to promote innovation, business growth and employment. The third is to further relax control over market access, especially in education and communications services. Tax incentives must be given to high-tech companies, R&D personnel, and independent entrepreneurs, and restrictions on small loans should be eased. At the same time, investment in technology R&D should increase and the growth of innovation and entrepreneurship consulting agencies should be encouraged.

10.3.2 Implementing a Knowledge-Oriented Distribution Policy As the driver of economic growth changes, China is implementing the innovationdriven development strategy and trying to build an innovative country by promoting science and technology progress. In this context, knowledge and technology assume critical roles in both value creation and determination. Therefore, the distribution policy should give more weight to the value of knowledge. In November 2016, the General Office of the CPC Central Committee and the General Office of the State Council jointly issued “Opinions on Implementing the Knowledge-oriented Distribution Policy”, stating that “it is necessary to accelerate the innovation-driven development strategy and implement knowledge-oriented distribution policies so that income distribution would generate incentives.” It also stipulates that we must “allow R&D personnel and teachers to take part-time jobs and earn moderate extra income in accordance with the law and regulations. R&D personnel should be allowed to earn legal income from part-time work, and university teachers should be allowed to earn legal income from off campus teaching activities” [10]. Knowledge-oriented distribution policies encourage R&D personnel and teachers to work part-time reasonably to the extent as law permits, which offers a strong motivation and promotes industry-research collaboration and integration. In addition, there were three suggestions. The first is offering annual wage instead of basic wage plus incentives and allowances. This would help guarantee the income of teachers and R&D personnel, avoid the commercialization of education and scientific research, and reduce the impact of income issues on their work performance. The second is implementing effective administration measures, such as compulsory reporting of part-time jobs and income from part-time work and interest conflict

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management to ensure that part-time work does not affect regular job performance. The third is a peer evaluation system. An academic community should be built in the place of interest community to create a knowledge-oriented distribution climate.

10.3.3 Improving the Business Environment to Raise Operational Income To raise the operational personal income, the key rests with encouraging entrepreneurship, mainly encouraging urban and rural residents to start small and medium-sized businesses and providing policy support for the low-income population to engage in independent business operations. In recent years, the Chinese government has stimulated the fervor of its people for entrepreneurship and independent business operations through implementing a series of support policies, optimizing the market environment, removing market barriers, and reducing corporate tax burdens. A good environment for innovation and entrepreneurship is essential for raising people’s operational income and promoting vertically social mobility. To create a good business environment, the first measure is to improve the core resource system that serves innovation and entrepreneurship. Efforts must be made to develop new business startup service institutions. Various innovation and business startup resources should be mobilized, such as national innovation demonstration zones, national high-tech zones, university science parks, and technology incubators, and scientific research facilities in universities should be open to high-tech startups. The second is to improve the technology incubation system. Efforts must be made to promote the integration of traditional incubators and new business startup service institutions, shape the entry and exit mechanisms for startups, and help growing enterprises move from incubation bases to industry parks. We must “encourage nongovernmental entities to offer business startup services on the basis of traditional incubators, and promote the marketization, professionalism, networking, and openness of startup services so that they can meet the new needs of innovation and entrepreneurship in the new era” [11]. The third is to improve the financial support system for innovation and entrepreneurship. We must enhance support and protection for non-bank financial institutions such as SME-oriented loan companies, financial leasing companies, guarantee companies, credit unions, and venture firms. We must improve the credit reporting system covering small and medium-sized private enterprises, and provide a solid basis for financial institutions to make wise credit decisions. Private SMEs must be aware of the impact of credit issues on loans and therefore be motivated to build good reputations [12].

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10.3.4 Aiding the Low-Income Group and Expanding the Middle-Income Group Expansion of the middle-income group depends on innovation with distribution policies. The key task is to increase the income of low-income groups and shape institutional mechanisms for low-income earners to move up into the middle-income group. First, we must encourage urban residents to start individual businesses and private companies, and establish a startup assistance system for the people in need. For example, we must support laid-off workers and farmers to engage in tourism and catering services, and wholesale and retail of agricultural products. They must be trained properly on how to start up and run new businesses. Business startup funds must be established to help skilled migrant workers start new businesses in nearby small and medium cities [13]. Second, we must enhance income protection and social security for low-income earners. We must implement minimum wage standards strictly, and encourage all employers to adopt distribution policies that favor low-income workers. Concerning social security for pensioners, we must try to increase fixed increase as a share of annual growth and reduce the income and social security gaps between retirees and the working population. Furthermore, we must strengthen education and human capital accumulation, and cut off the continuity of intergenerational poverty. The first measure is to increase investment in basic education, gradually establishing an education system which is primarily financed by the central government. In this way, we should try to coordinate education in urban and rural areas, promote fairness in education in the entire society, strengthen the development of teachers, especially teachers in rural schools, promote interactions and exchanges between rural and urban teachers, and give children of low-income earners more access to high-quality public basic education. The second is to build a modern vocational education system. By investing in vocational education and cultivating skilled workers, we can increase employment, and help low-income young-aged and middle-aged people move up to the middle-income section.

