Research on Normalizing Income Distribution Order in China 9811918856, 9789811918858

Citation preview

Canming Yang

Research on Normalizing Income Distribution Order in China

Research on Normalizing Income Distribution Order in China

Canming Yang

Research on Normalizing Income Distribution Order in China

Canming Yang School of Public Finance and Taxation Zhongnan University of Economics and Law Wuhan, Hubei, China

Ministry of Education Key Projects of Philosophy and Social Sciences Research 07JZD0011 ISBN 978-981-19-1885-8 ISBN 978-981-19-1886-5 (eBook) https://doi.org/10.1007/978-981-19-1886-5 Jointly published with Huazhong University of Science and Technology Press The print edition is not for sale in China (Mainland). Customers from China (Mainland) please order the print book from: Huazhong University of Science and Technology Press. Translation from the Chinese Simplified language edition: 中国规范居民收入分配秩序研究 by Canming Yang, © Economic Science Press 2014. Published by Economic Science Press. All Rights Reserved. © Huazhong University of Science and Technology Press 2022 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 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, expressed 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

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Raise of the Question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 The Growing Problems of Income Distribution Order . . . . . 1.1.2 The Social Focus on Income Distribution Order . . . . . . . . . . 1.1.3 Chinese Government’s Long-Term Commitment to Solving the Problems of Income Distribution . . . . . . . . . . 1.2 Definitions of Relevant Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.1 Order and Income Distribution Order . . . . . . . . . . . . . . . . . . . 1.2.2 The Pattern of Income Distribution . . . . . . . . . . . . . . . . . . . . . 1.2.3 Classification of Income Types . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.4 The Formation Mechanism of Income . . . . . . . . . . . . . . . . . . . 1.3 Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.1 China’s Present Situation of Income Distribution . . . . . . . . . 1.3.2 Research on China’s Labor-Capital Relationship . . . . . . . . . . 1.3.3 Research on Power Corruption and Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.4 Research on Recessive Economy . . . . . . . . . . . . . . . . . . . . . . . 1.3.5 On How to Standardize the Order of Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Framework of This Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 General Ideas of This Report . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 Analysis Framework of This Report . . . . . . . . . . . . . . . . . . . . 1.4.3 Technical Route in This Report . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Research Focus and Characteristics of This Report . . . . . . . . . . . . . . 1.5.1 Research Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.2 Characteristics of Research Methods . . . . . . . . . . . . . . . . . . . . 1.5.3 Main Innovation Viewpoints . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2 4 6 8 9 10 17 25 31 31 35 40 45 51 56 56 57 57 59 59 61 62 65

v

vi

Contents

2 An Analysis of the Current Situation of Income Distribution in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 A Review of China’s Reform on Income Distribution . . . . . . . . . . . . 2.1.1 Distribution According to Work: Let Some People Get Rich First (1978–1984) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 Distribution Mainly According to Work, Supplemented with Other Modes (1987–1992) . . . . . . . . . . . 2.1.3 A Diversified Distribution System with Distribution According to Work as the Main Form . . . . . . . . . . . . . . . . . . . 2.1.4 Evaluation of the Reform of Income Distribution System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 An Analysis of the Distribution Pattern of Chinese Income . . . . . . . 2.2.1 Income Approach to GDP and Its Composition . . . . . . . . . . . 2.2.2 Primary Distribution of Income of Residents, Enterprises and Government . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Redistribution of Income of Residents, Enterprises and Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 An Analysis of the Composition of Residents’ Income . . . . 2.3 An Analysis of the Income Gap Among Residents . . . . . . . . . . . . . . . 2.3.1 An Analysis of the Residents’ Income Gap in China . . . . . . 2.3.2 An Analysis of the Income Gap Between Urban and Rural Residents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 An Analysis of Regional Income Gap . . . . . . . . . . . . . . . . . . . 2.3.4 An Analysis of Income Gap Between Different Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A Qualitative Analysis of Income Distribution Chaos in China . . . . . . 3.1 Labor-Capital Imbalance and Income Distribution Chaos . . . . . . . . . 3.1.1 Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Conflict of Interest: Labor Relations in Nonstate-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3 Conflict of Interest II: Labor-Capital Relations in State-Owned Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.4 The Conduction Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Intervention of Public Power on Private Right and Income Distribution Disorder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 The Explicit Improper Intervention . . . . . . . . . . . . . . . . . . . . . 3.2.2 Invisible Inappropriate Intervention . . . . . . . . . . . . . . . . . . . . . 3.3 The Recessive Income and Disorder of Income Distribution . . . . . . 3.3.1 Types of Recessive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 The Quasi-Legal Recessive Income . . . . . . . . . . . . . . . . . . . . . 3.3.3 The Legal Recessive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

69 69 70 71 71 73 74 75 77 80 82 86 86 89 100 107 114 116 117 120 121 129 137 146 158 159 173 183 183 186 187 193 193

Contents

vii

4 Labor-Capital Relations and Labor Pay . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Determination of Labor Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 Intertemporal Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.2 Free Market and Labor Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 Market Deepening and Labor Pay . . . . . . . . . . . . . . . . . . . . . . 4.2 Optimal Labor Income Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 The Setting of the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 The Estimate the Rate of Labor-Capital Substitution . . . . . . 4.2.3 An Analysis of the Simulation Results . . . . . . . . . . . . . . . . . . 4.3 Optimal Income Tax of Labor and Capital . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Model Formulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Simulation Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 The Estimate of Optimal Tax Rate . . . . . . . . . . . . . . . . . . . . . . 4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 The Empirical Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 Variables and Data Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.3 Empirical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

197 198 199 204 206 217 219 221 224 233 234 236 240

5 Public Power and Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 The Wages Standards of Civil Servants and Its Changing Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 The Wages Standards of Civil Servants . . . . . . . . . . . . . . . . . . 5.1.2 The Changing Trends of the Wages of Civil Servants . . . . . . 5.2 Political Capital and Income Distribution . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Data Source and Variable Description . . . . . . . . . . . . . . . . . . . 5.2.2 Analysis Methods and Empirical Results . . . . . . . . . . . . . . . . 5.2.3 Impact of Political Capital on Income Inequality . . . . . . . . . . 5.3 Power Corruption and Income Distribution . . . . . . . . . . . . . . . . . . . . . 5.3.1 Power and Power Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

261

6 Recessive Economy and Income Distribution . . . . . . . . . . . . . . . . . . . . . . 6.1 Measurements of the Recessive Economy . . . . . . . . . . . . . . . . . . . . . . 6.1.1 Definition and Classification of Recessive Economy . . . . . . 6.1.2 Measurements of Recessive Economy . . . . . . . . . . . . . . . . . . . 6.2 China’s Recessive Economical Scale and Income Inequality . . . . . . 6.2.1 China’s Recessive Economical Scale . . . . . . . . . . . . . . . . . . . . 6.2.2 The Recessive Economy and Income Inequality . . . . . . . . . . 6.3 Size, Causes and Consequences of the Recessive Economy by Region in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Causal Variables of the Recessive Economy . . . . . . . . . . . . . . 6.3.2 The Target Variable of the Recessive Economy . . . . . . . . . . .

244 244 245 247 258 260

261 262 265 270 271 274 281 283 283 301 303 305 306 306 308 312 312 315 318 318 321

viii

Contents

6.3.3 Data and Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 6.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333 7 An Analysis of the Causes of Disorders in China’s Income Distribution: From the Perspective of Economic Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 The Perspective of the Transformation of Government Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Transformation of Government Functions and Income Distribution Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 Changes in Government Functions and Labor-Capital Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.3 Transformation of Government Functions and Corruption of Administrative Power . . . . . . . . . . . . . . . . . 7.1.4 Transformation of Government Functions and Recessive Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Ownership Structure Adjustment Perspective . . . . . . . . . . . . . . . . . . . 7.2.1 Ownership Structure Adjustment and Income Distribution Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Ownership Structure Adjustment and Labor-Capital Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 Ownership Structure Adjustment and Political Administrative Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.4 Ownership Structure Adjustment and Recessive Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 From the Perspective of the Relationship Between the Central and Local Governments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Adjustment of Intergovernmental Relations and Income Distribution Order . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Adjustment of Intergovernmental Relations and Labor-Capital Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Adjustment of Intergovernmental Relations and Political Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.4 Intergovernmental Relations and Recessive Economy . . . . . 7.4 The Perspective of Reform Based on the Distribution Principle . . . . 7.4.1 Reform of Distribution Principles and Income Distribution Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 Reform of the Principle of Income Distribution and Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.3 Reform of the Principle of Distribution and Political & Administrative Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.4 Distributive Principle Reform and the Recessive Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 A Perspective Based on Factor Liquidity . . . . . . . . . . . . . . . . . . . . . . .

335 335 336 336 341 351 354 354 358 362 369 372 372 373 375 381 383 383 389 393 396 397

Contents

7.5.1 Based on the Mobility of Elements and the Order of Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5.2 Mobility of Elements and Labor-Capital Relations . . . . . . . . 7.5.3 Mobility of Factors and Executive Authority . . . . . . . . . . . . . 7.5.4 Factor Liquidity and the Recessive Economy . . . . . . . . . . . . . 7.6 The Perspective of Motivating and Restraining People . . . . . . . . . . . 7.6.1 Incentive Restriction Mechanism and the Pattern of Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.2 Incentive Restriction Mechanism and Labor-Capital Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.3 The Incentive and Restraint Mechanism and Executive Power Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6.4 The Incentive and Restraint Mechanism and the Recessive Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 International Experience in Regulating the Income Distribution Order . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Handling of Labor Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.1 The Evolution of Labor Relations in Western Countries . . . . 8.1.2 Market-oriented Economic Powerhouse—USA . . . . . . . . . . . 8.1.3 Western European Countries with Stable Industrial Relations—Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.4 The Nordic Countries with High Welfare—Sweden . . . . . . . 8.2 Supervision and Restriction of Public Power in Different Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 Supervision and Restriction of Public Power in Western Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.2 Characteristics of Supervision and Restriction of Public Power in Western Countries . . . . . . . . . . . . . . . . . . . 8.2.3 A Country Practicing the Separation of Powers—America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.4 A Country with High Welfare—Netherland . . . . . . . . . . . . . . 8.2.5 A Fast-growing Latin American Country—Brazil . . . . . . . . . 8.2.6 An Emerging Industrial Country in Asia—Singapore . . . . . . 8.3 Prevention and Management of Hidden Economy . . . . . . . . . . . . . . . 8.3.1 The Background of Management of Hidden Economy in Foreign Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 Global Economic Power—The United States . . . . . . . . . . . . . 8.3.3 Italy—An Example in Western Europe . . . . . . . . . . . . . . . . . . 8.3.4 India—A Major Asian Country Carrying out Economic System Reform . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Construction of Income Monitoring System . . . . . . . . . . . . . . . . . . . . 8.4.1 Income Monitoring System of Developed World . . . . . . . . . .

ix

398 399 402 404 405 406 407 410 415 420 422 425 425 425 431 433 437 441 441 443 444 448 451 453 455 455 457 460 462 465 465

x

Contents

8.4.2 World Economic Power—The United States . . . . . . . . . . . . . 8.4.3 High-Welfare Country—Sweden . . . . . . . . . . . . . . . . . . . . . . . 8.4.4 Newly Industrialized Country in Asia—Korea . . . . . . . . . . . . 8.5 Reference from International Experience . . . . . . . . . . . . . . . . . . . . . . . 8.5.1 International Experience in Handling Labor-Capital Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.2 International Experience in the Supervision and Restriction of Public Power . . . . . . . . . . . . . . . . . . . . . . . . 8.5.3 International Experience in the Governance of the Hidden Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5.4 International Experience of Income Monitoring System Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Policy Recommendations for Regulating the Order of Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Correctly Addressing the Relationship Between Labor and Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.1 Improving the Labor Legal System . . . . . . . . . . . . . . . . . . . . . 9.1.2 Improving Enterprise Wage System . . . . . . . . . . . . . . . . . . . . . 9.1.3 Establishing Labor–Management Relations Coordination Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.4 Improving Social Security System . . . . . . . . . . . . . . . . . . . . . . 9.2 Supervision and Restriction of Public Power in China . . . . . . . . . . . . 9.2.1 Accelerating the Reform of a Market-Oriented Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.2 Promoting Political System Reform . . . . . . . . . . . . . . . . . . . . . 9.3 Preventing and Managing Hidden Economy . . . . . . . . . . . . . . . . . . . . 9.3.1 Managing Hidden Economy in a Classified Way . . . . . . . . . . 9.3.2 Building an Income Monitoring System . . . . . . . . . . . . . . . . . 9.4 Regulation and Development of the Third Sector . . . . . . . . . . . . . . . . 9.4.1 Improving the Relevant Legal System . . . . . . . . . . . . . . . . . . . 9.4.2 Strengthening the Third Sector . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.3 Regulating the Relationship Between the Third Sector and the Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.4 Cultivating Philanthropic Thoughts . . . . . . . . . . . . . . . . . . . . . 9.5 Cultural Heritage and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5.1 Reforming the Culture of Power . . . . . . . . . . . . . . . . . . . . . . . . 9.5.2 Building a Business Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5.3 Cultivating a Culture of Citizenship . . . . . . . . . . . . . . . . . . . . . 9.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

467 469 470 473 473 475 478 480 482 483 485 485 486 488 490 492 494 494 498 503 503 508 514 515 517 520 521 522 523 527 532 536

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539

Chapter 1

Introduction

1.1 Raise of the Question Since the 1980s, when China’s economy has been transformed from a planned system to a market-oriented socialistic system, a market regulation mechanism has been introduced into the income distribution to keep pace with the establishment of the market-oriented socialistic system. In China’s income distribution system, residents’ labor is taken as the main element with the coexistence of other multiple distribution modes, which allows labor, capital, technology and management to participate in the distribution. The income distribution system of extreme equalitarianism is no longer at the center. However, with the rising income level of the residents and the reform and opening up, the income distribution in China has been disordered due to institutional incompleteness and flaws in the transformation of the economic system, such as imperfection of legal institutions, incomplete transformation of government functions, intervention of public power in private rights and drawbacks embedded in the market itself. In November 2012, the report of the 18th National Congress explicitly stated that to increase the proportion of residents’ income in the national income distribution and to increase the proportion of labor remuneration in the initial distribution, both the first and the second income distribution need to be balanced with efficiency and equity, and the redistribution should be more equitable. Therefore, it is urgent to explore the theoretical basis of regulating the income distribution order and seek feasible ideas and countermeasures to regulate the distribution order in practice. How to understand and regulate the income distribution order effectively in China has become a major research topic in the construction of a harmonious socialist society.

© Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_1

1

2

1 Introduction

1.1.1 The Growing Problems of Income Distribution Order In recent years, there have been growing problems of income distribution despite a series of measures taken by the government to rectify the order of income distribution, which are shown as follows.

1.1.1.1

The Increasing Proportion of Government Revenue

From 1997 to 2008, China’s national income distribution tilted toward enterprises and governments, and the growth rate of enterprise profits ranged from 30 to 40%; the government’s revenue grew from 20 to 30%, while residents’ incomes grew by less than 10%. According to statistics, the country’s fiscal revenue was 10.374 trillion yuan in 2011, growing by 24.8%, of which tax revenue was 8.972 trillion yuan, growing by 22.6%, while nontax revenue was 1.402 trillion yuan, growing by 41.7%.1 In 2011, China’s GDP was 47.1564 trillion yuan, an increase of 9.2% over the previous year in terms of comparable prices,2 and the tax growth rate was nearly three times that of GDP.3

1.1.1.2

The Serious Polarization of Residents’ Income

In January 2001, the National Bureau of Statistics announced that China’s Gini coefficient was close to 0.4, concluding that there are indeed two extremes in real economic life in China since there is a stratum of super rich people of small groups; on the one hand, there are few people living in very poor bottom lines.4 According to the 2004 United Nations Human Development Report, which is close to 0.46–0.43 of Russia, Iran, China’s Gini coefficient has reached 0.45–0.53, higher than 0.3–0.4 of the United States, France, Japan, Poland, India below 0.59 of Brazil and South Africa. According to the China Family Finance Survey of Southwest University of Finance and Economics, the Gini coefficient for Chinese households in 2010 was 0.61, well above the global average of 0.44. The report, led by Gan Li, a professor 1

National Fiscal Revenue of 10,374 Billion in 2011 Increased by 24.8% YoY, NetEase Finance, January 20, 2012, http://www.cnr.cn/gundong/201201/t20120120_509083440.shtml. 2 The National Economy Continued to Maintain Steady and Rapid Development in 2011, Bureau of Statistics of the People’s Republic of China, January 17, 2012. http://www.stats.gov.cn/tjfx/jdfx/ t20120117_402779443.htm. 3 Fiscal Revenue Exceeded 10 Trillion in 2011 While the Curtain of “Tax Cuts” Has Opened, Southern Metropolis Daily, January 4, 2012, http://nf.nfdaily.cn/nfdsb/content/2012-01/04/con tent_35947676.htm. 4 National Bureau of Statistics, Looking at Gap between the Rich and Poor from Gini Coefficient, 2001, No. 1.

1.1 Raise of the Question

3

at Texas Agricultural University, and a 2011 survey of more than 8,000 households, found that the richest 10% of China’s population holds 56% of the country’s income. Although the ratio of per capita income of urban and rural residents in China fell from 2.36 in 1978 to 1.85 in 1985 at the beginning of the Reform and Opening-up, it was a period of volatility from 1986 to 2011, reaching 3.13 in 2011. Some scholars point out that the ratio of the income of urban residents to that of rural residents is approximately 5–6 if the urban workers’ recessive income is taken into account.

1.1.1.3

Non-Standardization and Non-Transparency of Income Distribution Order

In enterprises, some of them erode the state and public revenues by false steps and convert state-owned tangible and intangible assets into enterprises or individual ownership by eroding brand rights and patents, low-cost evaluation, price-cutting transfers or auctions. In the corporatization reform of state-owned enterprises, the income distribution incentive for individual management generally exists because of the imperfection reform of the property rights system. In addition, employees of state-owned enterprises enjoy a wide range of non-institutional income, such as subsidies, allowances, bonuses, and in-kind distribution, especially for senior management, those who obtain much higher wages and enjoy a high level of welfare treatment and position-related consumption. Many foreign-funded enterprises and private enterprises keep a shoddy bookkeeping to transform a huge amount of tax payable into enterprise surplus and to commit tax evasion and fraud. In the government field, there are still many problems, although the state has reformed the salary system of civil servants and strengthened the standardization of civil servants’ income system in recent years, namely, various bonuses and allowances, such as quarterly bonuses, year-end bonuses, performance bonuses, festival allowances, extra houses and subsidies for civil servants. In addition, nontransparent income and nonstandard income exist to some extent, which increases the proportion of nonwage income such as gray income, resulting in the larger gap between actual income and the wage. According to a study conducted by Wang Xiaolu, deputy director of the National Economic Research Institute of the China Reform Foundation, nontransparent income and nonregulated income in 2005 was approximately 4.8 trillion yuan, which accounts for approximately 26% of GDP that year.5

5

Wang Xiaolu: Gray Income and National Income Distribution, July 26, 2010, http://www.wyz xsx.com/Article/Class4/201007/168527.html.

4

1 Introduction

1.1.2 The Social Focus on Income Distribution Order A fair and reasonable, standardized and well-organized income distribution order is an important guarantee for the realization of fair distribution and a foundation for maintaining economic and social stability. “The spread of the income distribution problem will greatly damage the value of justice in society.”6 The unfairness of income distribution, such as power-for-money deals, corruption, various illegal enrichments, privileges and collectivization of benefits, will make people feel a strong sense of social injustice and will threaten social harmony and stability to a great extent. A stable social environment is the real need of people seeking development. Therefore, the income distribution order is becoming the focus of the present stage.

1.1.2.1

The People’s Great Focus on Income Distribution Order

If the contradictory accumulation caused by the disorder of income distribution among different groups and classes reaches a certain level, it will lead to social damage. For example, in recent years, the number of mass incidents7 in our country has been on the rise. As statistics show, there were 8,700 mass disturbances in China in 1993, rising to 87,000 in 2005, rising to more than 90,000 in 2006, reaching 100,000 in 2010, and the number of mass disturbances occurring across the country

6

Yang Yiyong: Review of China’s Income Distribution Theory and Policy Seminar, Economics Perspectives, 2005, No. 4. 7 “Mass incidents” is a conventional concept, the academic community did not carry out in-depth analysis of this concept in view of the sensitivity. First, the basis of mass incidents is group behavior, which is the most typical characteristic. There is no clear standard for how many people are involved in the mass disturbances. Public security departments generally define the mass incidents as the activity involving more than 15 people, while the letter-and-visit department defines it as petitions involving more than 5 people. Second, what kind of behavior is can be regarded as mass incidents. The nature of the incident is totally different in terms of the legal or illegal expression of the participants. At present, the official documents do not have a clear statement of the so-called mass incidents. In addition, the ambiguity between ideology and realistic operation also brings “legitimacy dilemma” to group behavior, which affects the definition of mass incidents. In this topic, we think that “mass incidents” are caused by certain social contradictions, specific groups and unclear number of people formed by the temporary aggregation of the group, in order to express certain demands or claims, struggle and maintain their own interests, vent dissatisfaction or create an impact through the large-scale aggregation form without legal basis, which cause widespread concern about the mass behavior. In recent years, there are some mass incidents with great impact: the incident happened in Chizhou, Anhui Province in June 2005, the incident happened in Dazhou, Sichuan Province in January 2007, the incident happened in Heyuan, Guangdong Province in June 2007, the incident happened in Wenan, Guizhou Province in June 2008, the incident happened in Shishou, Hubei Province in June 2009, the incident happened in Fujinchangchunling, Heilongjiang Province in April 2010,the incident happened in Maanshan, Anhui Province in June 2010 in, also known as “6-11” incident, etc.

1.1 Raise of the Question

5

was still rising in 2011. According to sociologists, mass disturbances in our country will take place frequently in the next few years or at least in 2020.8 Before the Two Sessions (NPC and CPPCC) in 2012, the People’s Network and the People’s Daily Political and Culture Department jointly launched “the survey of top 10 hot issues you concerned in 2012”, which showed that “income distribution” ranked second. Looking back at the results of the surveys of Two Sessions in recent years, the issue “income distribution” has always been in the top five and is still on the rise.