10.3.5 Deepening Fiscal and Tax Reforms to Enhance Fairness and Justice As the economy slows down, tax cuts and government transfer payments will guarantee the fair growth of personal income. The new round of fiscal and taxation reforms, which aim to match fiscal power with public service duties and provide equal access to public services, will be a focus of national reforms in the next five years and a key part of the income distribution reform. Their goal is to relieve the burden on enterprises, reduce double taxation, and promote the inclusiveness of public services.

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The first action is to promote structural tax cuts, reducing the tax burden on enterprises and households, and increasing government transfer payments, which is a means to optimize the pattern of national income distribution. The effect of redistribution has been minimal since the 1990s. As an analysis of the flow of funds shows, the regular government transfer payments include social insurance benefits, social assistance and others, in which “social insurance benefits” refer to refunds to individuals who pay social security contributions, “others” include government payments of endowment and healthcare expenses, and “social assistance” refers to welfare expenditures, which play an important role in raising the income of the low-income population. Based on the flow of funds data, the above three categories of government transfer payments accounted for about 7.3% of primary income distribution in 2012, in which social assistance only took 1.7%. The government transfer payments to households were low, especially the welfare expenditures. The new policy design should try to offer incentives and assessment mechanisms for the government to shift from material capital investment to human capital investment. More resources should be put into projects that guarantee people’s wellbeing, public services should be made more inclusive, and the social security system should provide multiple guarantees in the areas of employment, pensions, and health care. Second, taxation should be used to adjust income distribution, and income distribution reform should be linked up with fiscal and taxation reforms. We must “simplify the tax system, build a broad tax base, and implement low tax rates, and accelerate the improvement of the total tax system” [14]. We must raise the current tax threshold further, and the progressive tax rates can still be adjusted appropriately to allow lowincome people and most people who depend on wage to relieve their tax burden, while getting high-income people and people who earn property-based income to contribute more. In this way, taxation can really serve as a tool to regulate the proportions in national income distribution. Levying a higher property-based income tax will make income tax more progressive. The government should examine the feasibility of levying inheritance tax, and shape an overall property tax system composed mainly of capital gains tax and real estate tax, and supplemented by land use tax and vehicle and vessel use tax. The government must also consider levying windfall profit tax to reduce income gaps between industries, regulating the excessive incomes of industries with high monopoly power. Multiple taxation means should be mobilized to maximize the role of taxation in regulating income distribution.

10.3.6 Building a System of Reasonable and Orderly Income Distribution Lying at the core of a reasonable and orderly income distribution system is a freeflowing and competitive factors market, which is a prerequisite for forming a virtuous cycle in which personal income grows in step with economic development. Such a market would help mobilize various production factors, and the virtuous cycle is

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necessary for economic development to benefit all people. In the new normal state of economy, to accelerate the formation of a reasonable and orderly income distribution system, we must do the following. First, control “gray” income and eliminate “black” income. We must strengthen legislation and guarantee social justice through enforcement of law. In accordance with the basic rules of market economy and international norms, in addition to cleaning up administrative charges and regulating government funds, we must forbid such government-imposed redistribution practices as collecting money directly from enterprises and individual residents. Government budgets must cover all and be put under unified management, and all fiscal revenues outside unified budgets must be eliminated. The elimination of black income involves the combat against government corruption, drug smuggling and trafficking, tax evasion, frauds with loans and foreign exchange, embezzlement of State-owned assets, stock market manipulation, counterfeiting and selling of fake products, illegal sale of collective land use right, pyramid schemes, monopoly through use of violence, money laundering, gambling, pornography and human trafficking. We must improve the antimoney laundering system and strengthen monitoring over capital outflow. We must further improve legislation and strengthen law enforcement for both purposes. Second, adjust the wage payment system in monopoly industries. The wage scheme of monopoly enterprises must be designed scientifically according to the average level, for which purpose a reasonable control line must be set. We must implement control over the compensation of SOE managers, and establish an effective incentives system. Third, speed up the transformation of government functions and let the market determine the allocation of resources. We must let the market pricing mechanism and the supply-demand relationship play a major role in advancing innovation and entrepreneurship, while the government must work to improve the institutional environment, promote infrastructure construction, and support innovative enterprises in an all-round way [11].

10.4 Implementing Classified Income Distribution Policies As the reform deepens, interest conflicts are intensifying. Deepening the income distribution reform requires not only a transformative mindset, but also classified approaches. The 19th CPC National Congress proposed that “we must work to see that personal incomes grow in step with economic development, and pay rises in step with increases in labor productivity.” To realize this goal, we must follow the principle of distribution according to work while improving our institutions and mechanisms for distribution based on factors of production, to make income distribution more reasonable and orderly. We must encourage people to make money through hard work and legal means. We will expand the size of the middle-income group, raise the income level of low-income earners, adjust excessive incomes, and prohibit illicit incomes. Considering the realities and issues of different areas and different demographic groups, we must classify the income distribution reform.

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10.4.1 Promoting the Compensation Reform in the Financial Sector During the current period of socio-economic transition, the compensation of executives in the financial sector is extremely high, and there are other problems like inadequate income transparency and excessive perks. The ceiling imposed by the Ministry of Finance on the compensation of SOE executives in the financial industry is still higher than the level in other industries. Excessive pay in the financial industry may attract resources (such as talent and fund) that should have flowed to the real economy, creating financial bubbles and leaving the real economy underfunded. In this sense, excessive pay in the financial industry will harm the real economy. Therefore, it is urgent to accelerate the compensation reform in the financial sector. We must strictly implement the compensation ceiling of the MOF for senior executives of the financial industry, build a comprehensive income monitoring system, improve the executive compensation disclosure mechanism, and implement a market-based executive selection and a recruiting approach.

10.4.2 Deepening the Reform on the Compensation of Executives in SOEs In view of the current lack of motivation after compensation limit was imposed on SOE executives and the short-sighted operation style due to the current executive appointment method, the compensation reform of SOE executives requires “new thinking”. At the core, we must adjust the compensation design of SOE executives, connecting executive compensation with business performance, and aligning the personal income of SOE executives with the long-term corporate goals, rather than merely stressing the income gap between executives and employees. Therefore, as key part of the compensation reform, SOEs should appropriately increase the proportion of market-based recruitment of their executives, and rationally determine the wage and perks of SOE executives. Policy adjustment and implementation should highlight incentives for SOE executives to mobilize their enthusiasm, increase enterprise competitiveness, and therefore maximize the value of state-owned assets. Meanwhile, the administrative ranking of SOE executives should be delinked from their pay level, and the compensation of SOE executives should be disclosed through an improved system.

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10.4.3 Updating the Regular Pay Rise Mechanism for Employees Considering that ordinary employees typically earn low wages which grow very slowly and some are offered different pays for the same work, wage reform should aim to gradually increase the share of labor remuneration in primary distribution, reduce wage gaps, and encourage enterprises to implement a regular pay rise mechanism for their workers. It is also necessary to implement collective wage bargaining to raise the wage levels of skilled workers and front-line workers. The minimum wage adjustment mechanism should be improved so that the minimum wage standards can be adjusted reasonably. When the economy slows down, front-line workers in some labor-intensive industries would be hard hit by industrial transformation and technological innovation, and the unemployment rate may increase. It is even more necessary for the government to implement innovative reemployment policies and offer transfer payments to cope with the rise of frictional unemployment.

10.4.4 Intensifying the Wage Reform in Monopoly Industries Monopoly influences the income distribution system in two ways: income and consumption. Due to administrative monopoly, the benefits that should have been given to consumers are often turned into profits of monopoly enterprises. Even worse, monopoly causes unfair distribution, unfair opportunities and unfair rules, disturbing the social cohesion. If we let things run like this, any income distribution reform, however well designed, would not work at all. Therefore, it is necessary to strengthen anti-monopoly efforts. As part of the SOE reform, monopoly enterprises in competitive sectors must be opened to private capital and foreign capital, so that their excess profits would be compromised by the market, which would suppress excessive pays. At the same time, profits of SOEs should be covered in the national fiscal budgets. Executive compensation must be regulated, especially in industries which affect people’s wellbeing and public affairs, or which depend on natural monopoly and strategic resources.

10.4.5 Strengthening Rules to Prevent Corruption To eliminate unfairness in distribution, it is important to curb corruption and hold the government accountable. Abuse of power to seek personal gains would not only cause unfairness of distribution, but also impact the relationship between the Party and the people, and even integrity of the whole society. To fight corruption and promote social integrity, we must stay on high alert to guard against corruption. Any act of corruption must be punished.

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“To confine the exercise of power in an institutional cage” has become a major approach to guarantee Party and government integrity. The institutional cage refers to regular disciplinary mechanisms that prevent and curb corruption. The mechanisms are institutionalized anti-corruption measures that address both the symptoms and root causes of corruption. Especially in places and areas where the risk of corruption is high, the institutional cage must be used well. In addition, there are small acts of power abuse which look legal but unjust. Many officials act in this way and are followed by many illegal operators and middlemen. In fact, such small acts of corruption are even worse as they are hidden. They distort the institutions and erode the trust of the people in the government. If the administrative rules of government departments are transparent, and their procedures are simple enough and rule-based, justice would be felt and income distribution would look fair to the people.