1.1.2.2

Transition Period of Income Distribution

Regarding the changing relationship of income inequality, according to the “Kuznets inverted U-shaped curve” hypothesis, the income distribution tends to be unequal with the development of the economy at the stage when the economy has not been fully developed while the per capita national income is low. Then, with economic development and the increase in the per capita national income level, the income distribution disparity will gradually be narrowed, and as a consequence, a fair income distribution will finally be achieved. According to the 2012 China Labor Market Report, although there is a large disparity in China’s income distribution, the speed of its enlargement is becoming slower and closer to the Kuznets inflection point. According to the report, in 2010, Low Income Level of per capita disposable income for urban residents grow up 89.3% over 2005, Lower Middle Income Level of per capita disposable income for urban residents grow up 89.3% over 2005, Middle Income Level of per capita disposable income for urban residents grow up 87.4% over 2005, Upper Middle Income Level of per capita disposable income for urban residents grow up 84% over 2005, High Income Level of per capita disposable income for urban residents grow up 89.3% over 2005; Low Income Level of per capita disposable income for urban residents grow up 89.3% over 2005; also in this year, Low Income Level of per capita net income for rural residents grow up 20.69% over 2009, Lower Middle Income Level of per capita net income for rural residents grow up 16.43% over 2009, Middle Income Level of per capita net income for rural residents grow up 15.98% over 2009, Upper Middle Income Level of per capita net income for rural residents grow up 15.04% over 2009, High Income Level of per capita net income for rural residents grow up 14.05% over 2009, which means that incomes of low-income and middle-income groups in urban and rural areas are growing faster than those of high-income groups while the income gap between urban and rural areas is narrowing.

8

Wang Xiaodong: Innovation of the Interest Claim Mechanism of Disadvantaged Groups to Prevent and Resolve Mass Incidents, Journal of the Party School of CPC Taiyuan Municipal Committee, No. 3, 2006, p. 18.

6

1.1.2.3

1 Introduction

The Influence of Income Distribution Order on Future Development

In fact, the problems are not unique to China, while other countries also encounter these problems in development. If the transformation of the mode of economic development is not successfully realized after a country’s per capita income reaches a moderate level, the economic growth momentum will be insufficient, which eventually leads to a state of economic stagnation, that is, the “middle income trap”, which plunges society into instability and instability. For example, recent protests occurring in North African countries, such as the Jasmine Revolution,9 have exposed some deep-seated problems in the economy, politics and society in some countries, which are all related to social problems such as the polarization of the rich and the poor, social injustice, corruption and high unemployment in the distribution. The key to addressing multiple phases of problems and contradictions is to solve each problem in income distribution effectively.

1.1.3 Chinese Government’s Long-Term Commitment to Solving the Problems of Income Distribution Deng Xiaoping pointed out that “the socialist system should and can avoid polarization”.10 Common prosperity and social equity are the essential characteristics of socialism, the ultimate goal of socialist development and the important manifestation of socialist superiority. We must realize the fair distribution of income and avoid polarization while gaining efficiency to build a harmonious socialist society and achieve the common prosperity of all the people. The prerequisite and basis for achieving fair distribution is the norm to ensure the order of income distribution. On the basis of the abovementioned understanding, in recent years, regulating the order of income distribution has aroused great attention from the CPC and the government, which has been included in the “important developing program” of policy and the academic community since the Fifth Plenary Session of the 16th CPC Central Committee. On May 26, 2006, the Politburo of the CPC Central Committee held a special meeting to study the reform of the income distribution system and the regulation of 9

Jasmine Revolution: On December 17, 2010, an unemployed youth and street vendor in Sidi Bougid, southern Tunisia, set themselves on fire because they were dissatisfied with the violent law enforcement of the city, which culminated in the end of the regime of Tunisian President Ben Ali, a political strongman who had ruled the country for 23 years. Jasmine is the national flower of Tunisia, so the protests and violent clashes were called the “Jasmine Revolution” by the Western media, the “Jasmine Revolution” spread to other parts of the Middle East, causing panic throughout the Middle East, and triggered the “Arab Spring” engulfing the Middle East. The underlying causes of the Jasmine Revolution are Tunisia’s high unemployment rate and unbearable high inflation, the disparity between rich and poor and political corruption. 10 Deng Xiaoping’s Anthology, Volume 3, People’s Press, 1994, p. 374.

1.1 Raise of the Question

7

the income distribution order, which stressed the reform of the income distribution system to standardize the order of income distribution and to build a scientific, reasonable, fair and just social income distribution system. In October 2007, the 17th National Congress of the Communist Party of China (CPC) stated that the government should set a stage for more people to have property income by protecting legal income, regulating excessive income and banning illegal income. The government should also narrow the distribution disparity gradually by expanding transfer payments while strengthening the regulation of taxes, breaking the monopoly of business to create fair opportunities.11 Income distribution has become a hot topic of NPC and CPPCC among deputies since 2007. The 12th Five-Year Plan for National Economic and Social Development of the People’s Republic of China published in 2011 made the overall promotion of the reform of the income distribution system the focus of the transformation of the mode of development. The Central Economic Work Conference held in December 2011 stated that “Safeguarding and improving people’s wellbeing by accelerating the development of service and increasing the proportion of middle income level has become the focus of expanding domestic demand in 2012”,12 which need to deepen the reform of the income distribution system. Premier Wen Jiabao pointed out that an overall plan for the reform of the income distribution system should be worked out that very year at the executive meeting of the State Council held on March 16, 2012.13 Meanwhile, in 2012, he made the formulation of an overall plan for the reform of the income distribution system the most important thing in his final year in office when answered questions from reporters at the two sessions. The report of the 18th National Congress explicitly proposes that “we need to ensure that all people can benefit more fairly and thoroughly from the fruits of development and make steady progress toward common prosperity by adhering to the socialist basic economic system and distribution system, adjusting the pattern of national income distribution and strengthening the adjustment of second distribution, which contribute to making efforts to solve the income distribution gap problem.” The State Council approved “the Several Opinions on Deepening the Reform of the Income Distribution System” formulated by the Development and Reform Commission, the Ministry of Finance and the Ministry of Human Resources and Social Security on February 5, 2013, which called on a strict implementation of all 11

Hu Jintao’s report at the 17th National Congress of the Communist Party of China: Holding the Great Banner of Socialism with Chinese Characteristics and Fighting for a New Victory in Building a Well-off Society in an All-round Way, October 15, 2007. 12 The Central Committee of the Communist Party: Keeping Economic Price Stability and Increasing the Proportion of Middle-Income People, December 14, 2011, http://money.163.com/11/1214/12/ 7L81Q8OU00253B0H.html. 13 Wen Jiabao: The General Plan for the Reform of Income Distribution System Must Be Formulated This Year, March 14, 2012, http://www.china.com.cn/policy/txt/2012-03/14/content_2489 4722.htm.

8

1 Introduction

regions and departments. The Opinions stressed that adhering to common development and shared fruits is the prerequisite for deepening the reform of the income distribution system. It also pointed out that deepening reform of the income distribution system is an extremely arduous and complex task of systemic engineering, which must proceed from social development stage and basic national condition of China and be achieved by focusing on the current while keeping an eye on the future and surmounting difficulties while promoting orderly instead of achieving in one step. The opinions are divided into seven parts, whose proposals are as follows: for the first part, we need to fully understand the importance and difficulty of deepening the reform of the income distribution system; for the second part, we need to accurately grasp the overall requirements and main objectives of deepening the reform of the income distribution system; for the third part, we need to continue to improve the first distribution mechanism; for the fourth part, we need to accelerate and improve the adjustment mechanism of second distribution; for the fifth part, we need to establish and improve the long-term mechanism to promote the rapid growth of farmers’ income; for the sixth part, we need to promote the formation of an open, transparent, fair and rational pattern of income distribution; and for the seventh part, we need to strengthen and deepen the organization and leadership of the reform of the income distribution system. What mentioned above has illustrated that standardization of the income distribution order and reform of the income distribution system have given prominence to China’s economic and social development, which are not only important goals of China’s macro-policy but also important content of constructing harmonious socialist society for the Party and the government.

1.2 Definitions of Relevant Concepts The Politburo of the CPC Central Committee held a meeting to study the reform of the income distribution system and the regulation of the income distribution order on May 26, 2006. Since then, the issue of regulating the order of income distribution has become a focused topic of all walks of life. However, what exactly is the income distribution order?14 Neither senior government officials nor theoretical circles can 14

The research group has reviewed a considerable amount of literature, but found that no scholars have directly defined “what is the income distribution order” clearly and specifically. From the existing literature, we have only found two definitions of “distribution order”: one is that “distribution order refers to the rules, principles, discipline and systems that members of society must abide by in the process of distribution.”—Wang Zhenzhong, Studies on the Theory of Distribution in a Market Economy, Social Science Literature Publishing House, 2004. Another place is, “The so-called order of income distribution is a general term for the regulations, principles, discipline, and institutions that must be observed in the process of distribution. The distributive order is mainly determined by the relevant laws and policies but also partly by social habits and other factors.”—Yu Haifeng and Cui Di: Regulating the Order of Income Distribution and Promoting Income Distribution Reform, Tax Research, No. 3, 2011. However, there is no fundamental difference in the definition of “distribution order” from the two expressions.

1.2 Definition of Relevant Concepts

9

give a specific, clear and unified definition. In this study, we should first clarify the meaning of “income distribution order” and choose the concept or give our own definition as the basis of this study.

1.2.1 Order and Income Distribution Order Civilized society cannot function smoothly without a certain social order. In ancient Chinese, the characters of “Zhi” and “Xu”, the opposite of “chaos” and “disorder”, have the same meaning as “order” in English, which refers to the sum total of stability of a certain relationship existing in a certain environment, the order of structure, the regularity of behavior, the continuity of the process, the predictability of events and the security of property and psychology. In other words, the components are always arranged in an orderly and organized way to achieve a state of smooth operation or good appearance. The order is always associated with the characteristics of consistency, continuity and certainty, which is expressed as an orderly state. For example, the social order in people’s mind refers to the formation of relatively stable relationship patterns, structures and states in the course of long-term social interaction. Broadly speaking, order refers to the rules and rationality in natural and social phenomena and their change of development. We can define the term “order” from both static and dynamic aspects in general: it refers to a unified whole in which people or things present a state of well organization and non-disorder, thus showing the invariance and consistency of the structure from the static perspective. Dynamics refers to the continuity, repetition and predictability of things in the process of development and change. The economic order, which always exists as a pattern of maintaining the corresponding economic interests, will change to a certain degree because of any adjustment or change of economic interests. Because order is a necessary condition for social and economic development to maintain a smooth operation, we can lay a solid foundation for other economic orders only by establishing a reasonable order of distribution of benefits. The definition of the income distribution order can be drawn when the meaning of the abovementioned term “order” is applied to the field of income distribution. Income distribution order, the mechanism, channel and path formed by income, is defined in this topic as the state that the distribution from the principal part of income distribution and its result present. The income distribution order can also be defined from both static and dynamic aspects in the way, from a static point of view, the income distribution order is manifested in the pattern of income distribution, that is, the income distribution relationship between distribution subjects, income distribution structure and income gap status; that is, whether the income distribution rules and distribution process are standardized, reasonable and orderly. It is essential to clarify the formation mechanism of income and the problem of the income distribution process for studying the standardization of the income distribution order. We can say that the distribution process is the most fundamental

10

1 Introduction

content of the research, whose manifestation of the result or the state contributes to the formation of a distribution pattern. China’s income distribution system encounters a problem of unreasonable systems and distribution channels that hinder the flow of income to residents, especially those of the lower middle income level due to the problematic formation mechanism of income.15 The exploitation, which results in unfair and unreasonable distribution, will be formed if the requirement that distribution order needs fairness, justice, rationality and horses for course is violated. The main manifestation of distribution disorder is serious distortions in the income formation mechanisms of the market and public sectors, which leads to the unreasonableness and unfairness of the income distribution pattern.

1.2.2 The Pattern of Income Distribution The pattern of income distribution refers to the share of the distribution subject in the total income and the proportion relationship formed by it.

1.2.2.1

The Initial and Final Pattern of Distribution

The distribution of gross national product consists of the primary distribution and final distribution from the perspective of the income distribution process,16 in which two

15

In the academic circle, some scholars have interpreted “distribution order” as a general term for the rules, principles, discipline and systems that members of society must abide by in the process of distribution (see Wang Zhenzhong, Studies on Distribution Theory in a Market Economy, Social Science Literature Press, 2004). This definition emphasizes the static nature of the distributive order without highlighting its dynamic nature. 16 Primary distribution, also known as “first distribution”, refers to the process of dividing national income into the incomes of different economic agents in the field of production in accordance with certain principles and under the action of market mechanisms, to form the initial income of each economic agent. Specifically, includes the factor income obtained by labor and capital, and the net production tax (the balance of production tax minus price subsidies) received by the government, i.e., income from wages (including bonuses, allowances, etc.), profits, interest, rent, etc. After the initial distribution, national income is decomposed into workers’ personal income, enterprise income and state income. Among them, the workers’ personal income is realized in the publicly owned economy through distribution according to labor. In the process of primary distribution, the interests of the state, enterprises and individual workers should be correctly handled in accordance with the principle of socialist material interests. Redistribution of national income, also called “second distribution”, refers to the distribution of national income in the whole society after the primary distribution, i.e., the governments at all levels participate in the process of national income distribution as social managers, mainly in the form of taxation and financial expenditure, and this distribution process is regulated by the government. The final result of the distribution forms the adjusted gross disposable income of each economic agent. The redistribution of national income performs two basic functions: a distributive function and a regulatory function.

1.2 Definition of Relevant Concepts

11

distribution patterns are formed correspondingly, namely, the primary distribution pattern and the final distribution pattern. First, gross national income is allocated to labor and capital factors and governments by the direct link between the production process and primary distribution, through which the primary distribution pattern of GNI is formed. The individual primary distribution of income consists of the employment income and property income of the individual resident for providing labor and capital factor, including both the remuneration income of the residents in providing labor and capital factor for the production of GDP, and that earned by the residents for providing labor and capital factor to the production process abroad. The national primary distribution of income consists of production and import taxes imposed by the state power for the production, circulation and consumption of goods and services in production, sales or imports. Then, the enterprise’s primary distribution income consists of the balance of gross national income after deducting the individual and national income of primary distribution, which includes the consumption of fixed assets and the net retained earnings that is positive if the business is profitable and negative after deducting income from personal property. Second, the redistribution, different from the primary distribution, is a one-way income transfer on the basis of the results of primary distribution through cash or physical things and lack of the basis of exchange, generally including mandatory receipts tax, contributions, fines, mandatory donations of society, social relief and so on. The disposable income of the state, enterprises, and residents individual, which can be used for final consumption, investment or savings is formed by the redistribution of income while the individual disposable income of the resident is formed on the basis of the acquisition of primary distribution income for residents individual after the payment of personal income tax, social security contributions and various social transfer income. The final disposable income of the state takes form through the regulation of the income distribution of social transfer income (including various nonproduction taxes) and social transfer expenditure (including social relief expenditure) on the basis of the state’s acquisition of primary distribution income. Then, the disposable income of the enterprise consists of the balance of gross national income after deducting the disposable income of residents individual and state (including all the retained earnings after deducting income tax and other taxes, other social transfer expenditures and the subsidy received from the government). As a result, the distribution pattern of gross national income is formed by the final disposable income of individual residents, enterprises and the state. The primary distribution pattern still shows the income share that can be used for consumption and investment between the state, enterprise and resident, while the primary distribution relation of the three can be manifested. Therefore, we must analyze the disposable income and its proportion formed by the primary distribution and the second distribution based on the final distribution pattern to study the distribution relationship between the three.

12

1.2.2.2

1 Introduction

Distribution Relationship Among Government, Enterprises and Resident Individuals

The disposable income of the state, enterprises and resident individuals has increased considerably with the rapid development of China’s economy after the reform and opening up. Thus, the distribution pattern among the three has changed significantly in the distribution structure. On the one hand, the proportion of residents’ income to the primary distribution of national income has shown a downward trend in recent years, as the national income distribution is heavily skewed to the government and business in the three main bodies of income. According to statistics, the share of government revenue in the first and second distributions of national income rose from 24.25 to 30.48%, enterprise income rose from 9.88 to 15.82%, and the income of residents fell from 65.87 to 53.35% between 1995 and 2010 when non-budgetary income was taken into account.17 Revenue and business income growth are growing much faster than household income. On the other hand, abnormally high income of capital owners and low income of ordinary laborers occur in China in the primary distribution. Generally, distribution rates, the proportion of total labor remuneration to GDP, is a main index to measure the fairness of the primary distribution of national income, indicating that the first distribution of national income is fairer when there is a higher proportion of total remuneration to GDP. Total labor remuneration accounts for a higher share of GDP in countries with established market economies; for example, it accounts for 70% in the US and mostly 54–65% in other countries. However, the share of our country fell from 53.4 to 39.74% from 1997 to 2007 according to statistics.18 As shown in a study report by the China Economic Reform Research Institute, the minimum wage of China accounted for 25% of GDP per capita in 2010, while the world average was 58%; it accounted for 21% of the average wage of our country, compared with 50% of the world average.19 On the whole, although there is an impact of statistical calibre changes, overall, China’s “strong capital, weak labor” trend has been strengthened, and the proportion of labor remuneration has shown a downward trend year by year.

17

Ma Xiaohe, People’s Comment on Finance: Increasing the Income of Middle and Low Income Earners Must Cross Three “Cancers, People’s Daily Online, December 23, 2011. http://finance. people.com.cn/GB/16690226.html. 18 Dividing the Cake for Harmony: How to View the Unfair Distribution, People’s Daily, July 9, 2010, p. 15, http://news.163.com/10/0709/06/6B4OBDK7000146BC.html. 19 Report Says Mainland Civil Servants Earn 6 Times Minimum Wage, SOE Executives Up to 98 Times, China Finance Information, December 16, 2011, http://economy.cfi.cn/p20111216000310. html.

1.2 Definition of Relevant Concepts

1.2.2.3

13

The Condition of the Income Gap

The Gini coefficient, the main indicator used to reflect the fairness of income distribution in economics, is commonly used worldwide.20 The residential income gap in China has widened significantly in terms of the absolute level and distribution structure since the reform and opening up, which mainly manifests as follows: i.

ii.

The residential income gap of China has been ranked in the forefront of the world in terms of the absolute level according to the Gini coefficients measured by different research institutions and groups. For example, the Gini coefficient is 0.288 in 1981, 0.343 in 1990, 0.397 in 1999, and 0.46 in 2003 and exceeds 0.465 in 2004 according to the data of the National Bureau of Statistics. Based on World Bank data, the Gini coefficient of China rose from 0.28 at the beginning of reform and opened up to 0.47 in 2009.21 On the basis of a joint survey conducted by Chinese Democratic University and the Hong Kong University of Science and Technology, the Gini coefficient in mainland China has reached approximately 0.53 or 0.54.22 These data can reflect the serious situation of the disparity between the rich and the poor in our country to some extent, although they may not be completely accurate. In terms of the distribution structure, the widening of the income gap exists in various fields of social economy between urban and rural areas, different regions and industries and different economic patterns.

First, there is a wide income gap between urban and rural areas. The income of urban and rural residents has increased rapidly, with a per capita net income of 5919 yuan for rural residents and a per capita disposable income of 19,109 yuan for urban residents since the reform and opening up in 2010, during which the ratio of urban income to rural income in China increased from 2.57 to 3.23.23 This is the first time that the real income growth of rural residents has exceeded that of urban areas in 2010 since 1978, although the income gap between urban and rural areas 20

Some scholars believe that Gini coefficient can not be used as a measure of the reasonableness of income distribution in China, The reason is as follows: First, there are many factors that affect the actual income distribution curve and the Gini coefficient. Second, Gini coefficient, being independent of the absolute amount of income, represents only the distribution of income in terms of its meaning. A small gini coefficient may exist in both poor and rich countries. Third, equalization of income is regarded as a measurement of the reasonableness of income distribution in Gini coefficient. Therefore, strictly speaking, the criterion of Gini coefficient is not very comprehensive though it basically reflects the income gap of the population of a country. 21 Party School Experts Emphasize the Emergency of Fiscal and Tax Reform and Suggest to Levy Property Tax by Area, Sina Finance, June 24, 2010, http://politics.people.com.cn/GB/8198/65833/ 65844/4474248.html. 22 Share the Fruits of Reform and Development and Take the Road to Common Prosperity, People’s Daily Online, http://politics.people.com.cn/GB/8198/65833/65844/4474248.html. 23 China’s Resident Income Grows Steadily, Low-Income Groups Grow Fast, Xinhua, February 3, 2011, http://news.xinhuanet.com/politics/2011-02/03/c_121049745.htm.

14

1 Introduction

is still relatively large.24 The real income gap between urban and rural residents in China is approximately 4–6 times if the recessive income of urban residents,25 such as subsidies, labor protection benefits and social security, as well as the net income of farmers after deducting the portion used for reproduction are taken into account. Approximately 64.45% of the total income disparity between residents in China is made up of the income gap between urban and rural residents.26 According to data from 36 countries published by the International Labor Organization in 1995, the ratio of urban per capita income to rural per capita income in most countries is less than 1.6, while only three countries, including China, exceed 2. The international maximum is approximately 2, which shows that if health care, education, unemployment protection and other nonmonetary factors are taken into account, China’s urban–rural income gap is the highest in the world. Second, there is a wide income gap among different regions. There is a huge income disparity between the urban areas of eastern and western China and rural areas. For example, in 2010, the per capita disposable income of urban residents in Shanghai and Guizhou was 31,838 yuan. Third, the income gap between industries is also wide. The income of a few monopoly industries is too high. According to statistical analysis, laborers in the power, telecommunications, finance, insurance, water and electricity supply, tobacco 24

In a strict sense, hidden income is not the same as the recessive economy. The so-called hidden economy is a collective term for all kinds of economic activities that take place outside of government management, supervision, or behind the government’s back. The form of existence of the hidden economy is different from the open, formal explicit economy, which is manifested in the following: it is invisible in various government statistics, and it is the economic activity hidden behind various public statistics; a considerable part of it exists as the antithesis of the legal, open economic activities protected by the state, and is not legal, not open, and hidden in the “underground”. Economic behavior; some hidden economic activities, although allowed by the current regulations and policies of the government, but can not be truly counted and displayed, can not be formally regulated and managed, so it itself is very low transparency, people, although they can feel their presence in the socioeconomic life, but it is not easy to understand the mystery of it. Since hidden income is an important form of the hidden economy, it is sometimes referred to as the hidden economy, such as this topic calls the hidden economy the underground economy, the black economy, the shadow economy, and the unobserved economy. The result of this research is that the average size of the hidden economy in China (the proportion of the hidden economy in GDP) is between 10.5 and 14.5%, which is slowly increasing year by year. On the one hand, the hidden economy has certain positive effects on economic growth, but on the other hand, it has some adverse effects, such as making official macroeconomic statistics untrue, reducing the tax base leading to tax revenue loss, and affecting the government’s ability to provide public goods and services, etc. Therefore, it is necessary to control the size of the hidden economy (see Yang Canming and Sun Qunli, The size, causes and implications of the hidden economy in different regions of China, Economic Research, No. 4, 2010. 25 Chinese Academy of Social Sciences, Blue Book of Cities: China’s Urban Development Report, Social Science Literature Publishing House, 2009. 26 Macroeconomic Research Institute of the National Development and Reform Commission, Promoting the Formation of a Reasonable Resident Income Distribution Mechanism, Macroeconomic Research, No. 5, 2009.