10.4.6 Improving the Civil Servants Wage System In the past, the civil servants wage system was unreasonable, as civil servants received more perks than their wage. To address this problem, a series of laws and regulations, including the Civil Servants Law, have been promulgated to rationalize the compensation structure. The central government ministries were required to disclose their public budgets and final accounts, which has increased transparency and standardized the payment of allowances to public servants. However, the new measures have also brought new problems, especially since the promulgation of the “eight-point frugality code”. Restrictions and no incentives have damaged the morale of public servants. As the anti-corruption campaign progressed and intensified, civil servants have really been scared. The civil servants wage system needs further improvement, and the reform should mainly do three things. First, we must enhance the dynamic adjustment mechanism for civil service compensation, and implement relatively balanced adjustments. We must conduct regular income surveys (covering university professors, corporate technical personnel, and private business owners), and establish a more feasible, systematic and complete income comparison system. We must try to motivate civil servants to work better, and reduce the risk of civil servants getting corrupted or taking part-time jobs to make up for their low income. Meanwhile, we must also address the community discontent caused by the high income of public sector employees. The second is to link up the civil service compensation reform with the reform of public budget expenditures. Budgetary funds which used to be allocated to public expenditures should be allocated instead to individual public servants. Savings should be encouraged by turning savings into awards to relevant individuals. The third is to offer integrity annuity. A special reward will be given to retiring civil servants who have worked continuously (or cumulatively) for a certain number of years and have remained clean all along.

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10.4.7 Improving the Performance-Based Wage System of Public Institutions Performance-based wage is a type of motivational wage system that public institutions implement. Their employees are paid based on their work performance. The implementation of performance pays aims to promote the reform of public institutions, stimulate the enthusiasm of public institutions, and improve their public service efficiency. However, performance pay is often given out based on position, job title, seniority, and industry average level. Obviously, the original goal is missed, which slows down the reform of public institutions. In addition, as the total wage control, public institutions do not have the power to determine their own pay levels or pay rise. Adjustments to performance pay are often subject to multiple government authorities like the Ministry of Human Resources and Social Security and the Ministry of Finance, which makes the reform even more difficult. For this reason, the reform of performance-based compensation in public institutions should first strengthen the autonomy of public institutions in determining their total pay. This requires further decentralization of authority.

10.4.8 Developing an Innovative Distribution Mechanism for Factors like Knowledge and Technology We must implement knowledge-oriented distribution policies, so that income distribution policies would play a motivational role, stimulate the enthusiasm, initiative, and creativity of R&D personnel, and support the commercialization and industrialization of technology R&D results. Specifically, we must encourage research institutions to employ high-caliber research personnel through compensation agreements, while qualified state-owned science and technology companies can offer equity payments such as equity sales, stock-based rewards, stock options, or dividends such as project income sharing and position-based dividends. Technology personnel may benefit from R&D outcome transfer, and the payment should be managed under the employment or service contract. At the same time, R&D personnel and university professors can take part-time jobs to earn legal extra income. It should be noted that, as the Internet and other technologies continue to advance, the government should safeguard the right of innovative personnel to earn a decent income. The basic wage should be raised gradually and stably, while incentives should be offered more generously, including benefit from the commercialization of R&D outcomes. The income of R&D personnel should be closely linked with job responsibilities, work performance, and actual contributions, to form a virtuous circle of knowledge creation in the whole community. Value creators must receive deserved returns, and the income distribution mechanism should reflect the value of knowledge. In order to encourage

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respect for labor, knowledge, talent, and creativity, we must “make sure that labor, knowledge, technology, managerial expertise and capital play their due roles, that all wealth-creating sources come out sufficiently, and that development benefits all people.”

10.4.9 Improving the Targeted Poverty Alleviation System Targeted poverty alleviation is not only an effective measure to realize common prosperity, but also completes the income distribution system as an important means to build a well-off society in all respects. We should mobilize the Party, the country, and the entire society to fully implement targeted poverty reduction. We will provide focused assistance to areas of extreme poverty. We must make sure that by 2020, all rural residents living below the current poverty line have been lifted out of poverty, and poverty is eliminated in all poor counties and regions. Poverty alleviation should cover those who truly need it and create substantial outcomes as expected. In the new era when we’re close to the goal of building a well-off society in all respects, the task is more challenging to alleviate and eliminate poverty. To achieve the goal that no one is left behind, attention must be paid to helping people increase confidence in their own ability to lift themselves out of poverty and see that they receive the education they need to realize their dream. We should mobilize the internal driving force for poverty alleviation mainly through education. For poor areas and poor households, we must attach great importance to relieving their poverty and helping them create wealth for themselves. We must get rid of the soil that breeds poverty and arouse the motivation to eliminate poverty.

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9. Bai, C., Qian, Z., & Wu, K. (2008). A study on the determinants of distribution according to factors in China’s industrial sector. Economic Research Journal (8), 16–28. 10. Du, X. (2016, November 18). How to handle university teachers taking part-time jobs appropriately according to law. Xinhuanet.com. https://www.xinhuanet.com/legal/2016—11/18/c_1 29368610.htm. 11. Wan, G. (2015). Creating a new engine for mass entrepreneurship and innovation with a transformative mindset. Chinese Small and Medium Enterprises (5), 20–22. 12. Li, Y. (2013). The approach to increase the operational income of Chinese urban and rural residents. A Master’s thesis submitted to Tianjin University of Finance and Economics. 13. Cong, X. (2016). The status quo and measures for increasing personal income of residents in small and medium-sized cities in China. Journal of Urban Studies, 37(4), 7–14. 14. Yu, H., & Cui, D. (2011). Regulating income distribution and advancing the income distribution reform. Taxation Research (03), 15–19.

Appendix

Milestones in China’s Income Distribution Reform (1978–2017)

In 1978, the Third Plenary Session of the 11th Central Committee of CPC proposed to mobilize the enthusiasm of Chinese farmers, and for this purpose their material interests must be guaranteed. The autonomy of the People’s Communes, Production Brigades and Production Teams must be protected by law. The labor, capital, products and material capital of Production Teams must not be appropriated and occupied at no cost. Economic organizations at all levels must follow the socialist principle of distribution according to work, calculate labor remuneration according to the quantity and quality, and overcome equalitarianism. In 1979, as part of the rural reform, the distribution mode by which State needs must be satisfied first, the collective needs must also be met, and the surplus should be shared by individual members was put into effect step by step. As a result, the farmer’s production activities were directly linked up with the distribution of results. Meanwhile, the household contract responsibility system was first implemented as a pilot program in some rural areas of Sichuan Province and Anhui Province. In 1980, the pilot program spread to many other provinces (including municipalities and autonomous regions). By the end of the year, the system had been administered in most rural areas of China, driving up farmers’ income rapidly. In 1981, a document entitled “Regulations Concerning Creating More Channels to Develop Economy and Address Employment Issues in Urban Areas” was issued, adopting the policy of promoting employment by government recommendation, voluntary organization and self-employment. The focus was put on creating employment channels in the collective and individual economy sectors, especially promoting self-employment, and gradually forming an employment system which would benefit the national economy and improve the people’s wellbeing. In 1983, the Central Committee of CPC issued a document concerning “Some Current Problems in Rural Economic Work”, which highlighted the advantages of the household contract responsibility system, and claimed that this system was an “innovative application of the Marxist agricultural cooperative theory in China”, and a “great creation of Chinese farmers under the leadership of the Party.” The document allowed individual businesses to hire workers in rural areas, and allowed individual farmers to operate commercial and transportation businesses. © Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4

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In 1984, the Third Plenary Session of the 12th Central Committee of CPC adopted the “Resolution on the Reform of the Economic System.” The Resolution proposed to deepen the income distribution reform, and the main task was to enhance the vitality of enterprises. The Resolution advocated the principle of distribution according to work and made it clear that some people, some regions and some enterprises could become rich first through hard work, which would be a major step towards common prosperity. In 1985, the State Council issued the “Circular on the Reform of the Wage System of State Organs and Public Institutions” and the “Circular on the Reform of the Wage System of State-owned Enterprises”. By these reforms, the wage system of enterprises is separated from the system of government organs and public institution. In the wage system of governments and public institutions, position-based wage plays the main part, while in the wage system of enterprises, wage payment is linked with the economic performance of enterprises, no longer dependent on unified State arrangement. In 1986, the Office of the State Council issued the Circular on Prohibiting Illegal Benefits from Engagement in Social and Economic Activities, by which government officials and other staff were not allowed to accept “honorariums” or “gifts” in any name by engaging in social and economic activities. In 1987, the report to the 13th CPC National Congress pointed out that the income distribution mode in the primary stage of socialism must not be a single mode. Distribution according to work should play the main part, and other distribution modes should be supplementary. In addition to income from work, including labor remuneration and non-employment labor remuneration, various other forms of legal income should be encouraged. Enterprises which issued bonds should pay interests, dividends would also be paid to shareholders in the stock markets, remunerations paid to enterprise managers would include risk compensation, and private enterprises which employ labor would generate non-labor remuneration for enterprise owners. The above-mentioned incomes should be allowed if they are lawful. The report also pointed out that the distribution policy should benefit well-performing enterprises and individuals, allowing them to get rich first through honest business operations and hard work, and at the same time prevent the income gaps from widening too much and ensure that common prosperity remains within reach. This reflects equal emphasis on fairness and efficiency. For the first time, the report had raised the principle of taking the distribution according to work as the main body and embracing other distribution modes as supplementary, and allowing lawful non-labor remuneration to exist. In 1988, the State Council promulgated the “Provisional Regulations on the Contractual Responsibility System of State-owned Industrial Enterprises”, which covered the content and forms of the contractual responsibility system, the contracts, the rights and obligations of parties to contracts, the business operators, and the management of enterprises adopting the contractual responsibility system. In 1991, the State Council’s “Decision on the Reform of Endowment Insurance for Enterprise Employees” demanded that a new endowment insurance system be built up and updated as necessary combining basic endowment, enterprise supplementary endowment and employee personal savings endowment. The insurance won’t be