1.2 Definition of Relevant Concepts

15

and other industries enjoy 2–3 times the average salary of employees in other industries. If extra wage income and employee benefits are added, there would be a larger actual income gap, which could be approximately 15 times between the highest and the lowest.27 In China’s monopoly enterprises, “The wages of employees in the petroleum, electric power, tobacco and other industries account for approximately 60% of the total wages of the national labors, while the number of them is less than 8% of the national employees.”28 In recent years, with the rapid development of China’s economy, land, resources and capital elements have exerted tremendous power for wealth adjustment. Real estate, minerals and securities have become the “most profitable” profiteering industries, by which a small number of people have reached the top of social wealth overnight. For example, although the real estate industry was affected by a series of strict control policies in 2011, the performance of the richest people involved in the real estate industry is still striking. According to the 2011 Forbes China Fortune Rankings, 15 of the top 30 people in the rich list involve real estate business. Among the 7 superrich people, 3 were real estate businessmen.29 This shows that the real estate industry has become the main wealth concentration in our country. Fourth, the income gap between different economic types is wide. From 1990 to 2010, except for a few years, the average wage of employees of state-owned units grew faster than collective units and other units and became the economic type with the highest average wage income in recent years. The income gap between different groups in the industry is also rapidly expanding. According to the research report of the China Economic System Reform and Research Association, “the wages of executives in China’s state-owned enterprises are 98 times the minimum wage, while the world average is 5 times the minimum wage. Wage gap in different industries in China is 3000% high while the world average is 70%”.30 Fifth, income polarization is serious. During the period of economic transition, due to the deepening market reform and the encouragement of capital, technology and other production factors to participate in income distribution, the income of some people has increased rapidly and hierarchy in the high- and low-income people has become obvious, accompanied by which the income gap between high- and low-income groups has expanded.

27

According to the research results of Su Hainan, the director of the Labor and Welfare Institute of the Ministry of Human Resources and Social Security and the Chairman of the Salary Professional Committee of the Chinese Labor Association. 28 The Report States That the Salary of Civil Servants in the Mainland Is Six Times the Minimum Wage and That of State-Owned Enterprises Is 98 Times, Zhongcai.com, December 16, 2011, http:// economy.cfi.cn/p20111216000310.html. 29 2011 Forbes China Rich List Showed Real Estate Business Is Still the Main Force for the Creation of Wealth, September 8, 2011, http://finance.eastday.com/Business/m2/20110908/u1a609 5602.html. 30 The Report Said That the Salary of Civil Servants in the Mainland Is Six Times the Minimum Wage and That of State-Owned Enterprises Is 98 Times, Zhongcai.com, December 16, 2011, http:// economy.cfi.cn/P20111216000310.html.

16

1 Introduction

China’s high-income groups are mainly concentrated in such a group of people, including famous singers, movie stars, fashion models, some individual and private entrepreneurs, middle and senior employees in foreign companies and international institutions, managers in financial institutions, developers and managers of the real estate sector, some enterprise contractors and technology sharers, etc. These people are less than 1% of the total number of people, but the total annual household income is generally more than 200,000 yuan; they are at the highest level of high income. In contrast, the poor are mainly farmers at a disadvantage in rural areas, laid-off laborers, unemployed people, early retirement or default retirees, employees of discontinued or semi discontinued enterprises, and those who receive minimum living allowance due to illness or old age in urban areas. They are mainly immersed in poverty due to low levels of education, low social status or many other reasons. At present, the degree of differentiation between high- and low-income groups is still growing. On the one hand, wealth in the high-income class has grown rapidly, and China has become the world’s second-largest consumer of luxury goods; on the other hand, there are more than 40 million people living in absolute poverty and 270 million people in low-income groups in China. In 2010, the World Bank reported that 0.4% of China’s population had 70% of its wealth, and 5% of the US population had 60% of its wealth. China’s wealth concentration is the highest in the world, and it has become the most polarized country in the world. According to the statistics of the Ministry of Labor and Social Security, people with more wealth in society (10% of urban residents) possess 45% of all urban wealth, and those with less wealth (10% At present, the degree of differentiation between high- and low-income groups is still growing. On the one hand, wealth in the high-income class has grown rapidly, and China has become the world’s second-largest consumer of luxury goods; on the other hand, there are more than 40 million people living in absolute poverty and 270 million people in low-income groups in China.31 In 2010, the World Bank reported that 0.4% of China’s population had 70% of its wealth, and 5% of the US population had 60% of its wealth.32 China’s wealth concentration is the highest in the world, and it has become the most polarized country in the world. According to the statistics of the Ministry of Labor and Social Security, people with more wealth in society (10% of urban residents) possess 45% of all urban wealth, and those with less wealth (10% of urban residents) possess 1.4% of all urban wealth.33

31

Proper “cake” distribution promotes harmony—what is your opinion on unfair distribution, People’s Daily, July 9, 2010, 15th edition. 32 Investigation Report on the Compensation and Family Property of Public Officials in Local Party and Government Departments and State Organs, http://www.fyjs.cn/viewarticle.php?id=582738. 33 Zhao Xingluo: Research on the Financial System to Promote Fair Income Distribution, Economic Science Press, 2009, p. 134.

1.2 Definition of Relevant Concepts

17

1.2.3 Classification of Income Types Income refers to the total gain of individuals through various channels within one year, including wages, rental income, dividends, social welfare and other income.34 According to different standards, income can be divided into different categories (see Table 1.1).

1.2.3.1

Normal Income and Abnormal Income According to the Source or the Channel

Normal income refers to income obtained through normal channels or through distribution on the basis of labor and distribution on the basis of contribution of factors of production or income received from donations and normal gift, including normal wage income, normal property income, and other normal income. This kind of income is characterized by a legitimate source and channel, registration and reporting for taxes in accordance with regulations; it belongs to legitimate, disclosed and visible income. For example, normal wage and welfare allowances, labor remuneration, management remuneration, property leasing, and house purchasing added value. Abnormal income refers to income obtained through improper means, including abnormal wage income, abnormal property income and abnormal other income. Among these incomes, income obtained by ways violating laws and regulations but not violating the law belongs to quasi-legal and disclosed visible income; the income that is not registered and taxed due to lack of supervision is quasi-legal and undisclosed invisible income; income obtained by ways violating, abusing public power or violating the bottom line of human morality belongs to illegal and undisclosed invisible income. For example, income obtained by smuggling, drug trafficking, fake sales, theft, robbery, kidnapping, etc.

1.2.3.2 i.

34

Legal, Illegal and Quasi-Legal Income According to the Legality

Legal income refers to the income that citizens obtain within the limits prescribed by law. In China, legal income mainly includes normal wage income, normal property income and normal other income, for example, labor income (employee’s wages and bonuses; farmers’ income after the prescribed reserve [it is a kind of tax paid in form of grains] and tax payment in contract operation and other than the tax payment and management, income from family sideline business; legal profits of individual labors; manuscript fees, etc.), welfare and social insurance income (such as welfare funds, pension, severance pay, subsidy, student grant, compensation payment, etc.), incomes such as acceptance, inheritance, legal rents, and benefits. are all obtained through normal

The income here refers to personal income, which is different from corporate income and national income.

White

Golden

White

White

Wage income

Property income

Management income

Other income

Normal income

Color

Category

Type

Table 1.1 Different types of income Feature

Income from inheritance, donations, normal gift money, etc.

Income earned by individuals engaged in production and business activities Other incomes obtained normally and registered tax

Income distributed according to work and distribution according to the contribution of production factors, and registered and taxed Income from gold, stocks, according to regulations futures and other capital, property leasing, value-added purchases, etc.

Normal wage and welfare allowance, labor remuneration, business management remuneration, technical remuneration

Example

Legality Legal

Openness

(continued)

Open and visible

18 1 Introduction

Property income without illegal resource but not registered nor taxed, such as individual’s property income from renting out house Income from illegal property

Light gray

Dark gray

Red envelopes employees gained form their boss, teachers’ income from part-time job and neither registered nor taxed

Bonuses and allowances except for wages; superstandard labor compensation; extremely high salary income of managers in state-owned enterprises; exceed-standard technical compensation, etc.

Property income

Example

Light gray

Wage income

Abnormal income

Color

Category

Type

Table 1.1 (continued) Feature

Income with unknown and illegal resource, which is actually disguised bribery, and belongs to black income in the name of gray income

Legal resource but lack of supervision

Income distributed unconventionally and unreasonably, violating to regulation and discipline but not illegal

Legality

Illegal

Quasi-legal income

Openness

(continued)

Not open and invisible

Open and visible

1.2 Definition of Relevant Concepts 19

Gift money gained from illegal aim Income from smuggling, Income gained from drug trafficking, means breaking the law production and distribution of counterfeited goods, theft, robbing and kidnappinga

Dark gray

Black

Blood-red

Income from heritage, donation and normal gift money but not taxed

Light gray

Other income

Feature

Income at the expense of life, such as illegal mines which are lack of safe protection measures

Income from embezzling money and engaging in corrupt practices, power rent-seeking

Legality Quasi-legal

Income at the expense of others’ life or blood

Income from public power, can be called corrupted income

From illegal resource Illegal and not registered for tax

Income from other normal resource but nor taxed

Residents income from Income with legal independent management, resource but not taxed such as doing small business and not taxed

Light gray income

Example

Color

Category

Management income

Openness

a Among which income from smuggling, drug trafficking, production and distribution of counterfeited goods is also management income to some extent, but it is obviously illegal, so it is not listed in other category

Type

Table 1.1 (continued)

20 1 Introduction

1.2 Definition of Relevant Concepts

ii.

35

21

legal ways and have been registered and taxed. The Constitution of our country stipulates that the state protects the ownership of the legitimate income of citizens.35 Illegal income refers to the property obtained by the unit or individual through illegal ways violating the laws and policies of the nation, for example, incomes grabbed from illegal resale materials, speculation, money-for-power deal, corruption and bribery, tax evasion, outsource, falsification, fraud, and booty. Illegal income is roughly equivalent to black income, dark gray income, and blood color income in “five-color income”.36 In terms of nature, illegal income is the part of total social income that is occupied by some people in illegal and abnormal means. The normal income data generally come from the officially published statistics yearbooks of various kinds of statistics, while the illegal abnormal income is not disclosed because the residents are not willing and fearful to disclose it, which makes it a strong concealment and its data can only

What needs to be noted here is the difference between “legal income” and “reasonable income”. Reasonable income is income that is in line with the principle of social justice. For example, for the high income of China’s monopoly industries, purely from the perspective of legitimacy, at present, there is no legislation in the country that explicitly prohibits employees in any industry from having high income. Therefore, the high income of monopoly industries is at least superficially not illegal. However, at present, the service level of many monopoly industries is relatively poor, and the management efficiency is low. In the case that the society still presents a “pyramid” structure and too many low-income groups, its employees enjoy a significant mismatched income with their contributions and are obvious unbalanced with others. Such high incomes have been doubted to exploit other public and embezzle state assets by arbitrarily charging high-fee, extensive management and other mean. It violates the principle of social justice, which is unreasonable. In other words, the income of labors in monopoly industries is too high, even if it is “legal income”, but it is not “reasonable income”, which is also an important reason for dissatisfaction among other public. 36 Some scholars have proposed the “five-color income theory” to summarize the current income of various forms, that is, to summarize the various types of income in reality in five colors: “white, black, gray, blood, and gold.” Specifically, “white income” refers to legal income such as normal wages and benefits. “Black income” refers to illegal income obtained through illegal means such as corruption, bribery, robbery, and drug trafficking. It includes not only the illegal income obtained by some people’s power but also the income from illegal and criminal activities such as smuggling, drug trafficking, theft, robbery and kidnapping. “Gray income” refers to income between legal and illegal. There are two kinds of “gray income”: one is the “light gray” income which should be classified as “white income”. Because there is no clear regulation in the system, although the channel is justified, it lacks tax supervision. The income breaks regulations but not the law; the second is the “dark gray” income which is in the name of “gray” and is actually “black”, such as commercial rebates, gift money in annual festivals, small treasury, celebration gifts, etc., which are disguised forms of bribery. “Blood income” refers to income gained by means of trampling on the humanity and the bottom line of human civilization, at the expense of the lives of others, such as income from black brick kiln, black coal kiln and so on. “Golden income” refers to income earned from the use of capital such as gold, stocks, and futures. “Five-color income” is relatively independent and overlapped sometimes. This kind of generalization not only relies on the legitimacy of income but also refers to the social moral standards. It basically summarizes the main channels and ways of current income distribution in China. It is also an easy-to-accept way to describe current income status vividly.

22

iii.

1 Introduction

be obtained through abnormal ways. Therefore, illegal and abnormal income is generally not considered in the official statistics on income distribution. Quasi-legal income refers to income obtained through normal means but not registered for tax payment or violating rules and regulations but not violating the law, which is between legal income and illegal income. Such as income not taxed, including bonuses and allowances expect for wage, super standard labor remuneration, excessive salary income of senior executives in state-owned enterprises, income from small business of laid-off labors, from part-time jobs of teachers, acceptance of inheritance, donations, normal gifts, etc. Such income is not illegal in view of the source. It will become legal income if the relevant departments strengthen supervision. Therefore, it is roughly equivalent to the light gray part of the gray income.

The concept of gray income is difficult to characterize. At present, the definition of “gray income” is not unified in academic circles. Some scholars define gray income as invisible personal income from unknown sources, not recorded, not taxed, and without income declarations; some scholars think that gray income refers to income that is illegal, violating of discipline, questionable in accordance with socially recognized moral values, and other incomes that are from unidentified sources; and there are also scholars who have subdivided gray income into various degrees.37,38 The author of this project believes that gray income refers to incomes obtained from sources except for the income distribution system stipulated by the current national laws, regulations and policies and has not been explicitly prohibited by national laws, regulations and policies, such as various commissions, traffic allowances, gifts, etc., but it does not include illegal income such as “rent-seeking”, kickbacks, and bribes. There are two main types of gray income. The first type is incomes that have not been clearly defined to be legal or illegal by laws and regulations, including those that violate the rules but are not illegal; an official’s son accepts much more gift money than ordinary people in his wedding ceremony. The second type is incomes that are actually illegal, but with no clear evidence to be proved illegal, for example, the income from bribery that has not been verified by the relevant authorities. In addition to the general characteristics of concealment, diversity, and universality, gray income also has the following three major trends. First, the source of income is public funds. The main source of gray income is public funds, and the main channel is all kinds of direct or disguised, turning public property into private property; second, the way of obtaining income is in the name of a group. The unit distributes excessive bonuses and subsidies, which are generally for everyone after 37

Wang Xiaolu, Gray Income Enlarges the Income Gap of Residents, China Reform, No. 7, 2007, p. 9. 38 Chang Xiuze, a professor at the Macroeconomic Research Institute of the National Development and Reform Commission, believes that there are three main types of “gray income”, one is “positive gray” income, that is, the income that violates the regulation but not the law; the second is income in the name of “gray” but is actually “black”, such as commercial rebates, gift money in annual festivals, private small treasury, celebration gifts, etc., are the disguised form of bribery; the third is “light gray” income which should have been classified as “white income”, but there is no clear stipulation in the system. Although the channels are justified, it is lack of tax supervision.

1.2 Definition of Relevant Concepts

23

being studied by the leading group; third, the gray income has been justified. Some public servants take it for granted to accept their gray income by using various reasons and excuses. In particular, some public servants use their powers to seek gray income and gather unjust money. This has now become a prominent problem of the construction of Party conduct and a clean and honest government. At present, gray income has penetrated all walks of life in society and has a trend of continuous expansion, such as rebates, commissions, thank-you fees, labor costs, lecture fees, author remuneration, and gifts, which are often missed by official statistics. The large amount of gray income seriously distorts the distribution of national income and undermines the order of income distribution.

1.2.3.3

Visible Income and Invisible Income According to the Publicity

Visible income refers to the open book income obtained by people through quantitative labor in daily production and operation, including wage income, physical income, rent income, financial assets income, and legal operating income recorded on the books or declared tax. Generally, visible income is the income that can be known by the public, can be accurately measured by the relevant departments, and can be reflected in the income statistics of residents. For most people who live on wages, visible income refers to income on the payroll and can generally be seen in the form of items such as post-salary, basic salary, book fee, transportation subsidy, and communication fee. Since the main income of the majority of laborers is wage income, the distribution of wage income is objectively most related to their actual economic situation. In general, visible income is normal income and light gray income in abnormal wage income. At present, most countries in the world implement a visible income system. That is, laborers’ income basically depends on formal wages or salaries instead of other means. Invisible income refers to nonpublic income obtained by ways except for the normal channels such as wages, bonuses, allowances, subsidies, such as part-time income, amateur operating income, labor income, etc., which is opposite to visible income and has many latency, suddenness and unpredictability. Generally, the profits and income generated by market transactions can be accurately measured by certain criteria, while invisible income has to be discovered by using abnormal and nonmarketing concepts rather than normal trading rules, and it is difficult to accurately measure. Therefore, invisible income is often seen as abnormal income (except for the light gray part of the abnormal wage income) in the market economy. In general, invisible income can be divided into extra wage income, extra unit income, and illegal income: i.

The first level of invisible income: extra-wage income, which is not in-unit income obtained from formal wages. In China’s income system, some income from full-time jobs is not obtained from formal wages but from extra wages. Formal wages are not equivalent to actual living standards. At present, only foreign-owned enterprises, private enterprises and other “non-institutional”

24

ii.

iii.

1 Introduction

employment units have implemented the market price system of wages. Although the distribution of units within the system has begun to shift to the market price system, the monetary wages are still not high. Many important incomes of the units in the system are not fully expressed in the form of money, such as medical care, children’s schooling fees, housing, etc., while cadres tend to have more benefits in addition to formal wages. Therefore, the income system dominated by the nonmonetary distribution of units within the system has not yet been fully shifted, which can be confirmed by the intensity of competition for civil servants in recent years. The second level of invisible income: income apart from full-time job income. Income apart from full-time job income is the income that the worker receives apart from his or her “full-time job” position. Due to the low formal wages in China’s units and the disordered labor and income system, laborers obtaining income from outside the unit have become a universal phenomenon. Of course, there is also a distinction between taxation and tax evasion for income apart from full-time job income, which is the main criterion for differentiating whether it is gray income. The income apart from full-time job income is still the income of labor. As long as the tax is paid according to law, it is still a legitimate income, and labor in addition to the eight hours also creates new value for society and belongs to quasi-legal income. This kind of labor and income can also be seen as an adjustment to the current labor income system that has excess labor capacity. The third level of invisible income: illegal income. Illegal income is mainly obtained through complicated resources such as theft, robbery, drug trafficking, bribery and corruption, which involve legal issues. This kind of invisible income is the most important reason for intensifying social conflicts.

Among the three levels of invisible income mentioned above, the first and second levels of invisible income are benign, which will become visible income if well regulated by the relevant departments. The third type of income belongs to malignant invisible income, which is a powerful driving force causing the disorder of the income distribution system and should be resolutely cracked down. Corresponding to visible income and invisible income, the income gap of residents can be divided into a visible income gap and an invisible income gap. Usually, the officially published Gini coefficient on the income distribution of residents in a certain period in newspapers, magazines, books and other media is generally smaller than that obtained by unofficial scholars and research institutions. The reason for this phenomenon is the difficulty for statistical surveys to obtain real income data of highincome residents instead of the error of statistical survey methods or calculations. If the differences in calculation methods and the perspectives of thinking are not thought about, it should be said that the officially published data mainly reflect the visible income gap between residents and almost do not involve invisible income gaps, while the unofficially obtained data, to a certain extent, reflect both the visible income gap between residents and the partial invisible income gap.

1.2 Definition of Relevant Concepts

25

1.2.4 The Formation Mechanism of Income The formation mechanism of income mainly studies the way of formation for various types of income; in other words, it studies whether rules and the process of income distribution are standardized, reasonable and orderly. The research group believes that normal income is obtained on the basis of principle of distribution according to work and distribution according to production factors and the rules and process of distribution are standardized, orderly and reasonable, while the formation of abnormal income is due to the denormalization of government and market order in changes of distribution institution, the distribution rules and processes of which are generally nonstandard, chaotic, and unreasonable. This part only analyzes the overall income formation mechanism, and the specific performance and reasons for the formation of various types of income, such as normal labor income, normal non-labor income and abnormal income, will be more systematically and roundly analyzed in the following relevant chapters of this project.

1.2.4.1

The Formation Mechanism of Normal Income

The distribution system is the embodiment of a country’s economic system in the field of distribution. Formed under certain conditions, the income distribution system embodies certain distribution principles, clarifies the specific distribution methods, and reflects the income distribution structure, income distribution mechanism and income distribution system in certain societies.39 In economics, the merits of evaluating an income distribution system mainly depend on whether it can effectively deal with the relationship between efficiency and fairness, which is, finding the best equilibrium point between fairness and efficiency. From this perspective, a good income distribution system must meet two conditions. First, the system must be distributed according to the principle of efficiency and eliminate equalization of income to fully mobilize the enthusiasm of laborers. Second, it implements the principle of fairness and keeps the income distribution gap within an appropriate range to maintain social stability. At this stage, based on the basic economic system with public ownership as the pillar and all forms of ownership developing together, China’s income distribution system is “distribution according to work is the leading factor and diversified distribution methods coexist, and combination of the distribution according to work with distribution according to production factors”. This kind of distribution system is conducive to improving efficiency and promoting social equity. First, the income was obtained by distribution according to work. According to Marx’s vision of the future society, a system of distribution according to work will be implemented within publicly owned enterprises after the establishment of China’s socialist economic system. The essence of distribution according to work 39

Chang Xinghua: Common Wealth—The Income Gap in Building a Moderately Prosperous Society, China Water Resources and Hydropower Press, 2004, p. 130.