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covered by the State and enterprises alone, but it would be the joint responsibility of the government, enterprises and households. In 1992, the report to the 14th CPC National Congress again pointed out that distribution according to work must play the dominant role, and other distribution modes should be used as supplements, so that both efficiency and fairness could be achieved. The report also called for using various means of adjustment, including market forces, not only to promote efficiency and maintain reasonable income gaps by giving incentives to good performers, but also to prevent polarization to gradually realize common prosperity. This is the first time that efficiency and fairness have been equally considered in the distribution system. In 1993, the Third Plenary Session of the 14th Central Committee of the CPC made the “Decision of the Central Committee of the CPC on Several Issues Concerning the Establishment of Socialist Market Economy System”. The Decision explicitly proposed to transform the management mechanisms of SOEs, to nurture and develop the market system, establish a modern enterprise system and a reasonable personal income distribution system. The Decision also laid out eleven basic principles of income distribution. For example, for personal income distribution, distribution according to work should play the dominant role and various other distribution modes should coexist, and personal income distribution that should give priority to efficiency and fairness should be secured at the same time. In the same year, the State Council issued the “Circular on the Reform of the Wage System of Government Organs and Public Institutions”, which mandated the establishment of a wage system and a wage growth mechanism based on the nature and characteristics of government organs and public institutions. The wage system should be based on grades and jobs, with the total wage consisting of four parts: job-based payment, grade-based payment, basic wage and working age-based payment. In the same year, the Ministry of Labor promulgated the “Regulations on the Minimum Wage of Enterprises”, and later issued the “Circular on Implementing the Minimum Wage System”, and then the “Regulations on Wage Payment”. In 1994, the Labor Law of the People’s Republic of China was passed, which made minimum wage guarantee statutory. The minimum wage standards should be determined by the governments of provinces, autonomous regions and municipalities directly under the Central Government, and registered with the State Council. Wages paid by employers must not be lower than the local minimum standard. Since then, minimum wage guarantee has been put into effect across the country, and has played an important role in ensuring the life quality of workers. In 1995, the State Council issued the “Circular of on Deepening the Reform of the Pension System for Staff and Workers of Enterprises”, requiring that enterprise employees’ basic pension expenses should be jointly borne by enterprises and individual employees, and overall insurance fund collection and individual accounts should be combined. That was a major institutional innovation of China’s social security system. In 1997, the report to the 15th CPC National Congress proposed that distribution according to work should play the dominant role and co-exist with various other methods of distribution, and both income from work and income from production

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factors should be encouraged, with priority given to efficiency on the basis of guaranteeing fairness. China should protect lawful incomes, allowing and encouraging some of the people to get wealth first through honest labor and lawful operations, and allowing and encouraging the participation of capital, technology and other factors of production in the distribution of gains. Illegal incomes should be banned and those who appropriate public property or seek gains by such illegal means as tax evasion or by striking deals between power and money shall be punished according to law. China should check irrational incomes and correct the malpractice of individuals obtaining extra incomes by taking advantage of sectoral monopoly and some special privileges. China should regulate excessively high incomes, improve the personal income tax system, and introduce such new taxes as inheritance tax. These proposals were intended to optimize the income distribution to make income gaps more reasonable and prevent polarization. In the same year, the State Council made the “Decision on Establishing a Unified Basic Endowment Insurance System for Enterprise Employees”, laying down the principle that the basic endowment insurance premium paid by enterprises should not exceed 20% of their total wage payment, and that the proportion paid by individuals in 1997 should not be lower than 4% of their wage income, and should increase by one percentage point every two years since 1998 and finally reach 8%. In 1998, the State Council decided to revoke the welfare housing policy that had lasted more than 40 years, substituting monetary distribution for distribution in kind, declaring the end of the traditional housing system in China. In 1999, the CPC Central Committee and the State Council adopted a decision to adjust the income policy for middle-income and low-income groups. The level of the basic cost of living allowances for laid-off state enterprise workers, the level of unemployment insurance benefits, and the level of subsistence allowances for urban residents were all increased by 30%. The salaries and wages of employees working in government departments and institutions and old-age pensions for those retiring from there were increased along with the old-age pensions for workers retiring from SOEs. All pension entitlements overdue before June 1999 were paid for workers retiring from SOEs, which are covered by the overall State plan. Certain allowances for disabled service men and women and family members of revolutionary martyrs and service men and women were increased. In 2001, the State Council conducted a large-scale research project on income distribution, which was led by the State Council Office for Restructuring the Economic System and the CPCCC Office of Financial and Economic Cooperation, and participated by the Ministry of Civil Affairs, the Ministry of Labor and Social Security, the State-owned Assets Supervision and Administration Commission, and the Ministry of Finance. In 2002, the 16th CPC National Congress deliberated on how to deepen the income distribution reform. The report called for adjusting and regulating the distribution relationship among the government, enterprises and households: We should establish the principle that labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their respective contributions, thereby improving the system under which distribution according

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to work is dominant and a variety of modes of distribution coexist. We should give priority to efficiency with due consideration to fairness, earnestly implementing the distribution policy while advocating the spirit of devotion, and guarding against an excessive disparity in income while opposing equalitarianism. In primary distribution, we should pay more attention to efficiency, bringing the market forces into play and encouraging some people to get rich first through honest labor and lawful operations. In redistribution, we should pay more attention to fairness and strengthen the function of the government in regulating income distribution to narrow the gap if it is too wide. We should standardize the order of income distribution, properly regulate the excessively high income of some monopoly industries and outlaw illegal gains. Bearing in mind the objective of common prosperity, we should try to raise the proportion of the middle-income group and increase the income of the low-income group. In 2004, the Ministry of Labor and Social Security issued the “Regulations Concerning Minimum Wage”, which amended the 1993 “Regulations Concerning the Minimum Wage of Enterprises”. In the same year, the CPCCC announced in Circular No. 1 that agricultural taxes should be reduced and gradually revoked within five years. In 2005, the first round of tax reforms was implemented, and the personal income tax threshold was moved up from 800 RMB yuan to 1,600 RMB yuan. By this time, agricultural tax has been rescinded in 28 provinces, autonomous regions and municipalities directly under the Central Government, and the livestock tax has been rescinded nationwide. In 2006, the Sixth Plenary Session of the 16th CPC Central Committee proposed that China should adhere to the income distribution system in which distribution according to work plays the dominant role and various other modes co-exist, strengthen macro-regulation over income distribution to achieve fairness on the premise of boosting economic growth, raise the income level of low-income earners, gradually increase the proportion of middle-income earners, effectively regulate excessively high incomes, ban illegal incomes, and finally realize common prosperity. In the same year, the State Council issued the Circular on the Reform of the Wage System for Civil Servants, aiming to build a unified national wage system for civil servants based on both positions and ranks, develop scientific and reasonable wage band determination mechanisms and a normal growth mechanism. The wage management system should align with the economic system and the government official administration system, and wage payment should be scientific, regulated and law-based. In 2007, the report to the 17th CPC National Congress pointed out that China should adhere to and improve the system whereby distribution according to work remains the predominant mode and co-exists with various other modes, and improve the system that production factors such as labor, capital, technology, managerial expertise have a right share according to their contribution; gradually increase the share of personal income in the distribution of national income, and raise that of work-based income in primary distribution; raise the income of low-income groups, gradually increase poverty-alleviation aid and the minimum wage, and set up a

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mechanism of regular pay increases for enterprise employees and a mechanism for guaranteeing payment of their salaries; create conditions for more people to earn income from property; and strike a proper balance between efficiency and fairness through primary distribution and redistribution, with particular emphasis on fairness in redistribution. In 2008, the personal income tax break rose from 1,600 RMB yuan to 2,000 RMB yuan per month. In 2010, the Central Government proposed to increase the income of farmers, strengthen the support for low-income groups, steadily increase income from work, strengthen the regulation of personal income, and optimize the administration of total wage payment of SOEs to speed up income distribution reform. In 2011, the Central Government decided to adopt the net income per capita of farmers (2,300 RMB yuan) as the new national poverty line. The threshold of personal income tax was raised from 2,000 RMB yuan to 3,500 RMB yuan, and the progressive tax rates were reduced from 9 levels to 7 levels. In 2012, the report to the 18th CPC National Congress emphasized that, people must share the fruits of development, so we must deepen reform of the income distribution system, and increase personal income in step with economic development and labor remuneration in step with improvement in labor productivity, and we should raise the share of personal income in the distribution of national income and increase the share of labor remuneration in primary distribution. The report also pointed out that “we must strive for common prosperity. This is the fundamental principle of socialism with Chinese characteristics. We should adhere to the basic socialist economic system and the socialist income distribution system. We should adjust the pattern of national income distribution, tighten its regulation by secondary distribution and work hard to narrow income gaps so that all the people can share the fruits of development in a fair way and move steadily toward common prosperity.” For the first time, the goal was emphasized to double both GDP and per capita income of urban and rural residents by 2020 compared with 2010. In the same year, the State Council proposed to formulate an overall plan for reforming the income distribution system and regulate excessively high incomes earned through monopoly. The CSRC issued the “Interim Provisions for the Management of Employee Shareholding Plans of Listed Companies”, entitling employees to stock ownership. The draft amendment to the Labor Contract Law proposes to safeguard the right of leased workers to equal pay for equal work with contract-based formal employees. The State Council’s “Opinions on Promoting the Reform of Public Institutions by Category” propose that the wage system reform of public service institutions should focus on the improvement of incentives and disincentives, and a desired system must reflect the nature and characteristics of public institutions, and meet the need to drive performance and promote classified management. In 2013, the “Decision of the Central Committee of the CPC on Some Important Issues of Overall Reform” adopted by the Third Plenary Session of the Eighteenth Central Committee of the CPC emphasized that a rational and orderly income distribution pattern must be built by the following ways: protecting income from work, increasing the proportion of labor remuneration in primary distribution, and