26

1 Introduction

is “the same amount of products will be gained by equal amount of labor”.40 This kind of distribution method reflects the economic relationship of laborers’ equal rights. First, the income obtained by distribution according to work. According to Marx’s vision of the future society, a system of distribution according to work will be implemented within publicly owned enterprises after the establishment of China’s socialist economic system. The essence of distribution according to work is “the same amount of products will be gained by equal amount of labor”. This kind of distribution method reflects the economic relationship of laborers’ equal rights in distribution. It includes three aspects: The first is the equality of ownership of means of production. Means of production belong to all members of society, which has nothing to do with class differences. No individual can enjoy the privilege of public property, let alone misappropriating public property. The second is the equality of labor rights, which manifests the equal relationship of the ownership of means of production. Everyone with labor capacity has the right and obligation to participate in labor and participates in the production process as the main body of production. The laborer has the right to choose his/her own occupation and work position, give full play to his/her labor capacity, and maximize the individual’s labor rights. The third is the equality of labor exchange. Distribution according to work complies with the principle of the same amount of products will be gained by same amount of labor According to the principle of equal distribution of labor to obtain the same amount of products according to labor, the only measure of labor remuneration is the amount of labor, which means labor income depends on the amount of labor and has nothing to do with production conditions. Therefore, although distribution according to work is to make distribution of means of consumption based on the principle of equality, it does not advocate the equality of meeting the need or the amount of consumer goods distributed, because the former is distribution according to needs, and the latter is distribution according to the equalitarianism. Recognizing the difference and the inequality of the distribution of means of consumption is another feature of distribution according to work. It is precisely the differences in the distribution according to work that internally generate and promote laborers to continue improving labor efficiency to fully realize the incentive mechanism of personal interests, which can lay a solid foundation for the transformation to a higher society by the increasing supply quantity. The distribution according to work organically unifies fairness and efficiency. It upholds the socialist public ownership and eliminates the inequality of property ownership to eradicate the economic foundation that undermines fairness and efficiency and even makes them opposite to each other; it organizes the labors to form a labor union, making the labors the bearer of social production and the owner and master of the means of production and labor products; putting labors on the status of

40

This way of personal consumer goods distribution was directly categorized by Lenin as a distribution according to work which is carried on by the later generations.

1.2 Definition of Relevant Concepts

27

the masters, it enables labors to participate in the decision-making process, democratic management process of the production and management of the enterprise and income distribution process as a master, so that labors have the opportunity to give full play to their talents. Market-oriented distribution has become the best way to realize the combination of socialist fairness and efficiency because it embodies the equality that laborers have never had and promotes the maximum efficiency of social and economic operations in a way that surpasses any distribution method in any era. Second, the income was obtained by distribution according to production factors. Production factors participating in distribution in accordance with their contribution are not only a way of income distribution under market economy conditions but also a reflection of market-optimized resource allocation as well as the result of diverse forms of ownership in China, especially the diverse forms of public ownership and the clarification of laws and regulations that protect private property. The main points of its distribution are as follows: The first is the type of compensation according to that of factors. Laborers get paid for labor because they provide labor factors. Similarly, capital providers gain dividends and interest; land renters acquire land rent; business managers obtain management compensation; technology investors obtain technique; and government gain taxation as the remuneration for its provision of public goods and public services in social production. The second is the amount of compensation according to that of factors. Compensation is gained according to the quantity and quality of the input factors. In general, the greater the quantity and the higher the quality of production factors invested, the higher the compensation obtained. The third is that the reasonable remuneration of various factors is mainly realized through the various factor markets. For example, capital markets form capital prices; labor markets form labor prices, which are wages. The fourth is that the remuneration relationship between the inputs of each factor is determined by the proportion of the income generated by each factor in the total income, which means it is determined by the marginal productivity of each factor input. In the case of constant total income, the remuneration of each factor is a mutual constraint. Taking capital and labor as examples, if there is a shortage of capital and surplus of labor, the capital price will be relatively high and the labor price will relatively decrease; if capital is abundant and labor is relatively short, the capital price will be relatively low and the labor price will relatively increase. Production factors participating in distribution in accordance with their contribution have a positive effect in improving the rationality of the distribution relationship, exerting the role of distribution in promoting production, and making the distribution system more responsive to the requirements of the market economy. Under the conditions of a market economy, this kind of distribution system can form an incentive mechanism to mobilize people’s enthusiasm under a diversified system of property rights. Since the income distribution of each factor owner is closely related to the quantity and quality of his/her input factors, high income is a return on high investment and high quality. In turn, high incomes will stimulate factor owners to further improve the quality of the elements and increase the input of factors. As a result, the

28

1 Introduction

quality of production factors in the whole society will inevitably increase, the input of production factors will continue to increase, and the income of factor owners will continue to rise so that the national economy and the comprehensive income will be effectively improved.

1.2.4.2

Formation Mechanism of Abnormal Income

Abnormal income is formed by the violation of the income distribution principle and income distribution system. This part of income is the result of the nonstandardization of government order and market order in the change of China’s income distribution system. It is caused by factors such as abuse of public power, corruption, illegality, monopoly and unfair competition in the distribution process. After the founding of the People’s Republic of China, China implemented a highly centralized planned economic system to quickly eliminate economic backwardness, in line with which an egalitarian distribution method was implemented in the field of distribution. A hierarchical wage system is implemented in urban areas, and a distribution system based on population and labor rationing products is implemented in rural areas. Relying mainly on the government’s instructions and obedience to maintain the order of economic operation, this egalitarian distribution method resulted in economic inefficiency and product shortages. Therefore, the egalitarian distribution method implemented in the planned economy period lacks incentives for laborers and has many drawbacks. After the reform and opening up, China gradually introduced market factors into economic development and implemented gradual reforms, which led to the formation of an economic-construction government order and great change of the market order. The Twelfth National Congress of the Communist Party of China put forward the principle of “planned economy as the mainstay and market regulation as the supplement”. The 13th and 14th National Congress of the Communist Party of China emphasized the establishment of a socialist market system. It is necessary to construct a market micro-price order under government regulation in the economic field to comply with the establishment of a market economic system. To this end, China has implemented a double-track price system; at the same time, the system of “distribution according to work as the main body, other methods of distribution as supplement” was implemented in the field of distribution. However, confusion in the micro-orders of the market mechanism, namely, the price mechanism and illegal income, such as price difference rent-seeking by power, are caused by incomplete liberalization of price, the coexistence and contradiction of the two-track system, the slow development of commodity and factor markets, and imperfect market management regulations. For example, according to the statistics of scholars at the time, the total rent caused by the price double-track system in 1988 was 356.9 billion yuan, accounting for 30% of the national income of the year.41 41 Zhong Xiangcai: History of China’s Income Distribution Thought, Shanghai Academy of Social Sciences Press, 2005, pp. 352–380.

1.2 Definition of Relevant Concepts

29

China implemented tax-division reform in 1994, and decentralization caused competition of resources in local governments. From the maximization of its own utility, the local government asked for policies and projects from the central government that made the market-oriented reform evolve into a locally led reform. In China, the main indicators for the assessment of local government officials are GDP growth and investment attraction, which directly leads local officials to overemphasize high GDP growth and keenly engage in “achievement projects” to pave the way for their own promotion. To achieve so-called political achievements, local governments must release restrictions and entry barriers for enterprises. From the perspective of the market order, enterprises are gradually becoming independent market entities that are independently managed, independently responsible for their loss and profit, selfdiscipline and independent development; however, at the same time, enterprise development also has spontaneous demand for a macrolevel market order such as the rule of law, credit order, cooperation order and moral order. It is an inevitable choice to allow other production factors to participate in the distribution to improve the efficiency of business operations and resource allocation. The 15th National Congress of the Communist Party of China began to clarify that “other production factors can participate in income distribution and put forward the principle of combining distribution according to work and distribution according to factors”; the 16th National Congress of the Communist Party of China proposed establishing production factors such as labor, capital, technology and management to participate in distribution according to contributions and completing the distribution system with the distribution of labor as the main body and multiple modes of distribution coexisting; the 17th National Congress of the Communist Party of China clearly stated that it is necessary to uphold and improve the distribution system with the distribution of labor as the main body and multiple modes of distribution coexisting, and improve system that labor, capital, technology, management and other production factors participating in the distribution system according to contribution, which indicates that China’s income distribution system is becoming increasingly mature with the development of market economy. However, the distribution system of “the combination of distribution according to work and distribution according to production factors” must rely on standardized government order and market order. When local governments pursue excessive GDP growth, they must use power to expand their ability to intervene resources and elements, which will dilute government functions in market supervision, social management and public services. Meanwhile, enterprises are driven to protect their own interests, so they have a deformity reliance on governments, while this is just contrary to the rules of fair competition in the market, which interferes with effective competition of the market order. Therefore, the normal element distribution pattern is severely distorted under an anomie market order, and its outstanding performance is that a large number of abnormal incomes, such as hidden income and illegal income, are produced in the process of marketization. According to scholars’ statistics, in 2005, China’s hidden income reached 4.85 trillion yuan, by 2008, “The hidden income of national urban and rural residents topped 9.26 trillion yuan, which accounted for 30% of GDP……The gray income closely related to power-for-money

30

1 Introduction

deal and monopoly profits reached up to 5.4trillion yuan, income for highest-income families was 65 times that of families at the lowest income levels in both urban and rural areas”.42 These gray incomes that missing from official statistics seriously disturb China’s income distribution adjustment mechanism. On the one hand, China’s economic transition is the demand of spontaneous market forces, but a more important part is the compulsory institutional change in governments, which inevitably results in a power imbalance between the government and the market. Because institutional arrangements and definitions of rights are beneficial to the dominant actors in power, the government order decides the trend of market order. In developed and mature market economic countries, a perfect market system and standardized economic order expand the opportunity cost of abnormal government intervention. However, in a country in transition toward a market economy, it is an endogenous trend for the government to intervene in the marketplace by its power. Because the government expands its administrative monopoly scope with low marginal cost, the externality and butterfly effect43 it produces should be paid by society. Personal income distribution depends on personal natural endowment, capacity, the degree of effort, preference and so on; however, it depends greatly on the equitable environment, which is brought by standardized government order and market order. Generally, the primary distribution gap derives from the incentives brought by market competition, while the redistributive polices of government will improve the personal income gap. If the main reason for primary maldistribution comes from the Strong Game between the relevant government departments on main market players, then the redistributive polices will inevitably lead to induced distortions and increase the institutional risk of income distribution, thus hindering the evolution to a standardized market economy. In summary, the key to China’s abnormal income formation mechanism lies in the nonstandardized result of government order and market order in the vicissitude process of our income distribution system. Government departments tend to have more social resources; they monopolize factors and form vested interest groups because the government possesses legitimate power, low marginal cost for power expansion, and economic development concepts originating from the government. This destroys competitive market order, causing unfair market transactions and unreasonable gaps in primary distribution, which turn to more reliance on government redistribution policies. While public officials’ personal incentives rely on quantitative evaluation of economic performance, so they must pursue short-term optimal government supply, which inevitably leads to malfunction of government redistributive polices; thus, real efficiency and equity cannot be realized both in the field of primary distribution and redistribution. Finally, the nonstandardized government and 42

9 Trillion Hidden Income Chinese People Are Richer Than Imagined, Beijing Evening News, August 11, 2010. 43 Butterfly effect: a phrase meaning that small variations of the initial condition of a dynamical system may produce large variations in the long-term behavior of the system. It often used to illustrate that a bad micromechanism will bring seriously damage to society if not guided and adjusted in time.

1.3 Literature Review

31

market order cause the distribution according to work and production factors to dissipate in the latent rules of various distributions, and then various abnormal incomes have formed, such as monopoly income, power rent-seeking and corrupt income. Moreover, when the government controls a large number of market resources, it will form a malformation order centered on the distribution of power, which leads people to speculate on power and hinders the government’s acquisition and processing of real information. If power resources are involved in market transactions, it will also damage government credit and the harmonious values of society.

1.3 Literature Review To be consistent with the basic framework of the research on this topic, based on the literature review, we will analyze it from five parts: China’s present situation of income distribution, capital-labor relationship, political capital and administrative power corruption, recessive economy and policy recommendations for regulating income distribution.

1.3.1 China’s Present Situation of Income Distribution 1.3.1.1

Income Distribution System Reformation

Many scholars have summarized and concluded the vicissitude of China’s income distribution system. For the practices of reform and opening up, Liu Chengli (2008) summarized that the combination pattern of fairness and efficiency has gone through five phases as follows: To overcome egalitarian tendencies and with increasing economic benefits as the center (1978–1984). Efficiency comes first, fairness second (1984–1992). Both efficiency and fairness are considered (1992–1993). Efficiency should be given priority and given consideration to fairness (1993–2006). Primary distribution and redistribution must address the relationship between efficiency and fairness, and redistribution attaches more importance to fairness (2006). Reviewing China’s income distribution reform, Zhao Renwei (2002) believed that income distribution should comply with three principles in the economic restructuring period, namely, “Distribution according to work is predominant mode, coexisting a variety of distribution modes”, “Some people get rich first and then bring along altogether rich”, and “Efficiency should be given priority and given consideration to fairness”. Xie Xuren (2008) and Zheng Xinli (2007) have discussed China’s income distribution reform since the 17th National Congress of the CPC. The analysis from Wu Li and Wen Rui (2006) showed that New China’s income distribution system and its evolution mainly experienced two stages: the socialization of production materials and the averaging of living materials before the reform and opening up and the diversification of production materials and the gap in the possession of living

32

1 Introduction

materials that has widened since the reform and opening up. They also believe that the average level of income is mainly constrained by the changes in the economic and social development concepts, strategies and policies of the Communist Party of China as well as the changes in the accumulation and consumption relations of different periods.

1.3.1.2

Primary Distribution

Li Daokui (2009) and others believed that as a fundamental share of society, the primary distribution largely decided the basic pattern of the final income distribution of a society. Paying attention to the changing law of labor share in the primary distribution is of great practical significance for studying the current situation of the Chinese economy and the future trend. According to the analysis of the changing trend and characteristics of the labor share in the primary distribution in China and combined with the quantitative analysis of cross-country data, Li Daokui and others found that in the process of economic development, the change in the labor share in the primary distribution showed a U-shaped change law, namely, the decline in the labor share showed in the initial stage of economic development while continuously enhancing in the later stage of economic development. They believed that the basic reason for the U-shaped law of labor income in the primary distribution was the frictional wage factor in the process of economic development. According to the current development trend of the Chinese economy, there is an entire possibility that the proportion of labor income will rise in the next two years. Yang Chengxun (2008) believed that the primary distribution was the main body of the distribution system. Redistribution only played a certain regulatory role, which was in a complementary position, so the difficulty of income distribution system reformation was in the primary distribution; therefore, it was necessary to highlight the primary distribution depending on the income distribution system. Li Yang and Yin Jianfeng (2007) found that the relative decrease in labor remuneration of residents was mainly due to the relative decline in labor remuneration paid by the enterprise sector, the decline in the income of residents’ property and the relative decrease in labor remuneration received from enterprises, which indicated that a nonnegligible part of the residents’ income was transferred to the profits of the corporate sector and the government’s income. Taking advantage of the factor income of Chinese residents in the primary distribution from 1978 to 2002, Xu Xianxiang and Wang Haigang (2008) used the nuclear density function to estimate the income distribution of each province, added up to obtain the income distribution across the country, and then investigated the income distribution evolution of China’s primary distribution. They found that polarization was mainly caused by the different distribution standards of labor contribution in industries; other differences from factor contribution distorted China’s income distribution within the range from 2 to 15%. According to the analysis, Liu Shujie and Wang Yun believed that there were two main reasons for the sharp decline in the proportion of labor remuneration in the

1.3 Literature Review

33

primary distribution: one was that the proportion of migrant workers in nonagricultural employment has increased significantly, and the other was that the capital factor grew faster than the labor factor input in the heavy industrialization stage.

1.3.1.3

Redistribution

Tifu and Jiang Zhen (2009) used fund flow statements from 1996 to 2005 to compute the basic pattern of China’s national income in primary distribution and ultimate distribution. They found that China’s current national income distribution pattern was inclined to governments and enterprises, so the share of residents’ ultimate distribution continued to fall. The reasons were as follows: profits eroded labor remuneration; the rapid growth of government tax revenue lowered the proportion of residents’ income; residents’ property income grew feebly; and transfer expenditure systems were imperfect. The national income distribution pattern refers to the proportional relationship between the disposable income of enterprises, governments, residents and other departments in the national income distribution (Bai and Qian 2009). Great changes have taken place in China’s national income distribution pattern in the last decade, the proportion of resident departments has declined year by year, and the proportion of enterprises and governments has risen year by year. Be Duoguang and Luo Feng (2006) analyzed the development and application of fund flow. Xu Xianchun (2002) first used fund flow statements to compute China’s national income distribution in enterprises, governments and residents from 1992 to 1997. According to calculations of fund flow statements from 1992 to 2007, Chang Xinghua and Li Wei (2009) found that in the primary distribution pattern of national income, corporate income grew rapidly, government obtained second place, and inhabitant income increased slower. In the redistribution pattern, taking into account various income out of the system of the government and land transfer income, they found that the share of government obtained rose significantly, enterprises were in a weak position, and inhabitant income maintained a downtrend. They also believed that the proportion of the incomes of residents would constantly decrease, which might last longer, and residents’ income disparity would continuously expand. Bai Chongen and Qian Zhenjie (2009) found that residents’ income as a share of national disposable income was at its highest ever in 1996, then it reduced year by year during the period of 1992–2005. In the primary distribution phase, the proportion of resident income showed a downward trend, while the share of enterprises and governments was on rise. In the redistribution phase, the proportion of residents and enterprises income declined, and the share of government income increased. Comparing and analyzing the saving rate of residents, enterprises and governments in terms of income distribution and propensity to save, Li Yang and Yin Jianfeng (2007) found that labor remuneration, property income and redistributive income received by the residents all declined during the period of 1992–2003. Governments’ disposable income accounted for a larger share of national income distribution through the primary distribution and redistribution, they pointed out

34

1 Introduction

the reason why the proportion of residents in national disposable income declined was that the share of labor income and property income dropped in the primary distribution phase during the period of 1992–2003.

1.3.1.4

Resident Income Disparities

The Gini coefficient is often used for measuring income disparities, and many studies have used the income disparity of cities and countryside to measure income inequality. Cheng Yonghong (2007) believed that at present, most studies have focused on the Gini coefficient in urban or rural areas, while Gini coefficient research on the whole country is very limited. Many studies on the calculation of the Gini coefficient have only involved a few years. Since the reform and opening up, Gini coefficient research on continuous time series in rural areas, urban areas and the whole country has been completely lacking. According to household sample survey data in 1998, 1995 and 2002, China’s resident income distribution research group estimated that the national Gini coefficients were 0.382, 0.45 and 0.47,44 respectively. The results of the Gini coefficient estimated by different scholars (Hong 2008; Wang et al. 2009) indicated that China’s overall Gini coefficient was increasing, and China’s income distribution disparities were continuously expanding. Li Shi and Yue Mingxi (2004) divided national individual income disparities into three parts, namely, inside cities and towns, inside the country side, and between the city and the countryside. They found that the contribution of the income disparities between the city and the countryside to the national income disparities increased from 36% in 1995 to 43% in 2002, which increased by 7 percentage points. A report from the World Bank (1997) pointed out that income disparities between the city and the countryside could explain more than half of China’s overall income disparities in 1995, while the change in income disparities between the city and the countryside could explain 75% of the amount of change in the overall income disparities from 1984 to 1995. Yue Mingxi, Li Shi and Shi Taili (2010) used microeconomic survey data to divide high income in monopolized industries into reasonable and unreasonable. Empirical analysis found that more than 50% of the income disparities between monopolized industries and competitive industries were unreasonable, and they believed that this was mainly caused by administrative monopoly. Chen Zhao, Wan Guanghua and Lu Ming (2010) used income disparities based on a regression equation to find that in 1988, 1995 and 2002, interindustry income inequality made an increasing contribution to China’s income disparity of city dwellers, and this was mainly caused by monopolized industries with rapidly rising incomes.

44

Li Shi, Shi Taili, Peong Gustafson: Research on China’s Resident Income Distribution III, Beijing Normal University Publishing House, 2008, p. 13.

1.3 Literature Review

35

1.3.2 Research on China’s Labor-Capital Relationship The research priorities of the labor-capital relationship have some differences at the macro-level and the micro-level. At the micro-level, the important part of the laborcapital relationship is the process of determining the wages of workers in enterprises. The reasonability and effectiveness of laborers’ wage decision mechanism often dominate the evolution of the labor-capital relationship within a specified period. At the macro-level, the important part is the share volume of labor income of GDP. The current research progress mainly focuses on the labor-capital relationship between state-owned enterprises and non-state owned enterprises at the micro-level and the market system and labor-capital relationship as well as factor liberation and the share of labor income at the macro-level.

1.3.2.1

Labor-Capital Relationship in State-Owned Enterprises

The basic situation and features of the labor-capital relationship in state-owned enterprises can be summarized into two aspects: the first is transitional, and the second is complexity (Guo Qingsong 2001). Under the planned economy, the labor relation in state-owned enterprises was the magnified integration pattern: namely, high-level organizations had the power to issue orders to low-level organizations or individuals, while low-level organizations or individuals took and obeyed orders from high-level organizations or individuals. One of the important aspects of the labor-capital relationship in state-owned enterprises lies in the relative position of labor and capital in the production operation and how to distribute the control over the production operation process. Personnel employment45 is one of the important aspects of the development of the labor-capital relationship in state-owned enterprises. In the period of planned economy, although there was no employment relationship on the surface, workers were the “host” of the business; in fact, the labor force was still sold to the country through an implicit and compulsory contract. This was actually a labor relation pattern with “state wage labor” because price of labor power—wage level, the time of change in wage and the amount of change in wage—was prescribed by the state in a unified way. In 45

In July, 1949, three regulations of labor-capital relationship were adopted by nationwide conference through All- China Federation of Trade Unions, namely, Measures of the All-China Federation of Trade Unions on the Interim Treatment of Labor-Capital Relationship, Interim Procedures for the Labor and the Capital of Privately Owned Industrial and Commercial Enterprises to Conclude Collective Contract, and Temporary Provision for Labor Dispute Settlement Process, which provided powerful guarantee for the standardizing development of labor-capital relationship. On July 12, 1986 the State Council promulgated the Temporary Provision for Stated-owned enterprises to Implement Labor Contract System, the Temporary Provision for Stated-Owned Enterprises on Disciplinary Staff Dismissal and the Temporary Provision for Stated-owned enterprises to Hire Staff, on May Day, 1993, the State Council promulgated the Temporary Provision for Unemployment Insurance of Stated-owned enterprises Staff, while delegating the employment right to enterprises, these four files also had some necessary specification for basic rights of staff.

36

1 Introduction

state-owned enterprises, appointment by organizations was the main way to gain position for managers, which existed some conflict with market basic rules and was the concrete embodiment of “state wage labor”. Compared with the selection mechanism in market microeconomic subjects, managers appointed in this way had relatively poor reliability in focusing on enterprise performance, which easily led to the low operational efficiency of enterprises. This low efficiency also led to limited income available for distribution in enterprises and then influenced the actual income levels of staff. Generally, in the annual salary of enterprise managers, salary income accounted for nearly 30% of the total amount of annual salary, and managed factor income accounted for approximately 70%.

1.3.2.2

Labor-Capital Relationship in Nonstate-Owned Enterprises

Today, as the private economy gradually becomes an important part of China’s economy, the development situation and trend of its labor-capital relationship need to be given the necessary attention. Huang Mengfu and Hu Deping (2005) believed that the overall situation of the labor-capital relationship in non-state owned enterprises was not optimistic in general. In the period of economic transformation, comparing the power between labor and capital in non-state owned enterprises, it is more favorable to capital, labor-capital relationship presents four features, namely, inequality, instability, incompleteness of contract and imperfect of tripartite mechanism. In 2004, 8.5% of respondents said that their workplaces had collective labor disputes, and 11.1% of enterprise workers said so (All-China Federation of Trade Unions National Staff Condition Survey Office 2005). In recent years, the laborcapital relationship has shown a worsening tendency in some provinces, which led to the occurrence of mass incidents such as the Foxconn and Honda incidents that took place in Hubei Province in 2010. According to the survey of Hubei Province, there were three main reasons leading to the occurrence of the Foxconn incident, namely, serious imbalance between pay and reward (62.7%), great labor intensity and a long working time (59.7) and misgovernment as well as lack of humanistic care in enterprises (49.8%).

1.3.2.3

Market System and Labor-Capital Relationship

With the improvement of market system construction, both labor and capital began to show comprehensive attention and discussion in terms of income distribution plans for the overall value of enterprise implementation and bargaining problems with implementation forms. In terms of the negotiation on wage levels for workers, this negotiation between labor and capital had a typical labor market structure effect: This negotiation was accidental and partial in low-skilled labor markets. More often than not, low-skilled workers were the recipients of market wages. In the high-skilled labor market, such negotiations are usually inevitable and extensive. The relevant evidence put forward by Hall has supported this judgment. This situation is also the

1.3 Literature Review

37

inevitable result of the inner differentiation of the labor market in the process of market development. It is worth pointing out that market maturity can not only bring income disparity between workers but also enable workers to gain more relative freedom in work choice, such as more job selection opportunities, job hopping or voluntary unemployment. In fact, the true mark of market maturity is the promotion of the latter few aspects. Following the tradition of Merz (1995), the frictional problems that might exist in the matching process in the labor market once again received the relevant scholars’ attention and research, and there were more insights into unemployment problems. Supposing there existed externality in the labor market, Hosios (1990) put forward that the labor market would inevitably generate overemployment or underemployment, which led to mismatch between real wages and personal ability. However, he did not distinguish the heterogeneity of workers; instead, he treated workers in the market as representative workers with average labor skills and average preferences. In fact, if the labor market is subdivided, assuming that there exist both endogenous externalities and many firms, then asymmetric externalities will be produced due to the competition among firms in terms of wage levels, and the real wages of workers can approach the true value they create in the enterprise. This is basically consistent with the labor market situation in the Yangtze River Delta and the Pearl River Delta after the financial crisis. Following this idea, Elliott (2011) believed that this condition significantly improved the bargaining power of workers before they entered enterprises, which could negotiate workers’ personal interest with enterprises to some extent, eliminating the possibility of accumulation and expansion of potential contradictions between labor and capital. At present, the measure of bargaining power between the labor and the capital is still relatively difficult to become endogenous, and an after-the-event measurement method is generally adopted, namely, backward calculating their bargaining power based on the ratio between the absolute amount and the optimal share of the labor and the capital in the final income distribution, such as the research of Blanchard and others. In addition, although the shape of the utility function is constantly optimizing, the multiperiod optimization of utility is taken into consideration, and the strategies of both the laborer and the enterprise under heterogeneous conditions are continuously improved, it is hard to effectively describe the change in wages for heterogeneous laborers in the market deepening process. In reality, heterogeneous laborers would have more selection sets with the deepening of the market, and they also faced more second-best choices in this condition. In addition, to fight for more valuable workers, manufacturers have begun to join the competition. In other words, competitive manufacturers also existed in the decision process of labor wages. In this case, the labor-capital relationship has begun to show more stage characteristics.

1.3.2.4

Factor Liberalization and the Share of Labor Income

At present, it is important to estimate the optimal share of labor income by adopting the CES function. The core thought of this estimation is that it can incorporate the

38

1 Introduction

marketization degree of labor and capital into the estimation of the optimal share of labor income. The measurement index is mainly the labor and capital replacement rate in the CES function. Since Arrow et al. (1961) derived the CES function (constant elasticity equation, CES), the analysis of economic growth has begun to show a more general form. At present, the process of exploring economic growth by the CES function has begun to receive more attention from scholars (Kaas and von Thadden 2003; Barro and Sala-i-Martin 2004; Guo and Lansing 2009). In this vein, it has received the attention of relevant researchers in the past 80 years that a change in the replacement rate would lead to economic growth (Solow 1956; Ventura 1997; Saam 2008). By assuming that there was a replacement rate greater than 1 in the aggregation CES function, Solow (1956) concluded that the economy could exhibit sustainable growth in his neoclassical model. It is worth pointing out that the implied assumption of this higher substitution rate can be replaced by capital even if there is a lack of labor force. In the long term, the marginal income of capital was consistently above 0. The reasonability of the conclusions obtained under this premise has been questioned. Mankiw (1992) developed the model of Solow (1956), but his assumption on the homogeneity of each variable was criticized by Durlauf and others. Recently, Kaas (Kaas and von Thadden 2003) and Guo (Guo and Lansing 2009) pointed out that multiple growing paths and global or local uncertainties would be generated in the case of a replacement rate less than 1. An increasing number of empirical studies have shown that a replacement rate less than 1 could exist in many cases. Evidence of a replacement rate greater than 1 is also widespread. In general, the above conclusions are related to their specific research environments and objects. That is, there is a situation dependency. Ventura (1997) has considered the CES function with the progress of labor technology. This idea was actually proposed by David in 1965. Barrow (Barro and Sala-iMartin 2004) also adopted a similar CES function to analyze the relationship among the main variables in economic growth. It is worth pointing out that Barro and others deal with the changes in the main variables in CES from the perspective of the economic growth process. Although they propose a method for measuring income disparity and analyzing income evolution, there is no general analysis on per capita income share in terms of replacement rate. Klump (Klump and Grandville 2000) proposed two well-known axioms in terms of replacement rate and per capita income growth in the CES function, which assumed the existence of technological progress, and these two axioms have become an important reference for many studies in this field. If the setting was according to the CES function, many of the conclusions drawn by the CD function as the aggregate production function would be corrected to some extent.

1.3.2.5

Labor-Capital Relationship Processing

Ding Yuanxing (2005) believed that labor force factors also had income rights because they were the same as capital and other elements, so labor should not only obtain wages to recover the labor cost but also participate in the distribution of corporate

1.3 Literature Review

39

profits. Inside the enterprise, when capital interests seriously misappropriated the interests of labor factors and affected the formation of harmonious social income distribution, it was necessary to clearly define the labor property rights and establish the legal system to guarantee the realization of labor income rights to form a harmonious labor-capital interest distribution relationship. Zhengming and Xiaoliang (2005) believed that China’s market mechanism was still very imperfect in the economic transformation period, and society must have various contradictions in the case of the coexistence of various ownerships. Therefore, by adopting a materialistic attitude, we should dare to truthfully admit the existence of various contradictions, reaffirm the principle of taking both public and private interests into account as well as benefiting both labor and capital, and deal with and resolve conflicts. Zhong Dajun (2007) believed that China’s labor-capital relationship has opened a new prelude to improve labor rights, which was a challenge for Chinese society and the entire economic development model. This would not only bring changes in labor interests but also change the structure of income distribution, imports and exports as well as fiscal consumption and social consumption in China. Zhao Xiuli (2008) discussed the deep-seated reasons for the current income distribution from the aspects of marketoriented reform and government reform and then proposed that the unprecedented combination of capital and knowledge in the process of globalization has put workers in a weak position in the labor-capital relationship. Beginning with the necessity of government intervention in the labor-capital relationship of private enterprises, Chen Yufeng and Chen Guoying (2009) have concluded the roles and function differences of Chinese and Western governments in the labor-capital relationship and proposed that in the construction of harmonious private labor-management relations, the long-term dislocation and insufficient intervention of the government’s functions and roles should be corrected in the adjustment of the private labor-capital relationship. Xia Lingjuan (2009) proposed that the government should establish a “soft constraint” mechanism for rewards and punishments between employers and employees to balance labor capital interests. After analyzing the unharmonious factors in labor-capital relationship building, Yu Huajun (2010) proposed that governments should have multiple roles in building harmonious labor-capital relationships, such as protecting basic rights for labor, promoting labor-capital negotiation mechanisms such as collective bargaining, mediating labor disputes and planning harmonious labor-capital relationships. Writing in The Timely Week, Li Tie (2010) pointed out that the government only needs to be a good third party in labor disputes. Li Bingan and Xiang Shuqing (2010) indicated that the government should play nine roles in the labor-capital relationship in transitional periods. To analyze the interest relationship changes between the government, enterprises and workers in the planned economic system and the market economic system, Chen Weibo (2010) summarized the interest relationship between the government, enterprises and workers in the transitional period of state-owned enterprises and studied the problems of labor relations in state-owned enterprises during the transition period from the perspective of interest analysis.

40

1 Introduction

1.3.3 Research on Power Corruption and Income Distribution 1.3.3.1

The Return on Income of Political Capital

With regard to the return on income of political capital, Nee (1989, 1996) proposed in his market transformation theory that the return on income of human capital increased while political capital declined during the transition from redistributive economy to market economy by studying Fujian Rural Survey Data. However, the regression coefficient of the variable of the current cadre was negative in Nee’s essay, which was not significant. Since Nee’s market transformation theory was introduced, the focus on the decline in the return on political capital income has led to many debates and tests. According to the survey data of Tianjin in 1988 and 1993, the power persistence theory proposed by Bian and Lorgan (1996) believed that the leadership of the Communist Party and the urban department system have not changed in the process of China’s market transformation, and those people who possessed redistributive power could give priority to the market system and those with party membership could enjoy more income advantages. The power deformation theory of Rona-Tas (1994) believed that the redistributive powers of Communist Party cadres were transformed into social network resources, and then social network resources were transformed into private property; the dominant position of political capital continued to remain in the process of transition to market economy in Hungary. Arish and Michelson (1996) believed that the political market that emerged in a transitional economy affected the distribution of benefits and the operation of the economic market; therefore, the economic return of political power would continue to maintain its advantages. Party membership reflected their political loyalty to party organizations, which was a very important political qualification indicator for party organizations to investigate cadres and determine their promotion. Leading cadres who were party members and held certain positions could represent their individual political capital, which reflected both personal abilities and personal enterprises and political aspirations. With the promotion of positions, especially when power was combined with resources, capital, and social relations, leading cadres in certain positions would play an increasingly important role in determining or influencing income distribution. The study of Liu Hewang and Wang Yufeng (2010) suggested that the impact of political capital on personal income mainly came from three aspects: personal ability, social capital and power rent-seeking. Using party membership as a measurement index of political capital, they found that the income of political capital has generally shown a downward trend since the reform and opening-up and believed that the return on income of political capital was different at different ages, regions and between urban and rural areas. Li Shuang (2008) found that party membership has significantly increased personal income, and there was no significant difference in the role of party membership in different ownership sectors. By constructing the political capital indicator system of each province and adopting the panel data of 30 provinces from 1998 to 2002, Li Ming and Li Huizhong (2010) found that political capital had

1.3 Literature Review

41

a significant positive impact on the income gap in various regions of China, but its marginal effect was diminishing. Using “China Urban Household Income Survey Data” in 1988 and 1995, Bian Yanjie and Zhang Zhanxin (2002) found that with the improvement of urban marketization, political capital such as party membership and cadre status increased the income return, among which the income advantage of party members rose from 9.7% in 1988 to 12.9% in 1995; the income of cadres was 9.1% higher than that of workers in 1988 and increased to 14% in 1995. Yang Ruilong (2010) studied the impact of individuals with political capital on the use of power and resources to obtain additional income for themselves and their family members. The results of Wu and Xie (2003) showed that party members earned 11% more than nonparty members. By analyzing the determinants of income in the 20 cities of China from 1955 to 1994, Zhou (2000) found that there was no evidence to show the decline in the role of party membership or cadre status. To obtain more income returns in the economy, in addition to political capital, the factor of human capital or individual education level cannot be ignored, and the internal relationship is closely related between political capital and human capital. Since the reform and opening-up, with economic development and institutional changes, personal education and skills have been increasingly valued to be more conducive to the needs of economic construction, and the ruling party would absorb well-educated intellectuals to join the party organization. In terms of the promotion of cadre positions, it now pays equal attention to both political loyalty and education from the focus on political loyalty before the reform and opening up and gave welleducated party members more opportunities to enter the leadership, which made that party cadres had both political loyalty and high academic qualifications and professional skills. Walder (1995) believed that well-educated party members and well-educated nonparty members might obtain different returns under the communist system. Therefore, a personal good education background, rich professional knowledge and management ability have become important evaluation indices for the promotion of cadre positions. Political capital refers to the identity, power, resources and the resulting deterrence and influence provided by political parties and regimes. Bian Yanjie and Zhang Zhanxin (2002) believed that the identity of Communist Party members demonstrates their individual political affiliation, while their positions show their power to influence distribution in economic organizations. In Liu’s (2006) study, he only considered using the identity of party membership to measure political capital. However, he believed that people’s salary levels and benefits in all kinds of physical or monetary forms are not determined by their party membership but by their positions. In the study of Nee (1989, 1996), he used the identity of current cadres and former cadres to measure individual political capital. Bian and Logan (1996) measured political capital at the individual level by using the identity of Communist Party members and the occupation that redistributes power. Zhou (2000) believed that the position power of occupational groups is closely related to that of social groups. Therefore, he proposed two sets of measures to assess the status of cadres. First, we defined cadres at or above the department level as senior cadres and cadres below the section

42

1 Introduction

level as junior cadres; we made a distinction between cadres in the public sector and those in the economic sector.

1.3.3.2

The Contribution of Political Capital to the Income Gap

Since the reform and opening up, whether it is between urban and rural areas, between regions and between industries, China’s income gap has been constantly expanding, and income inequality continues to increase. In 1989, 1996, and 2003, the Chinese Residents’ Income Distribution Research Group conducted surveys about the income of Chinese urban and rural residents that they earned in 1988, 1995, and 2002, respectively. The estimated Gini coefficients were 0.382, 0.45, and 0.47. With the wider income gap, how much does political capital contribute to the income gap of urban residents? Research on this issue is rare in the existing literature. In terms of research methods, regression-based methods are basically used to decompose the contribution of different factors to income inequality. For example, Oaxaca (1973) and Blinder (1973) first used regression methods to study the income gap between male and female employees and its reason and quantified the contribution of work experience, education and other factors to wage income inequality. Fields and Yoo (2000) and Fields (2003) used a semilogarithmic income decision function to study the effects of various factors on the income gap of South Korea and the United States. Then, there is an approach of Shapley value decomposition proposed by Shorrocks (1999), which is suitable for the decomposition of arbitrary inequality indices and fully considers the processing of constant terms and residuals in regression. On this basis, Wan (2004), Wan and Zhou (2005) and Wan Guanghua (2006) conducted pioneering research on China’s income inequality, providing a new perspective for the decomposition of income inequality. In a recent study, Chen et al. (2010) used the Gini coefficient, coefficient of variation, and Theil index as indicators of income disparity when studying the causes of income disparities in different industries in China’s cities and towns. The results of the regression analysis based on the 2002 data show that the contribution of party membership to income inequality in different industries is between 3 and 4%. Zhao Jianzhi and Lu Ming (2009) adopted the Sharpe value decomposition method and used the Gini coefficient, the Atkinson index and the generalized entropy index as indicators of the income gap when studying the contribution of the relationship to the rural income gap. Moreover, they found that the contribution of political capital (party membership) to the income gap of rural residents is 0.6%, which had little effect on it. Chen Yuyu et al. (2004) studied the regional factors and the effect of human capital on the income inequality of urban residents in China in the 1990s. According to this study, the contribution of party membership to income inequality was 1.52% in 1995 and 1.17% in 1999. Based on data from household surveys in 1995 and 2002, Yue Ximing et al. (2008) used the Gini coefficient and the Theil index as indicators to measure income inequality, analyzed the personal income gap and its changes in China, and found that the contribution of party membership to income inequality is small, but it has increased. They argued that this might be due to

1.3 Literature Review

43

an increase in the value of political capital and political relations or in the unnoticed ability linked to party membership. Morduch and Sicular (2002) used survey data on the income of farmers in 16 villages in Zouping County of Shandong Province from 1990 to 1993 and adopted the regression-based decomposition method to study the income gap in rural China. According to the study, the decomposition of taking the Gini coefficient as a measure of the income gap shows that the contribution of party membership to income inequality is a positive number, but the influence is not significant, and the contribution of cadre identity to income inequality is 4.5%. Another study by Morduch and Sicular (2000) showed that in rural China, the income advantage of party membership is not significant, but the income advantage of village cadres is nearly 20% higher than the average income. Meng (2004) used a regression-based decomposition method. The results show that in Chinese cities, the contribution of party membership to income inequality in 1988, 1995, and 1999 was 0.75, 2.4, and 1.9%, respectively. The contribution of change was 27.98% from 1998 to 1995 and −12.72% from 1995 to 1999.

1.3.3.3

The Impact of Corruption on Income Inequality

Chen Gang and Li Shu (2010) used panel data from 30 provinces and cities in China (excluding Tibet) from 2000 to 2007 to study the impact of corruption on income inequality. The Gini coefficient, Theil index, coefficient of variation, and logarithmic income variation coefficient are used as indicators to measure income inequality. The ratio of the number of cases of corruption, bribery, dereliction of duty and the number of public officials and the ratio of the number of people involved to the number of public officials per year were used as indicators to measure the level of corruption in China. The study found that corruption is the main reason for the income gap between urban residents. Chen zongsheng and zhou yunbo (2001) measured illegal abnormal income and incorporated it into normal income; the calculated Gini coefficient rose from 0.403 to 0.493, and the degree of income inequality increased by 22.49%, indicating that illegal abnormal income widened the income gap. Tanzi (1995) argued that corruption distorts the government’s redistributive function. When groups are closely associated with government officials, most of these groups belong to the high-income class and sometimes occupy the relevant benefits gained from corruption. The research of Blackburn and Forgues-Puccio (2007) showed that the relationship between corruption and income disparity is positively related. When high-income people pay bribes to corrupt officials to evade taxes, the government’s tax revenue is reduced, thereby weakening the government’s redistribution functions. At the same time, the income gap between high-income and low-income people is greater than the income gap in a non-corrupt environment. According to the comparative study of the panel data of 11 OPEC countries and 32 OECD countries from 2000 to 2007, Mehrara et al. (2011) found that corruption has increased the degree of inequality in OPEC countries. This is a significant negative correlation between the relationships with inequality in OECD countries. Gupta et al.

44

1 Introduction

(2002) used a cross-country panel data study from 1980 to 1997 to find that corruption widened the income gap and exacerbated poverty. For every one standard deviation of the corruption index, the Gini coefficient increased by 4.4. It has also been found that corruption inhibits economic growth, distorts the tax system and public programs that benefit the poor, and worsens the gap of human capital, and increases uncertainty in the accumulation of factors. This is the main reason why corruption increases the income gap. They also believe that reducing corruption can effectively reduce income inequality and poverty. Li et al. (2000) and Chong and Calderón (2000) found that there is an inverse U-shaped curve between corruption and income disparity. There is a positive correlation between corruption and income disparity in high-income countries and a negative correlation in low-income countries. Based on OECD data, Asia, Africa, and Latin America, Gymiah-Brempong (2002, 2006) believed that corruption is an important factor in expanding the income gap. According to data in the US, Glaeser and Saks (2006) and Dincer and Gunalp (2008) confirmed this conclusion. Ullah and Ahmad (2007) found through a multinational panel study of 71 developed and developing countries from 1984 to 2002 that corruption not only affects income growth but also affects income distribution and increases income inequality.

1.3.3.4

Administrative Power Corruption and Income Distribution Order

Chen Zongsheng and Zhou Libo (2001) studied the impact of illegal abnormal income on the income difference of residents. Their empirical analysis showed that illegal and abnormal income had an obvious influence on the income gap of residents, so illegal and abnormal income is the root cause of the abnormal expansion of the income gap of residents in China at this stage, which is one of the biggest public concerns. Zhu Guanglei’s (2001) study showed that the separation between “the official” and “the civilian” and the separation between “management” and “being managed” are the social and historical roots of corruption that have prevailed in various countries for thousands of years. The long-term departure with microeconomy and social management activities and society and the misplacement of government functions are the realistic roots of corruption in China. Therefore, the effective transformation of government functions is the key to controlling corruption from the source. Through institutional and policy innovations, government functions are effectively transformed, and market-oriented microeconomic and social management activities should be controlled to society so that corruption can be lost to the social foundation of existence. Jiang Hongkun (2005) proposed that the transformation of government functions should be accelerated, which can prevent corruption from the source, to build “efficient government”, “law-based government”, “responsible government” and “satisfactory government”. Xu Wen (2007) believed that the dislocation of government functions is the soil for corruption. Therefore, anticorruption efforts need to transform government functions and control corruption from the source. Guo Mengshu (2007) believed that the more common and superior rent-seeking method in

1.3 Literature Review

45

modern society is to use administrative and legal means to safeguard or redistribute vested economic interests. Therefore, government functions must be accelerated to effectively curb institutional corruption. Jiang Huafeng (2007) believed that the insufficient transformation of government functions leads to institutional corruption. Therefore, through the establishment of the law-based government and the regulation of government functions, the transparency of information and the restriction of power are three important ways to promote anticorruption through the transformation of government functions. Wang Yun (2008) believed that the rise of the bureaucratic privilege stratum and their plundering of money are the reasons for the disparity between the rich and the poor and many other social problems in China. Those rich and powerful people will also be the biggest threat to our country.