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improving the collective wage negotiation mechanism for enterprises; updating the wage and subsidy system of government organs and public institutions, and weighting income distribution toward remote vulnerable regions; optimizing the market-oriented mechanisms of compensation for capital, knowledge, technology and expertise, expanding investment and leasing services; optimizing the mechanisms of returns to public company investors, protecting the legitimate rights and interests of investors, especially small investors, and increasing property-based income obtained through multiple channels; and taking quick steps to improve the mechanisms of secondary distribution based on taxation, social security, and transfer payments. In 2015, the 5th Plenary Session of the 18th Central Committee of the CPC further pointed out that efforts should be made to narrow down income gaps, enable its people to share the fruits of economic development, update the normal wage growth mechanism and the payment guarantee mechanism, and improve the mechanisms of evaluating the contribution of factors and distribution according to contribution. In the same year, the “Plan of Compensation Reform for Leaders of SOEs under the Central Government” was put into effect. In 2017, the report to the 19th CPC National Congress stressed the need to “improve the quality of employment and raise incomes … We should continue to follow the principle of distribution according to one’s work while improving our institutions and mechanisms for distribution based on factors of production, make income distribution fairer and more orderly. We should encourage people to make their money through hard work and legal means. We will expand the size of the middle-income group, increase income for people on low incomes, adjust excessive incomes, and prohibit illicit income. We should work to see that personal incomes grow in step with economic development, and pay rises in tandem with increases in labor productivity. We should expand the channels for people to make work-based earnings and property-based income. We will see that government plays its function of adjusting redistribution, move faster to ensure equitable access to basic public services and narrow the gaps in incomes.”

Epilogue

In 2017, Shanghai Federation of Social Science Associations decided to sponsor a series of studies on China’s reform and opening-up program to celebrate the 40th anniversary of this grand program. Chinese economists of my age have grown up along with this historic program, and have witnessed the great changes in China over the years. In this sense, we’re perfectly well positioned to review the development of China as a result of reform and opening-up, and our findings and conclusions would form a pillar of socialist political economics with Chinese characteristics. With great excitement and a strong sense of responsibility, our team has delved into China’s income distribution reform over the past 40 years. I must reiterate that this project is a team work. After the project proposal was approved by Shanghai Planning Office of Philosophy and Social Science, the Institute of World Economy of Shanghai Academy of Social Sciences (SASS) organized a panel, of which I was the chief expert, to design the guidelines and prepare the outline of this research. In the course of the research, we organized many seminars and this book includes the brilliant views of the participating experts and scholars. About the division of task for writing this book, I am responsible for Chapter One, Chapter Nine and Chapter Ten; Chapter Two is done by Dr. Gu Xueqin; Chapter Three and Chapter Four by Dr. Liu Fang; Chapter Five by Dr. Luo Hairong and Dr. Zhou Jiawen; Chapter Six and Chapter Seven by Associate Fellow Li Ling; and Chapter Eight by Dr. Chang Yaqing. After the first draft was completed, I took up the revising job, refining and adapting the logical analyses to make the conclusions more solid. Before the book was finalized, I went to the Party School of the Central Committee of CPC for a training program. In my spare time, I tried to utilize the abundant resources available in the School and further improved the draft, adding details and refining the logic. The 40 anniversary of reform and opening-up is highly worth celebrating, so I hope this book would make the anniversary celebration more meaningful. Of course, speeding up the reform in an all-round way, especially the income distribution reform, is the best we can do to mark the anniversary. I hope our research would help advance China’s income distribution reform! Quan Heng © Shanghai Jiao Tong University Press 2021 H. Quan, Forty Years of Renovating the Income Distribution in China, https://doi.org/10.1007/978-981-33-6244-4

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