1.3.4 Research on Recessive Economy 1.3.4.1

Measurement of Recessive Economy

Participants in recessive economic activities do not always want to be exposed to the public, let alone the income they receive from these activities. Therefore, for official statistical departments and researchers, it is difficult to obtain accurate information on recessive economic activities and how they affect the commodity and labor markets. Although it is difficult to measure the size of the recessive economy, there are still many scholars who have made unremitting efforts in this respect, and they have achieved many valuable results by adopting different measurement methods. The methods of measuring the size of a recessive economy can usually be divided into direct methods and indirect methods. The direct method is based on the collection of direct information, such as the undeclared income of individuals or enterprises. The collection of information mainly includes tax auditing and direct investigation. The indirect method is based on the traces left in official macroeconomic statistics to determine the size of the recessive economy. These methods can be broadly classified into six types: the differential method of national income and expenditure, the differential method of official statistics and actual labor, the currency trading method, the money demand method, the volume input or power consumption method, the structural equation modeling method or the MIMIC method. They all have their own advantages and disadvantages, and Schneider and Enste (2000) and Schneider (2005) made a very comprehensive comment on these methods, and it need not be repeated here. Currently, the money demand method and the structural equation modeling method in the indirect method are the two most commonly used. Cagan (1958) first proposed the monetary demand method, which is widely used to measure the size of recessive economies, and he believed that the increase in underground economic activity would increase the demand for money, so he used this method to estimate the underground economy of the United States from 1919 to 1955. Tanzi (1983) further developed the Cagan’s method. Under this approach, it usually assumes that the recessive economy is traded only through cash because cash

46

1 Introduction

does not leave any traces to the regulator. In addition, he also assumed that the tax burden is the main reason people participate in implicit transactions because people can at least avoid taxation to a certain extent. Therefore, if the tax base is given, an increase or decrease in the tax rate will lead to more or less recessive economic activities, thereby boosting or reducing the demand for money (Pickhardt and Pons 2006). Although the money demand method to measure the size of the recessive economy has been widely used in countries around the world, many researchers have criticized the assumptions of this method. For example, (i) taxation is the only cause of a recessive economy; (ii) only cash payment is used in recessive economic activities; (iii) the speed of currency circulation is equal in the official economy and recessive economy; and (iv) there is no recessive economy in the base year. If this assumption is abandoned, it means that the size of the recessive economy should be adjusted upward (Schneider 2005). In response to the above criticism, many researchers have confirmed this through empirical analysis. Schneider and Enste (2000) and Dell’Anno (2007) argue that the tax burden is an important reason for implicit economic activity but not the only reason. In addition, government regulations, self-employment, unemployment rate and other factors will also have an impact on the recessive economy. According to Isachsen and Strom (1985), the proportion of cash payments in Norway’s recessive economy in 1980 was approximately 80%. Ahumada (2007) believes that the velocity of money in official and recessive economies will be equal only when the income elasticity of money demand is equal to one. Frey and Pommerehne (1984) and Thomas (1986) believe that the parameters in Tanzi’s (1983) study are unstable. Structural equation models are often used to discover the relationship between indicators of non-observable and observable variables and causal variables. These models are widely used in almost all research related to sociology, marketing, and economics. Although Zellner (1970) has already begun to explore structural equation models, the MIMIC model was not accepted until the publication of Jöreskog and Goldberger (1975). Frey and Weck-Hannemann (1984) were the first to apply this model to estimate the recessive economy as an unobservable variable in subsequent studies, and many economists used this method to perform statistical analysis of recessive economies. Representative studies include the study on Latin America by Loayza (1996), New Zealand by Giles (1999a, b), Asia-Pacific countries by Bajada and Schneider (2005), Spain by Alanon and Gomez-Antonio (2005), Portugal by Dell’ Anno (2007), the United States by Dell’Anno and Solomon’s (2008), 110 countries by Schneider (2005), India by Chaudhuri et al. (2006), and three Mediterranean countries of France, Greece and Spain by Dell’Anno (2007). Because different researchers focus on different issues, they may use different methods. Schneider and Enste (2000) and Schneider (2005) explained the advantages and disadvantages of various measurement methods in detail. Therefore, when we want to determine how large a country’s recessive economy is, policymakers should be cautious and use several methods to measure and compare.

1.3 Literature Review

1.3.4.2 i.

47

The Reasons That Affect the Recessive Economy

Tax burden

Schneider (2005), Dell’Anno and Schneider (2003), and Johnson et al. (1998) examined the impact of tax burdens on recessive economies. They found that the impact of taxation on recessive economies is very significant. For example, the main driving force of the recessive economy in Austria is direct taxation (including social security contributions), followed by regulation and complex taxation. Schneider (1986) obtained similar results in the study of three Nordic countries (Denmark, Norway, and Sweden), namely, the average direct tax rate, the average total tax rate (including direct and indirect taxes), and the marginal tax rate, which all have a significant positive impact on the recessive economy. ii.

Government regulation

Schneider and Enste (2000) believed that the reasons for influencing the recessive economy are multifaceted, with taxation and government regulation being the two main factors. Aigner et al. (1998) argued that government regulation has a large impact on the recessive economy. Johnson et al. (1998) argued that government regulation is a key factor in measuring recessive economies. The results of Ihrig and Moe (2004) showed that tax rates and government regulation can affect the size of recessive economies. Giles and Tedds (2002) confirmed that government regulation is positively related to a recessive economy. The results of Friedman (2000) showed that for every 1-point increase in the regulatory index (range: 1–5 points), the recessive economy increases by 10%. In addition, these studies have found that the existence of a hidden economy interferes with the implementation of government policies and suggests that the government should provide more incentives to replace various regulations and penalties so that people are far from a hidden economy (Giles, 1999a, b). iii.

Unemployment rate

The composition of the labor force in the recessive economy is diverse. Some of them are employees in the official economy who use part of their spare time or working hours to engage in recessive economic activities. Moreover, the other parts of them are retirees and illegal immigrants, minors and housewives (Tanzi, 1999). Tanzi (1999) and Giles and Tedds (2002) argued that because of the increasing number of unemployed people, they have more time to engage in work in recessive economies. Bajada’s (2005) study in Australia showed that the relationship between unemployment and a recessive economy is positively correlated. According to Dell’Anno and Solomon (2008), the relationship between the unemployment rate and recessive economy in the United States was also positively correlated from 1970 to 2004. iv.

Self-employment

Bordignon and Zanardi (1997) believe that self-employed people are more likely to evade taxes, which will cause a decrease in tax base and individual income tax.

48

1 Introduction

In addition, because of the imperfect internal management and external oversight mechanisms of private companies, they are more likely to hire informal workers than large companies, which means that the higher the self-employment rate is, the larger the size of the recessive economy, and vice versa. Studies by Dell’Anno and Schneider (2003) and Dell’ Anno and Gómez-Antonio (2007) found that selfemployment rates were significantly positively correlated with recessive economies. The rising ratio of individual and private employment to the total labor force has brought about more potential opportunities for invisible income. Several studies have shown that the income of self-employed people accounts for a higher percentage of total income, such as 35% in the UK (Pissarides and Weber 1989) and 12–24% in Canada (Schuetze 2002), and none of these incomes were reported. Schneider and Enste (2000) reviewed the size of the workforce in a recessive economy and the proportion of the recessive economy to GDP in some OECD countries. The results show that the size of the labor force in the recessive economy in countries such as Austria, Denmark, France, Germany and Spain is positively correlated with the size of the recessive economy.

1.3.4.3 I.

The Consequences of Recessive Economy

The Impact on Official Economy

In terms of the relationship between the recessive economy and official GDP, Schneider and Klingmair (2004) found that the relationship between the recessive economy and the official economy is pro-cyclical in developed countries and countercyclical in developing countries, according to the different stages of economic development in different countries. A study by Schneider and Enste (2000) showed that two-thirds of the income in the recessive economy contributes to the official economy immediately. Therefore, to a certain extent, the recessive economy can have a positive impact on the official economy, thereby increasing overall economic growth. The empirical results of Schneider (2005) showed that in developing countries, for every 1-percentage-point increase in the size of the recessive economy, the official GDP growth rate falls by 4.5–5.7%. In developed countries and countries with economies in transition, for every 1 percentage point increase in the size of the recessive economy. II.

The Impact on Income Inequality

Few people have studied the impact of recessive economies on income inequality. Rosser et al. (2000, 2003) found that the relationship between the size of recessive economic and income inequality is significantly positively correlated through the study on the relationship between the recessive economy of countries with transitional economies and income inequality. An increase in the size of the recessive economy will reduce tax revenue, which will weaken the government’s ability to redistribute in social security and other aspects, thus leading to greater income inequality. On

1.3 Literature Review

49

the other hand, income inequality further intensifies recessive economic activities. Studies in 66 countries by Ahmed et al. (2004) showed that a 10% increase in the size of the recessive economy will increase the Gini coefficient by 2%; in turn, if the Gini coefficient increases by 10%, the recessive economy will increase by 6 percentage points. Valentini (2009) studied the impact of the recessive economy on wage income in Italy from 1995 to 1998. The results showed that the size of the non-observed economy is negatively correlated with wage income. Lu Ming, Chen Yu and Wan Guanghua (2005) found that economic growth, fiscal expenditure on agricultural production by governments and urbanization have significantly narrowed the urban-rural income gap, while economic openness has widened the urban-rural income gap.

1.3.4.4

Measurements of Recessive Economic Scale

In the early days, Giles (1999a, b) combined the money demand method and a special form of structural equation model, namely, the multiple indicator multiple causes (MIMIC) method, to estimate the size of the recessive economy of New Zealand from 1968 to 1994. The study found that during this period, New Zealand’s recessive economy accounted for 6.8–11.3% of GDP. In a recent study, Schneider (2005) used the money demand method and the MIMIC method to measure the recessive economies of 110 countries from 1999 to 2000. The results showed that the recessive economies scale was 41, 38, and 17% in developing countries, countries with economies in transition, and OECD countries, respectively. Among them, the size of China’s recessive economy in 1999/2000 was 13.1%. The study of 17 countries in the Asia-Pacific region Bajada and Schneider (2005) showed that the recessive economies of these countries are on the rise, and the average size of the recessive economy in 17 countries has risen from 21.2% in 1989– 1990 to 23.1% in 1994–1995 and 26.3% in 2000–2001. Among them, the size of China’s recessive economy rose from 10.2% in 1994–1995 to 13.4% in 2000–2001. Dell’Anno and Solomon (2008) used the structural equation model to estimate the recessive economy of the United States according to US quarterly data from 1970 to 2004. The results show that the proportion of the recessive economy to GDP from 1970 to 1983 was 14–19% and then declined steadily to 7% in 2004. The study found that in the United States, the proportion of social security contributions to GDP, unemployment rate, and self-employment rate are the main determinants of the recessive economy. There is an unusual discovery that the tax burden has no significant impact on the recessive economy. Through the further study of Okun’s Law, they estimated the relationship between economic growth, recessive economy and unemployment rate and found that the relationship between recessive economy and unemployment rate is significantly positively correlated. Dell’Anno used the MIMIC method to study the recessive economy of three Mediterranean countries, France, Spain and Greece, from 1968 to 2002 and found that unemployment, tax burden and self-employment rate are the main reasons for the recessive economy in these countries. Among them, the proportion of France’s recessive economy in GDP

50

1 Introduction

fell from 36% in 1968 to 9% in 2002, while the proportion of Greece’s recessive economy rose from 8% in 1980 to 28% in 2002. The recessive economy of Spain was not significant before 1977 and then rose from 9 to 26% in 2002. Dell’Anno used the structural equation method to study the recessive economy of Portugal from 1977 to 2004 and found that the size of the recessive economy dropped from 29.6% in 1978 to 17.6% in 2004. Many scholars use the money demand model to measure the size of the recessive economy and have achieved many results. Tanzi (1983) used the money demand method to measure the underground economy of the United States from 1930 to 1980. It was found that the underground economy in 1980 accounted for 4.5–6.1% of the GNP. Schneider’s (1986) study of Denmark shows that the tax rate has a significant impact on the demand for money. He calculated the size of the recessive economy through different currency needs in Denmark from 1952 to 1982 and found that before 1977, the recessive economy accounted for 10% of the GNP, and in 1978-1982, the recessive economy was between 7 and 10%. Based on Tanzi’s study, Bhattachary (1990) proposed another form of money demand equation, using the quarterly data of the United Kingdom from 1960 to 1984 to estimate and test the recessive economic scale in the UK. The results of the study show that the size of the recessive economy in the United Kingdom increased from 7.4% in 1960 to 11.1% in 1977 and then began to decline to 7.6% in 1984. Pickhardt and Pons (2006) used the money demand method and the structural equation method and combined them to study the scale of the underground economy in Germany from 1980 to 2001. The results show that regardless of what method is used, the sizes of the estimated underground economy are basically similar and are increasing year by year, from 9.4% in 1980 to 15.27% in 2001. Based on the money demand equation, Hill and Kabir (2000) analyzed the data from 1978 to 1990 through vector autoregression, cointegration analysis, error correction mechanisms and other methods, forecasting that the underground economy in Canada accounted for between 0.1 and 0.7% of GDP in 1991–1995 after considering the change in the marginal direct tax rate. Mauleon and Sarda (2000) proposed a very concise underground economic estimation model based on the money demand equation after introducing the tax variable. This method does not need to assume that the size of the recessive economy in the base year is zero, and there is no need to assume that money circulates at the same speed in the underground economy as in the official economy. Pickhardt and Pons (2006) used the method proposed by Mauleon and Sarda (2000) to estimate that the size of the underground economy in Germany from 1980 to 2001 was between 9.4 and 15.7%. Chaudhuri et al. (2006) used the structural equation method to study the scale of the recessive economy of 14 states in India from 1974 to 1996. The results show that during this period, the average scale of the recessive economy increased from 13.1 to 26.3%. According to the cross-sectional survey data of Slovakia and the Czech Republic made by Orviska et al. (2006) in 2002, the recessive economies in 2002 were 23.2 and 21.8%, respectively. Schneider and Savasan (2007) used the dynamic MIMIC model to estimate the recessive economic scale of Turkey from 1999 to 2005 and found that direct taxes, indirect taxes, per capita GDP, and unemployment rates

1.3 Literature Review

51

were significantly positively correlated with the recessive economy, and its recessive economy scale rose from 31.1% in 1999 to 35.1% in 2005. Dobre and Alexandru (2009)’s study of Japan found that in 1980–2008, its recessive economy scaled was 8–11%, and the tax burden had a significant impact on the recessive economy. Wang (2006) used the MIMIC method to measure the size of the underground economy in Taiwan from 1961 to 2003. The results show that before 1998, Taiwan’s underground economy was between 11 and 13.1% and remained at 10.6–11.8% from 1989 to 2003. The logarithm of actual government consumption expenditure and inflation has a remarkably positive impact on the underground economy, but the tax burden has a negative impact on the underground economy when it accounts for 5%, and the relationship between the unemployment rate and crime rate and the underground economy is not significant. Many domestic researchers have used different methods to estimate the scale of China’s non-observed economy. For example, Xu Yuting and Li Jinchang (2007) estimated the ratio of non-observed economies to GDP since 1985 based on the actual data of China’s first economic census in 2004. Li Jianjun measured the size of China’s non-observed economy through the equilibrium model of national accounts and found that non-observed economies through two different methods account for 10–49% of GDP based on the equilibrium relationship model between savings, credit and international balance of payments. Xia Nanxin (2004) used the money demand method to estimate the size of China’s underground economy, which was 11% ~ 17% in 1995–2001. Wang Xiaolu (2007) conducted a survey on the income and expenditure of more than 2000 households of different income classes in dozens of cities and counties across the country in 2005–2006 and calculated that the invisible income that was not counted in the income of urban residents nationwide reached 4.8 trillion yuan.

1.3.5 On How to Standardize the Order of Income Distribution Experts and scholars in this area are more focused on the issue of income distribution, placing emphasis on on how to adjust and narrow the income gap, improve the income distribution system and promote the fair distribution of income. Research on how to standardize the order of income distribution is often involved, or some countermeasures are proposed sporadically. In summary, there are mainly the following aspects:

1.3.5.1

Improving the Income Distribution System

Yin Yanlin (2000) believed that standardizing the income distribution order must improve the mechanism by strengthening the supervision of income distribution,

52

1 Introduction

canceling and standardizing unreasonable income, and banning illegal income. Specific measures include standardizing the distribution behavior of the government according to law and resolutely stopping unauthorized fees collection, fine imposing, and expenses apportioning (the three illegalities) in various names; deepening the reform of state-owned enterprises and establishing a mechanism for maintaining and increasing the value of national assets; improving the wage distribution mechanism; and rectifying unreasonably high income. Zhao Zhenhua (2007) believed that standardizing the order of income distribution requires the establishment of a sound modern market system, which is the basis for standardizing the order of distribution. Yang Yiyong (2010), from the Institute of Social Development of the National Development and Reform Commission, believed that we should quantify targets of income distribution reform by setting hard indicators such as the urban-rural income gap ratio, the industry income gap ratio, and the Gini coefficient, which should all be controlled appropriately in the next five or ten years. Wang Xiaolu (2010) believed that gray income is the main reason for expanding the income gap of residents. Therefore, reforming the government management system is the key to solving the problem of income distribution. Yu Haifeng (2011) believed that it is very important to standardize the management and supervision of extrabudgetary funds and establish a transparent management system. Governments at all levels shall, in accordance with the provisions of laws and policies, gradually incorporate extra budgetary funds into the management of budgetary funds. Those who cannot be included in the budget temporarily should be incorporated into special accounts, whereby revenue and expenditure are managed separately. Ma Haitao (2011) believed that different policy objectives correspond to different policy instruments, and the effectiveness of policies is closely related to the strategy of implementing policies. It is recommended that the government choose policy strategies to narrow the income gap from the aspects of the mechanism of action and the conditions of action.

1.3.5.2

Standardizing Distribution Behavior of Income Distribution Subjects

Jin Lili and Bai Shuxiang (2006) wrote that the market, enterprises, and government are the three income distribution subjects under the condition of a socialist market economy. In reality, there are many irregular and unreasonable factors in the distribution behavior of these three income distribution entities. Therefore, measures should be taken to standardize the distribution behavior of the market, enterprises and government. In recent years, scholars have begun to notice the role and influence of administrative power on distribution and put forward solutions to address income distribution that should start with powers. Guo Zhichun (2006) believed that the main reason for the unfair income distribution was nonstandard operation of powers and deficient protection of rights. Therefore, we must start with protecting rights and standardizing powers as we seek to effectively address income distribution. Liu Xiaoxuan

1.3 Literature Review

53

(2007) believed that solving income inequality was not to expand the government’s power to allocate resources but to reduce the share of resources held by the government. This entails minimizing unnecessary taxes and fees, maximizing the share of private resources, and decentralizing the ownership of monopoly resources, fostering a diversified market pattern. We must focus on the root causes of the problem, that is, start with the reform of the power trading mechanism. Gao Yuan (2006) believed that the key to reforming the existing income distribution system was to adhere to marketization and return the power of resource allocation to the market.

1.3.5.3 i.

Improving Reform of Primary Distribution Filed

Deepening Reform of Income Distribution of Monopoly Industries

Scholars believe that deepening the reform of the income distribution of monopoly industries, such as streaming the price of essential factors of production, narrows the income gap between departments or industries. Jia Kang (2010) believed that stateowned enterprises (SOEs) should pay fatter dividends. Lin Yifu believes that we should focus on three areas, including finance, violation of property and monopoly industries, as we seek to accelerate the process of income distribution reform. Chi Fulin (2010) believed that it is necessary to formulate the implementation details of Anti-Monopoly Law, lower the threshold for monopoly industries, introduce competition, and regulate the investment field of state-owned enterprises (SOE). We should streamline the distribution pattern of resource products, change the situation where a few enterprises enjoy resource dividends, and carry out Employee Stock Ownership Plans to enable employees to enjoy the appreciation bonuses of enterprises. Su Hainan (2010) believed that the pacesetter of income distribution reform was state-owned enterprises that should regulate the distribution order, establish Remuneration Incentive and Restraint Mechanism and correctly handle the remuneration distribution relationship between senior executives, middle-level managers, general staff and front-line workers. Yu Haifeng (2011) believed that we should formulate control standards of wages for monopoly industries, cut off invisible but existing relationships between some industries and enterprises and governments, and eliminate the institutional basis of administrative monopoly fundamentally to strengthen the regulation of the income distribution of monopoly industries. ii.

Reforming the Wage System of Civil Servants and Institutions

Wei Shi (2006) believed that the emphasis on standardizing distribution order was the reform of the civil servants’ wage system, which was also an important opportunity for standardizing income distribution order. Lin Huo (2006) believed that the income distribution reform focused on reforming the civil servants’ wage system and raising the level of becoming urban residents entitled to minimum subsistence allowance, increasing the living standard for those who enjoy special care and placement. Zhao Zhenhua (2007) believed that it was necessary to further reform the civil servant income distribution system. The establishment of the civil servant

54

1 Introduction

income distribution system will promote a demonstration effect throughout society. We should standardize workers’ income from public institutions and improve the social security system. Jia Kang (2008) believed that the effective way to truly regulate the recessive income of civil servants was to bring all extra budgetary funds under government budget control, that is, to make the source of income and item of expenditure clear, put an end to extra budgetary funds, and to ensure that the income of civil servants was allocated uniformly by the state. Su Hainan (2010) believed that there was still a big resistance to solving the income distribution, that is, the constraints of some vested interest groups. During the reform and opening-up since 1978, some interest groups, being in a favorable position, obtained unreasonable and unfair income by abusing one’s administrative power, monopoly position and personnel status, exerting a huge impact on the formulation of policies and the publicity of public opinion. The solution to the problem of income distribution is naturally how to play against these vested interest groups.

1.3.5.4

Improving Reform on Second Distribution Field

Jia Kang (2007) believed that the government shouldered the responsibilities for maintaining justice, combining balance and fairness, lowering high income and ensuring a low income level in terms of individual income distribution. There are various reasons for the income disparity of members of society. Therefore, in terms of income distribution, the government should classify and adjust income disparities on the basis of the source of income. Wen Laicheng (2011) suggested that special funds for finance and transfer payments should be established to promote the wage growth of migrant workers and improve various service systems, including migrant workers and peasant merchants. Zhao Renwei (2010) pointed out that efforts should be made to promote redistribution. This entails further promoting transfer payments to the poor, rural areas and western regions, especially in the domains of social security, medical care and education. We should promote tax-sharing reform, which requires allocating more real estate taxes, value-added taxes and consumption taxes to local governments, making the financial and business authorities of central and local governments more transparent. Su Hainan (2010) believed that it was necessary to improve the macrocontrol system of income distribution, such as the minimum living security system for urban and rural residents, minimum wage system, unemployment insurance system, line of pay guidance, salary information investigation and release system, monopoly industry salary level regulation system, personal income tax collection and management system. Yu Bin (2010) believed that it was necessary to adjust nonproduction taxes to expand the scope of social security and frequently increase the transfer payment to residents. The government should increase physical transfers of consumption and the supply of public services in the process of adjusting government expenditures.

1.3 Literature Review

55

Chi Fulin (2010) believed that it was necessary to increase taxation of income and property, mainly including the inheritance tax levied in a timely manner, the perfect combination of comprehensive and classification of personal income tax system, the social security tax, and the social security income and expenditure shall be included in the national budget. Kuang Xiaoping and Yang Deqian (2011) believed that it was necessary to shift the tax system with turnover tax as the main body into a tax system that pays equal attention to both turnover and income tax. We should include some value-added tax items with small demand elasticity in the scope of tax exemption, expand the scope of consumption taxes and adjust the tax rate structure of consumption taxes. Liu Xiaobing (2011) believed that the adjustment of income distribution in China’s current fiscal and taxation policies has shown a trend of reverse regulation; therefore, improving the effect of income redistribution should downsize the total scale of government expenditure. We should transform the tax system into a model based on personal income tax and property tax. Yu Haifeng (2011) believed that the reform of the income distribution system should first intensify tax adjustment. Guided by the principle of a more simplified taxation system, broader tax allocation basis and lower tax rates, we reform the tax system. Second, we should optimize the tax structure and make the burden of taxation fairer. This entails increasing the proportion of direct tax as it seeks to better play the role of tax adjusting income distribution.

1.3.5.5

Comprehensively Using Law and Various Means

In regard to income distribution, many scholars believe that income distribution reform is a gigantic system engineering that entails various means of economy, law, market orientation and administration to address it from different aspects. Wu Jinglian (2004) believed that the current difference in income levels between residents and urban and rural areas in China has grown to such a dangerous degree that it might cause social instability. Therefore, the state must use laws and policy measures to effectively prevent public property from being obtained by some people in the process of ownership restructuring, avoiding the polarization of the initial possession of property. Su Hainan (2010) believed that it was necessary to establish a package of regulatory systems, including means of law, economy, information and administration, to better combat illegal income, protect legitimate income and regulate gray income. Wang Zhanyang (2010) believed that, unlike all previous reforms, the basic conditions for the success of China’s current distribution system reform required public participation featuring extensive, sustained and strong rather than self-isolation reform. We should mobilize the broad masses of ordinary people and ensure that it is the National People’s Congress that formulates legal systems related to the market economy, trade unions, minimum wages, social security and social insurance. Yu Haifeng (2011) believed that it was necessary to formulate a legal system to eliminate gray income and strengthen the development of a legal system that standardizes the behaviors of national civil servants and leaderships at different levels. We should strengthen the development of rules and regulations for regulating

56

1 Introduction

market conduct, establish and perfect various legal systems, and raise the costs of corruption, rent-seeking behaviors and other illegal behaviors, aiming at maintaining a normal distribution order. Yue Ying (2010) summarized and sorted out the hot issues in the field of income distribution research in China in recent years and summarized ten countermeasures and suggestions for deepening the reform of China’s income distribution system: we should adjust the structure of national income distribution and improve the income of workers. We should deepen the reform of the income distribution system for monopoly industries to narrow the unreasonable gap between them. We should adjust the threshold for personal income tax to reduce the tax burden on middle-income groups. We should raise the minimum wage to ensure basic living standards for lowincome workers. We should implement performance pay of public institutions. We should bridge the “dual-track gap” in the pension system. We should effectively raise farmers’ incomes to narrow the income gap between urban and rural areas. We should strictly standardize the order of income distribution to reverse the widening income gap. We should adjust the structure of government expenditure to increase support for low-income groups. We should work out our efforts to promote the third distribution focusing on social responsibilities that the rich will take to help the poor improve their living standard and play the regulatory role of the force of the nongovernment sectors. In addition, some scholars have also begun to study nongovernmental sectors, but the current research is more focused on the origin, characteristics, advantages, internal organization and management of nongovernmental sectors and the relationship with the government. However, studies connecting nongovernment sectors and income distribution, especially the standardization of income distribution, are rare. This may be a new perspective for academic circles to study the standardization of income distribution order in the future.

1.4 Framework of This Report 1.4.1 General Ideas of This Report The research ideas of this report are as follows: First, theoretically define the income distribution order → Expounding China current chaotic income distribution order by qualitative analysis → Through large-scale investigation and research, the quantitative analysis, on the basis of understanding the real situation of income distribution of Chinese residents, was used to study China residents’ income distribution order from three aspects including labor-capital relations, administrative power and recessive economy → From the perspective of economic transition, analyze the reasons that caused nonstandard China residents’ income distribution order from six aspects including government function transformation, ownership restructuring, central-local government relations, reform of distribution principles, factor liquidity

1.4 Framework of This Report

57

and incentive and constraints perspective → Drawing on the advanced concepts and practices of foreign countries in this field → Proposing a comprehensive and feasible reform plan to standardize the current income distribution order in China.

1.4.2 Analysis Framework of This Report The government, as the makers of the national economy operation rules and income redistribution policies, undoubtedly plays an important role in improving income distribution. In modern democracies, the government must first define its own boundary with the market, eliminate overstepping its authority and the absence of government management, and then coordinate and compensate for the lack of market resource allocation through the formulation of public policies, thereby achieving harmonious development between society and the economy. Based on the above research ideas, the overall analysis framework of this subject is constructed. Through a large number of empirical investigations, we grasp the real situation of the current income distribution chaos, deeply analyze the underlying causes of this situation, and then draw on the reality of our country and draw from advanced experience abroad. Finally, we provide a feasible and comprehensive improvement plan for the income distribution from the three levels of first distribution, second distribution and third distribution. Specifically, first, we should improve the market mechanism and perfect the macroeconomic environment, such as correctly handling labor-capital relations, restricting the over allocation of income for state-owned monopoly industries, formulating a scientific civil service pay system, establishing a unified and standardized labor market, restraining the marketization of public power and standardizing China’s property income, aiming at reaching the regulation equity of income distribution. Second, we should improve the government’s redistribution function, reduce public power intervention in the market and economy, severely eliminate all types of administrative corruption and classify and manage the recessive economy as we seek to achieve basic fair results. Third, we should improve the third distribution mechanism of society, encourage the development of nongovernment sectors and organizations, and provide multilevel public goods through nonprofit organizations on the basis of effective supervision of the government, as we seek to achieve social equity in income distribution.

1.4.3 Technical Route in This Report The overall principles of technical route design are collective design, respective group tasks, system integration, and pursue concerted and coordinated efforts to address problems, which is implemented in the following various research activities:

58

1.4.3.1

1 Introduction

Literature Review and Data Collection

To avoid low-level repetitive research, the members of the research work in groups and have their own respective tasks to take “dragnet” collection and collation of the key documents on the basis of the previous data collection. We arranged special personnel in the school library and college reference room to provide data collection and information collection services. On this basis, they should improve the quality of translation of foreign language materials, including materials of foreign mainstream government websites and academic websites.

1.4.3.2

First-Line Survey of Major Samples

To address the existing practical problems in society, we must return to reality and conduct field investigations to obtain reliable first-hand information. It is impossible for us to truly understand the reality of income distribution without large-scale, scientific empirical investigations; hence, it is impossible to carry out targeted institutional design. The core content of field research includes acquisition and processing of data, statistical analysis and refinement of key variables. One of the characteristics of this project is to send a group of members to Xinjiang, Beijing, Henan, Hubei, Zhejiang, Guangdong, Shenzhen, Guangxi and other provinces (municipalities, autonomous regions) and Shenyang to carry out a large amount of field research, thus fully grasping the first-hand information. At the same time, three all-dimensional large-scale questionnaire surveys were conducted on the income status of residents across the country. The causal link between the events was obtained through the indepth analysis and collation of the field research conducted throughout the country, especially the data obtained from the questionnaire survey.

1.4.3.3

Build an Analytical Framework and Deep Research on Core Topics

The determination of the analysis framework reflects whether research methods are scientific or not, and the core topic in the project is the breakthrough to fully resolve the problem. The research team will mobilize superior force with concerted efforts and coordination to research core topics. In particular, emphases, difficulties and analytical frameworks have been considered in a comprehensive and in-depth way many times. The research team finished the 13th draft of the outline and the ninth draft of the general report through the procedures of thinking, discussion, revision, improvement, rethinking, rediscussion, revision, refinement and multiparty argumentation regarding the outline of the general report of the project.

1.5 Research Focus and Characteristics of This Report

1.4.3.4

59

Empirical Test

All policy recommendations can be limited to the derivation of the theoretical model. The scientific and feasible policy recommendations can only be verified through practice. Therefore, the policy proposals proposed in this topic are all verified by practice or can basically pass the test. As far as the three questionnaires are concerned, guided by the premise of consistency and comparability, the modification and improvement of each questionnaire are conducted on the basis of scientific, practical, feasible policy conclusions and social feedback.

1.4.3.5

Feedback and Adjustment of Reforming Policies

The research team collected feedback from various departments and parties on the recommendations while conducting an empirical test on policy recommendations. They repeatedly analyzed and sorted out the feedback. On this basis, the policy recommendations were appropriately adjusted as they seek to make policy recommendations more effective and operative. Under the overall framework of standardizing income distribution order, the specific technical route of this report is shown in Fig. 1.1.

1.5 Research Focus and Characteristics of This Report 1.5.1 Research Focus Judging from the current realities of income distribution in China, the irrational income that truly causes public dissatisfaction and even intensifies social contradictions is concentrated in three aspects. First, strong capital and weak labor lead to primary distribution inequality. The strong capital and weak labor in labor-capital relationships lead to unreasonable distribution between labor and capital and labor disputes. Second, improper interference of public power with private rights has distorted the distribution relationship to some extent. For example, some government departments or public officials conduct power-money deals by using rulemaking rights or resource allocation rights and participate in market distribution to obtain improper income by abusing their public power, which even leads to distribution order chaos and seriously damages the image of the party and the government. The third is the recessive economy, which is an important aspect of the current irregular income distribution order. Some recessive economies are benign; for example, laidoff employees put up stands or stalls without business licenses, they may not pay taxes, but they are for the sake of their livelihood. Generally, they are not harmful to society. However, some groups, through illegal channels including counterfeiting fraud, tax evasion or smuggling or drug trafficking, seized social wealth and high

60

1 Introduction Theoretical definition of standardizing income distribution order

Current situation of China residents' income distribution

Theories and data of literature Official statistics

Survey data from field investigations

retrieval

income distribution chaos in China

Political administrative power and Labor-capital relationship

corruption

Recessive economy

Analysis on the causes of income distribution chaos: Based on transition perspective

the changing of government

ownership restructuring

functions

Reform of allocation principles

Relation between central and local

factor liquidity

Incentive and constraints

international experiences and lessons on standardizing income distribution order

the processing of labor-capital

Supervision and regulation of public

relationships

power

Prevention and management of recessive economy

the construction of income monitor

International experiences for

system

reference Policy recommendations on standardizing income distribution order

Construction of harmonious labor-capital relationships

Restrain public power and combat corruption Promote and standardize

Classified management of recessive economy

Fig. 1.1 The specific technical route of this report

development of nongovernment sectors

1.5 Research Focus and Characteristics of This Report

61

incomes from infringing on consumer rights, belong to a vicious recessive economy and are extremely harmful to the country and society. Based on this, this topic will define the core and key points of the income distribution order in three aspects, namely, labor-capital relationships, power economy and recessive economy.

1.5.2 Characteristics of Research Methods Guided by the principle of correlating theory with practices, this topic mainly adopted the methods of systematic analysis, comparative analysis methods, questionnaires and interviews, econometric analysis and model construction, especially the field research and multidisciplinary research methods regarding research methods.

1.5.2.1

Focus on Field Research

The research of this subject not only pays attention to the excavation and deepening of the theory but also pays great attention to the empirical research on the reality of China’s income distribution order, focusing on the field investigation and the collection of first-hand information. One of the highlights of this research report is that the research on the subject is based on the field research of the team members and three large-scale questionnaires whose empirical analysis of the results has been highly evaluated by the whole community, and the results of research has made huge social influence. In the summer of 2008, our members went to Beijing, Xinjiang, Guangdong and other places to conduct a large amount of field research and study. They conducted three large-scale questionnaire surveys on the income of urban and rural residents in 31 provinces, municipalities and autonomous regions in the summer of 2008 and the Spring Festival of 2010 and 2011, taking advantage of the opportunity for students to return home. The survey involves the income status of various sources of urban and rural residents across the country. Many field investigations have played an important role in obtaining a clear picture of the income distribution of national residents. At the same time, the research team conducted detailed data processing and statistical analysis on the valid questionnaires recovered. The measurement and model analysis of the questionnaire survey and its results have been highly praised by leaders at all levels, scholars and experts from the National People’s Congress, the Ministry of Finance, the State Administration of Taxation, the Chinese Academy of Sciences and Hubei Province, producing good social impact.

1.5.2.2

Multidisciplinary Research

This subject belongs to interdisciplinary, cross-school and cross-disciplinary research. The subject studies the income distribution order focusing on labor-capital

62

1 Introduction

relationships, public and private power, recessive and explicit economies through questionnaire surveys and statistical data analysis. The research covers economics, politics, law, sociology, culture, religion and other fields. The research methods comprehensively apply knowledge from the perspectives of economics, politics, sociology, culturology and ethics. In-depth and systematic research on the fairness of the starting point, process, the results, rules, procedures and society of residents’ income distribution has been carried out. Because the methods adopted in the research are suitable for the needs of this topic, the research of this subject is not only limited to the study of income parity but also truly turned to the study of income distribution order.

1.5.3 Main Innovation Viewpoints 1.5.3.1

Theoretical Definition of “Income” and “Income Distribution Order”

First, various incomes are sorted out and classified. The academic classification of income is represented by five-color theory and source theory, which have intersections of income and are slightly rough. This topic divides income into two categories, normal income and abnormal income, and each type of income is subdivided. We conducted detailed collation and classification of income from the sub-classification, characteristics, legality, publicity, color and corresponding examples of each type of income. This kind of classification, compared with the original academic classification, is undoubtedly more specific, detailed and rigorous, which is more suitable for income realities and more consistent with people’s views on various types of income. Second, the connotation of the “income distribution order” is clearly defined. Judging from the existing research, neither the theory research departments nor the practice departments have a specific, clear and unified definition of the “income distribution order.” This topic believes that the income distribution order refers to the distribution behavior of the income distribution subject and the state of its results, that is, the mechanism of income formation, the channels and the path of formation. The income distribution order can be examined from both static and dynamic perspectives. First, from the static perspective, the income distribution order is expressed as the income distribution pattern, that is, the income distribution relationship among the distribution entities, the income distribution structure and the income gap. Second, from the dynamic perspective, the income distribution order is expressed as the formation mechanism of income, that is, whether the income distribution rules and the distribution process are standardized, reasonable and orderly. The key to studying the normative income distribution order is to understand what is the formation mechanism of income? What is wrong with the income distribution process? A normal income distribution order requires fair, just, reasonable, and

1.5 Research Focus and Characteristics of This Report

63

ensures that everyone can get what they deserve. If the process of income formation violates such requirements, such income distribution is unfair and unreasonable. On the surface, China’s current income distribution problem is understood as the large gap between residential incomes. The essence of this problem is that the random income distribution and chaotic income distribution order lead to ever-worsening income distribution issues. There is something wrong with the formation mechanism of income, thus resulting in an unreasonable income distribution pattern. Manifestation of it includes the following: unreasonable labor-capital relationships caused by unequal power among capital and labor, endless issues including power economy, corruption, and rent-seeking caused by vague power limits between government and market. Third, the underground economy and the recessive economy escaped the long arm the rules, thus leading to the prevalence of the underground economy and the recessive economy. Therefore, this topic believes that the three aspects of labor-capital relations, administrative power intervention in the economy and recessive economy, are the key to China’s income distribution order chaos in the current period of economic transformation. Moreover, these three aspects distort other formation mechanisms, such as birth, mobility, choice and effort, related to the income distribution of residents. Residents’ income distribution differentials will be reasonable and normal in the process of economic development if there is no confusion about the disorder of income distribution caused by these three aspects. It is the problem of the formation mechanism and the formation process of income that leads to the unfair distribution of income, making the income distribution pattern unreasonable. This topic, based on the definition of the connotation of the income distribution order, focuses on the formation mechanism, formation channels and path of income in terms of the dynamic perspective in the process of research, which emphasizes the formation process rather than the results of income.

1.5.3.2

Challenging Some Traditional Mainstream Views

The traditional mainstream view was that the market economy would inevitably bring about polarization, which requires government intervention. However, this topic believes that dialectical analysis should be conducted from the perspective of income distribution. Market mechanisms are not necessarily more likely to lead to polarization than other mechanisms. In contrast, government intervention does not necessarily eliminate polarization. Therefore, we need to re-examine the role of government and market in income distribution and redefine the principles and boundaries of government intervention. In fact, the market only has a funds threshold at the level of income distribution. However, there will be other thresholds, including funds thresholds, in the case of government intervention. The poor will not be able to eliminate poverty if there are too many thresholds. Therefore, the market is pro-poor to some extent, that is, the market is a friend of the poor. Marx described the real pure public ownership condition where the income distribution gap cannot be too large. However, the income

64

1 Introduction

distribution gap can be large enough to last under the pure private ownership system. In current capitalist countries, the existing problems of the income distribution gap, differentiation of property rights and intensified social contradictions drive the capitalist government to purse self-improvement as it seeks to promote its development. These countries, by perfecting their social welfare system and expanding the proportion of the middle class, narrow the income distribution gap, thus greatly overcoming the existing contradiction of the capital society. However, the Chinese government has done many things in income distribution that do not necessarily play a role in narrowing the residential income gap. For example, the means of tax regulation that is frequently used by the Chinese government in the process of regulating income distribution. However, the reality in our country is that the adjustment of tax to income distribution results in reverse regulation in some aspects. We believe that China’s income distribution problem mainly stems from the field of primary distribution rather than the realm of second distribution, which also shows that the improvement of the market mechanism is a more fundamental choice.

1.5.3.3

Analyzing the Causes of the Income Distribution Chaos on the Basis of New Perspective and Naturally, Derive the Solution to Standardize the Income Distribution Order

On the one hand, based on the perspective of economic transformation, this report elaborates on labor-capital relationships, political power and corruption and the formation of a recessive economy from the following six aspects: the transformation of government functions, the adjustment of ownership structure, the relationship between central and local governments, the reform of allocation principles, factor liquidity and incentive and constraint mechanisms for people. The report comprehensively analyzed the reasons for the nonstandardized income distribution order of Chinese residents and provided a research framework and unique perspective for analyzing the income distribution order. On the other hand, it is natural to derive countermeasures and suggestions for standardizing the income distribution order on the basis of an in-depth analysis of the causes of the income distribution chaos. This topic puts forward some countermeasures to correctly deal with labor-capital relations, restrict and supervise public power and classify and manage the recessive economy from many aspects. At the same time, it also proposed promoting and standardizing the development of the nongovernment sector. In regard to the countermeasures to standardize the income distribution order, we must pay special attention to political system reform, strengthen democratic political construction, persist in reform and opening up and give full play to the role of market mechanisms. It is worth noting that this report is a groundbreaking study. As far as the income distribution order is concerned, no one else has yet carried out such a special, systematic and in-depth research on relevant issues like corruption, political power, capital exploitation of the labor and recessive economy. Although we have made some

References

65

preliminary attempts to standardize the income distribution order, there are still some problems and deficiencies that need to be addressed by more people. We will continue to strive for self-improvement and perfect research results.

References Chinese References An Tifu and Jiang Zhen, Adjusting the National Income Distribution Pattern and Increasing the Proportion of Residents’ Distribution, Finance and Trade Economy, No. 7, 2009. Bai Chong’en and Qian Zhenjie, Who Is Crowding Out Residents’ Income—An Analysis of China’s National Income Distribution Pattern, China Social Science, No. 5, 2009. Be Duoguang and Luo Feng, Development and Application of Capital Flow Analysis Method, Economic Research, No. 2, 2006. Chang Xinghua and Li Wei, The Measurement Results of China’s National Income Distribution Pattern and Adjustment Measures, Macroeconomic Research, No. 9, 2009. Cheng yonghong, The Evolution of the National Overall Gini Coefficient and Its Urban-Rural Decomposition Since the Reform, China Social Science, No. 4, 2007. Chi Fulin, Reform of Income Distribution with an Eye on the Transformation of Development Mode, China Economic Times, June 21, 2010. Guo Qingsong, Management of Labor Relations in Enterprises, Nankai University Press, 2001. Hong Xingjian, A New Formula for Decomposing the Subgroups of Gini Coefficient—Also on the Urban-Rural Decomposition of the Overall Gini Coefficient in China, Economics (Quarterly), Vol. 8, No. 1, 2008. Huang, Mengfu and Hu, Deping, eds: Report on the Development of China’s Private Economy No. l, Social Science Literature Press, 2005. Jia Kang, On the Government’s Classification and Adjustment of Income Distribution to Maintain Justice and Balance, Foreign Taxation, No. 8, 2007. Jia Kang, The Proportion of Dividends Paid by State-Owned Enterprises Should Be Adjusted Upward, Shanghai State-Owned Assets, No. 11, 2010. Li Daokui, Liu Linlin, and Wang Hongling, The U-Shaped Law of the Evolution of Labor Share in GDP, Economic Research, No. 1, 2009. Wang Yunwu, Evaluation of the Swedish Labor Employment System and Implications, Journal of Southwest University for Nationalities, No. 2, 2006. Wang Zhanyang, The Success of the Reform of the Distribution System Depends on Public Participation, Study Times, No. 8, 2010. Wang Zuxiang, Zhang Kui, and Meng Yong, A Study on the Estimation of Gini Coefficient in China, Economic Review, No. 3, 2009.

English References Ahmed, E., Rosser, J.B., and Rosser, M.V., 2004, Income Inequality, Corruption, and the NonObserved Economy: A Global Perspective, presented at the conference: New Economic Windows 2004: Complexity Hints for Economic Policy, Salerno, Italy.

66

1 Introduction

Aigner, D., Schneider, F., Ghosh, D., 1998, Me and My Shadow: Estimating the Size of the US Underground Economy from Time Series Data, in: W. Barnett, E. Berndt, H. White (Eds.), Dynamic Econometric Modeling, Cambridge University Press, Cambridge, MA. Arrow, K.J., Chenery, H.B., Minhas, B.S., and Solow, R.M., 1961, Capital-Labor Substitution and Economic Efficiency, Review of Economics and Statistics, Vol. 43, No. 3. Bajada, C., 2005, Unemployment and the Underground Economy in Australia, Applied Economics, Vol. 37. Bajada, C. and Schneider, F., 2005, The Shadow Economic of the Asia-Pacific, Pacific Economic Review, Vol. 10, No. 3. Barro, R.J. and Sala-i-Martin, X., 2004, Economic Growth. 2nd Edition, MIT Press, Cambridge, MA. Bhattachary, D.K., 1990, An Econometric Method of Estimating the ‘Hidden Economy’, United Kingdom (1960–1984): Estimates and Test, The Economic Journal, Vol. 100, No. 402. Bordignon, M. and Zanardi, A., 1997, Tax Evasion in Italy, Giornale degli Economisti e Annali di Economia, Vol. 56. Chaudhuri, K., Schneider, F., and Chattopadhyay, S., 2006, The Size and Development of the Shadow Economy: An Empirical Investigation from States of India, Journal of Development Economics, Vol. 80. Dell’Anno, R. and Schneider, F., 2003, The Shadow Economy of Italy and Other OECD Countries: What Do We Know? Journal of Public Finance and Public Choice, Vol. 21. Dell’Anno, R. and Solomon, O.H., 2008, Shadow Economy and Unemployment Rate in USA: Is There a Structural Relationship? An Empirical Analysis, Applied Economics, Vol. 40. Dobre, I. and Alexandru, A., 2009, Estimating the Size of the Shadow Economy in Japan: A Structural Model with Latent Variables, Economic Computation and Economic Cybernetics Studies and Research, Vol. 1. Giles, D.E.A., 1999a, Measuring the Hidden Economy: Implications for Econometric Modeling, The Economic Journal, Vol. 109. Giles, D.E.A., 1999b, Modelling the Hidden Economy and the Tax-Gap in New Zealand, Empirical Economics, Vol. 24. Giles, D.E.A. and Tedds, L.M., 2002, Taxes and the Canadian Underground Economy, Canadian Tax Paper No. 106, Canadian Tax Foundation, Toronto/Ontario. Guo, J.T. and Lansing, K.J., 2009, Capital-Labour Substitution and Equilibrium Indeterminacy, Journal of Economic Dynamics and Control, Vol. 33, No. 12. Hill, R. and Kabir, M., 2000, Currency Demand and the Growth of the Underground Economy in Canada, 1991–1995, Applied Economics, Vol. 32. Ihrig, J. and Moe, K., 2004, Lurking in the Shadows: The Informal Sector and Government Policy, Journal Development Economic, Vol. 73. Johnson, S., Kaufmann, D., and Zoido-Lobatón, P., 1998, Regulatory Discretion and the Unofficial Economy, The American Economic Review, Vol. 88. Kaas, L. and von Thadden, L., 2003, Unemployment, Factor Substitution, and Capital Formation, German Economic Review, Vol.4. Mauleon, I. and Sarda, J., 2000, Income Measurement and Comparisons, International Advances in Economic Research, Vol. 6. Nee, V., 1989, A Theory of Market Transition: From Redistribution to Market in State Socialism, American Sociological Review, Vol. 54, No. 5. Nee, V., 1996, The Emergence of a Market Society: Changing Mechanisms of Stratification in China, American Journal of Sociology, Vol. 101, No. 4. Orviska, M., Caplanova, A., Medved, J., and Hudson, J., 2006, A Cross-Section Approach to Measuring the Shadow Economy, Journal of Policy Modeling, Vol. 28. Pickhardt, M. and Pons, J.S., 2006, Size and Scope of the Underground Economy in Germany, Applied Economics, Vol. 38. Pissarides, C. and Weber, G., 1989, An Expenditure-Based Estimate of Britain’s Black Economy, Journal of Public Economics, Vol. 39.

References

67

Rainer Klump and Olivier D. La Grandville, 2000, Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions, American Economic Review, Vol. 90, No. 1. Rosser, J.B., Rosser, M.V., and Ahmed, E., 2000, Income Inequality and the Informal Economy in Transitions Economies, Journal of Comparative Economics, Vol. 28, No. 1. Rosser, J. B., Rosser, M. V., and Ahmed, E., 2003, Multiple Unofficial Economy Equilibria and Income Distribution Dynamics in Systemic Transition, Journal of Post Keynesian Economics, Vol. 25, No. 3. Saam, M., 2008, Openness to Trade as a Determinant of the Macroeconomic Elasticity of Substitution, Journal of Macroeconomics, Vol. 30. Schneider, F. and Klingmair, R., 2004, Shadow Economies Around the World: What Do We Know? Working Paper, 0403, (April), Department of Economics, Johannes Kepler University of Linz, Austria. Schneider, F., 1986, Estimating the Size of the Danish Shadow Economy Using the Currency Demand Approach: An attempt, The Scandinavian Journal of Economics, Vol. 88. Schneider, F., 2005, Shadow Economies Around the World: What Do We Really Know? European Journal of Political Economy, Vol. 21. Schneider, F. and Enste, D.H., 2000, Shadow Economies: Size, Causes, and Consequences, Journal of Economic Literature, Vol. 38. Schneider, C.S. and Savasan, F., 2007, Dymimic Estimates of the Size of Shadow Economies of Turkey and of Her Neighbouring Countries, International Research Journal of Finance and Economics, No. 9. Schuetze, H.J. 2002, Profiles of Tax Non-Compliance Among the Self-Employed in Canada: 1969 to 1992, Canadian Public Policy, Vol. 28. Solow, R., 1956, A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, Vol. 70, No. 1. Tanzi, V., 1983, The Underground Economy in the United States: Annual Estimates, 1930–1980, IMF Staff Papers, Vol. 30, No. 22. Tanzi, V., 1999, Uses and Abuses of Estimates of the Underground Economy, Economic Journal, Vol. 109. Valentini, E., 2009, Underground Economy, Evasion and Inequality, International Economic Journal, Vol. 23, No. 2. Ventura, J., 1997, Growth and Interdependence, Quarterly Journal of Economics, Vol. 62. World Bank, 1997, Sharing Rising Incomes-Disparities in China, Washington, DC.

Chapter 2

An Analysis of the Current Situation of Income Distribution in China

China’s economy has grown rapidly after the reform and opening up. Accordingly, the residents’ income kept rising during the period of economic transition from a planned system to a market-oriented system. At the same time, with the deepening innovation and improvement of China’s income distribution system, the pattern of national income distribution has changed considerably, so the residents’ income gap has continued to expand between urban and rural areas and among different regions and industries. Some problems have aroused growing attention in recent years, such as the declining proportion of wages in the primary distribution of income, decreasing proportion of residents’ disposable income in national income, widening income gap, industry monopolies, power rent-seeking, chaotic order of income distribution, skewing national income distribution to the government, business, urban areas and the minorities. Therefore, we need to conduct an in-depth analysis of the current income distribution condition and causes of these problems. This chapter first reviews the history of the reform of China’s income distribution system, then analyzes the pattern of primary distribution and redistribution of national income, and finally combines the relevant data of national residents’ income sample questionnaire in 2008, 2010, and 2011 to analyze residents’ income gap between urban and rural areas, and among different regions and industries. Aiming at improving the income distribution system and standardizing the income distribution order, we hope to find problems in national income distribution and residents’ income distribution to solve them under the requirements of China’s income distribution system reform.

2.1 A Review of China’s Reform on Income Distribution Because of the planned economy in China before the reform and opening up in 1978, the income distribution is relatively fair and shows a strong equalitarianism liability with a Gini coefficient of 0.16 in cities and slightly higher in rural areas, © Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_2

69

70

2 An Analysis of the Current Situation of Income …

which account for 0.21–0.24 according to most scholars. Although the degree of income equalization is high, egalitarianism seriously hinders the implementation of the principle of distribution according to work, which goes against social productivity, resulting in slow economic growth and low economic efficiency. To break egalitarianism and improve economic efficiency to promote economic growth, we must reform our income distribution system by implementing differentiated personal income distribution to stimulate and restrict economic participants. Looking at the changes in the income distribution system since China’s reform and opening up and the series of reform measures adopted in income distribution, they all have a very important role in mobilizing the enthusiasm of the people and promoting the rapid development of social productivity. In this section, we review and sort out the changes in China’s income distribution system based on the important documents proposed by the National Congresses of the Communist Party of China since 1978 with a focus on the principles of income distribution, efficiency and fairness.

2.1.1 Distribution According to Work: Let Some People Get Rich First (1978–1984) In December 1978, the Third Plenary Session of the Eleventh Central Committee of the Communist Party of China required rural economic organizations at all levels to conscientiously overcome egalitarianism by calculating compensation according to the quantity and quality of labor under the socialist principle of distribution according to work. Subsequently, the household responsibility system for joint production was implemented in the countryside, which broke with egalitarianism and the practice of having everyone “eat from the same big pot”, thus mobilizing the enthusiasm of the majority of farmers to greatly raise farmers’ income. In October 1984, the decision of the CPC Central Committee on reform of the economic system adopted by the Third Plenary Session of the Twelfth Central Committee of the Party pointed out that it is necessary to further implement the socialist principle of distribution according to work by allowing and encouraging some regions, enterprises, people get rich first rely on hard work, and those who get rich first can then help others, so that common prosperity can be achieved. In addition, the enterprise can determine the employee bonus according to the operating conditions so that the wages and bonuses of the employees are matched with the economic benefits of the enterprise. Within the enterprise, it is necessary to widen the wage gap to fully reflect reward for the excellent and punishment the inferior, more pay for more work, and manifest the differences among various forms of labors, such as mental and physical, complex and simple, skilled labor and unskilled, and heavy and light. State organs and institutions must also reform the wage system and follow the principle of reform in which the wages of employees are closely linked to their responsibilities.

2.1 A Review of China’s Reform on Income Distribution

71

2.1.2 Distribution Mainly According to Work, Supplemented with Other Modes (1987–1992) In October 1987, the report of “moving forward along the road of socialism with Chinese characteristics” at the 13th National Congress of the Communist Party of China stated that we must persist in the principle of “distribution according to work, and supplemented with other methods” and stressed that “the distribution methods of the primary stage of socialism cannot be single”. Since the reform and opening up, based on the principle of distribution according to work, we have been gradually relaxed restrictions on other distribution methods. Apart from labor remuneration, creditor rights should be allowed to obtain debt interest, shares to receive dividends, business operators to receive risk reward, private owners to obtain part of nonlabor income, as long as it is legal. We must encourage great businesses and individuals who work honestly to get rich first. It is necessary for us to rationally widen the income gap but to avoid disparity between the rich and the poor to reflect social equity on the premise of promoting efficiency. We must effectively regulate the excessively high income of individuals and severely sanction behaviors that seek to make huge profits through illegal means in accordance with the law. In October 1992, the report of Accelerating the Reform, the Opening to the Outside World and the Drive for Modernization, to Achieve Greater Successes in Building Socialism with Chinese Characteristics stated that “we must adhere to a system that distribution according to work as the main form, supplemented with other modes, give priority to efficiency with due consideration to fairness. We should not only encourage advancement, promote efficiency, rationally widen the income gap but also prevent polarization and gradually realize common prosperity by using market means and various other adjustment methods.”

2.1.3 A Diversified Distribution System with Distribution According to Work as the Main Form After the reform and opening up in 1978, the reform of the distribution system according to work played a significant role in mobilizing the enthusiasm of the majority of workers by breaking egalitarianism, widening the income distribution gap. However, the fundamental reform of China’s income distribution system came after the Third Plenary Session of the Fourteenth Central Committee of the Party when the establishment of a socialist market economic system was proposed. In November 1993, the Third Plenary Session of the Fourteenth Central Committee of the Party adopted the Decision of the Central Committee of the Communist Party of China on Several Issues in Establishing a Socialist Market Economy System, stating that “the income distribution must be based on a diversified distribution system with distribution according to work as the main form”.

72

2 An Analysis of the Current Situation of Income …

The policies of income distribution such as adhering to distribution according to work remains the predominant mode and coexisting with various other modes, encouraging the productive elements, such as capital, technology and so on to take part in the income distribution, combining distribution according to work with distribution according to production factors, and 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, were proposed in important meetings like the 15th National Congress of the CPC in in September 1997, 16th National Congress of the CPC in in in November 2002, 17th National Congress of the CPC in October 2007, and Fifth Plenary Session of the Seventeenth Central Committee in October 2010. In the reform of income distribution, the relationship between efficiency and fairness must be handled properly. Major issues have been proposed in some meetings about further handling the relationship between efficiency and fairness: from giving priority to efficiency with due consideration to fairness in the Third Plenary Session of the Fourteenth Central Committee; to the first time focusing on efficiency, redistribution to fairness in the 16th National Congress of the CPC; and to equality, which is emphasized more in redistribution, and efficiency shall both be considered in initial distribution and redistribution in the 17th National Congress of the CPC and the Fifth Plenary Session of the Seventeenth Central Committee. We must both oppose egalitarianism and prevent income disparity and polarization to make the income gap reasonable. We should also allow and encourage some people to get rich first through honest work and lawful business and promote the rich to help others. We must expand the proportion of middle-income earners, take priority to raising the income of low-income earners, and gradually achieve the goal of common prosperity. Illegal income and benefits obtained through dirty ways such as embezzlement of public property, tax evasion, power-for-money deal, etc. should not be resolutely punished according to law. In the reports of the 17th National Congress of the CPC and the Fifth Plenary Session of the Seventeenth Central Committee, we must “Increase the proportion of residents’ income in the distribution of national income and increase the proportion of labor remuneration in the primary distribution. It is necessary to create conditions to increase the property income of residents and to reasonably adjust and regulate the distribution relationship between the state, enterprises and individuals due to the declining proportion of Chinese residents’ income and labor compensation. For redistribution, the government should further strengthen the regulation of income distribution, enhance the role of taxation in regulating income distribution, improve the personal income tax system, expand transfer payments, and effectively regulate excessive income. We correct it to break the operating monopoly, especially the extra personal income obtained by virtue of the industry monopoly and certain special conditions. Due to the chaotic income distribution order, it is proposed to regulate and rectify the distribution order, protect legal income, rationally and effectively regulate the excessively high income in a few monopoly industries, and ban illegal income. Gradually work hard to reverse the trend of widening income gaps between urban and rural, regional, industry and social members.

2.1 A Review of China’s Reform on Income Distribution

73

The Report on the Work of the Government in the Fifth Session of the Eleventh National People’s Congress held in March 2012 stated, “It is imperative to formulate an overall plan for reforming the income distribution system to increase the proportion of residents’ income in national income distribution and increase the proportion of labor compensation in the primary distribution. We must improve the wage system by establishing a normal wage growth mechanism and steadily raising the minimum wage standard. We are supposed to create conditions to increase residents’ property income and establish a mechanism whereby the public shares the proceeds from the sale of public resources. We will take further steps to adjust taxes for high-income groups, strictly standardize supervision of pay and bonuses for senior management in state-owned enterprises and financial institutions, expand the proportion of middleincome groups, raise the incomes of low-income groups, and promote equal opportunity. We will ensure that income distribution is governed by proper standards, effectively protect lawful income, and resolutely ban illegal income. We will quickly reverse the trend of a widening income gap. In February 2013, Suggestions on Deepening the Reform of the Income Distribution System approved by the State Council from the Development and Reform Commission, the Ministry of Finance, and the Ministry of Human Resources and Social Security. It emphasized that we must adhere to and improve the system whereby distribution according to work remains the predominant mode and coexists with various other modes, both support primary distribution and redistribution. 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 mechanism of secondary distribution regulating income distribution mainly through taxation, social security, and transfer payments. We strive to synchronize the growth of residents’ income with economic development and the increase of labor compensation with the improvement of labor productivity, gradually forming a reasonable and orderly income distribution pattern to promote sustainable and healthy economic development and stabilize harmonious society by increasing residents’ income, narrowing the income distribution gap and standardizing the pattern of income distribution.1

2.1.4 Evaluation of the Reform of Income Distribution System The reform of China’s income distribution system is an important part of the reform of the economic system, which was gradually carried out with the deepening of the reform of the economic system. Since 1978, the reform of China’s income distribution system has continued to explore, innovating toward perfect. 1

(No. 6 [2013] of the State Council): Suggestions on Deepening the Reform of the Income Distribution System.

74

2 An Analysis of the Current Situation of Income …

Since the reform and opening up, China’s income distribution has changed from a single distribution system according to work supplemented by other distribution methods to a diversified distribution system with distribution according to work as the main form. Labor, capital, technology, managerial expertise and other production factors participate in the distribution of income in accordance with their contributions. During the reform of the income distribution system, we further clarified the relationship between efficiency and fairness: from giving priority to efficiency with due consideration to fairness; to the first time allocation focusing on efficiency, redistribute on fairness; and to equality, which is emphasized more in redistribution, and efficiency shall both be considered in initial distribution and redistribution. We should allow and encourage some people to get rich first through honest labor and legal business and make efforts to increase the income of low-income earners to gradually realize common prosperity. This series of reforms of the income distribution system is in line with China’s economic system reform, which is also an inevitable choice for the development of China’s economy. The reform of the income distribution system has fundamentally broken egalitarianism, which mobilizes the enthusiasm of the masses. The growing income of urban and rural residents has improved people’s living standards and quality of life, optimizing the efficiency of resource allocation and improving economic efficiency to promote rapid economic growth in China. However, as China’s economy and society have entered a new stage of development, a number of issues have been exposed in the current income distribution field, which has attracted public concerns due to incomplete reforms, imperfect systems, and inadequate regulation. For example, the national income distribution pattern shows an imbalanced proportion between the government, enterprises and residents, and the proportion of labor compensation and household income in GDP is relatively low and has continued to decline. The income gap between urban and rural areas, regions, industries and members of society continues to widen; income distribution is not standardized, speculation is prevalent, corruption continues to emerge, and the share of gray income and illegal income continues to increase, which worsens the income distribution relationship. All these issues are the focus of decision-makers and public concerns that urgently need to be studied and solved.

2.2 An Analysis of the Distribution Pattern of Chinese Income National income distribution includes primary distribution and redistribution. After the initial distribution of national income, workers’ compensation, net production tax, and capital income are formed. The share of laborers, governments, and enterprises in national income constitutes the initial distribution pattern of national income. National income redistribution is based on the initial distribution of income and redistributes the total income of the initial distribution through transfer payments and

2.2 An Analysis of the Distribution Pattern of Chinese Income

75

other forms. The result of income redistribution forms the total disposable income of the household, government, and enterprise sectors, and the sum of the total disposable income of each sector equals the total national disposable income.

2.2.1 Income Approach to GDP and Its Composition National income is divided into four categories in China’s national income accounting system: labor compensation, net production tax, fixed asset depreciation, and operating surplus. To analyze the composition of the income method of GDP, we obtained data of the national GDP to calculate the share of labor compensation, net production tax, fixed asset depreciation, and operating surplus in GDP and its changing trend by summarizing the GDP of all provinces and municipalities according to the income approach. From the statistical definition of the primary distribution, the calculation formula for provincial GDP through the income method is as follows: GDP = labor compensation + net production tax + fixed asset depreciation + operating surplus In the above formula, the remuneration of the laborer refers to the total remuneration obtained by the laborer for production activities, and the net production tax refers to the balance of the production tax minus the production subsidy, which is government income. Fixed asset depreciation refers to the depreciation of fixed assets in accordance with the prescribed fixed asset depreciation rate to compensate for the depreciation of fixed assets within a certain period of time or the depreciation of fixed assets virtually calculated at the depreciation rate uniformly prescribed in national economic accounting. Operating surplus refers to the balance of the added value created by the resident unit after deducting labor compensation, net production tax and depreciation of fixed assets. Depreciation of fixed assets and operating surplus are the return of capital. We obtained national GDP and its proportion from 1995 to 2010, as shown in Table 2.1, by summarizing provincial GDP and its composition through the income method in China’s Statistical Yearbook from 1996 to 2011.2 In Table 2.1, the share of labor compensation in GDP gradually decreased from 53.4% in 1996 to 39.74% in 2007, a decrease of 14%. Moreover, it rose to 46.62% in 2009 but fell by 1.61 to 45.01% in 2010; the proportion of net product tax of government to GDP increased from 11.91% in 1995 to 15.24% in 2010. The share of income of enterprises (that is, the return of capital, including depreciation of fixed assets and operating surplus) in GDP increased from 33.8% in 1996 to 45.45% in 2

In the summary, we found that the GDP in 2005 and 2009 for each region in China Statistical Yearbook were from 2003 and 2007, so the summary table lacks relevant summary data in 2004 and 2008.

68,584.30

76,956.61

82,780.25

85,496.67

97,209.37

106,766.26

118,020.69

135,539.14

197,789.03

231,053.34

275,624.62

365,303.69

437,041.99

1996

1997

1998

1999

2000

2001

2002

2003

2005

2006

2007

2009

2010

15.3%

196,714.07

170,299.71

109,532.27

93,822.83

81,888.02

67,260.69

60,099.14

54,934.65

49,948.07

44,873.34

43,988.95

40,628.24

36,622.20

23,235.82

45.01

46.62

39.74

40.61

41.40

49.62

50.92

51.45

51.38

52.49

53.14

52.79

53.40

51.20

18.2%

66,608.73

55,531.11

40,827.52

32,726.66

29,521.99

21,551.46

18,493.78

16,779.28

14,972.41

12,808.51

11,981.24

10,486.41

8781.42

5406.88

Value

15.24

15.20

14.81

14.16

14.93

15.90

15.67

15.72

15.40

14.98

14.47

13.63

12.80

11.91

Proportion

Net production tax

Value

Proportion

Labor compensation

Source Calculated according to the China Statistical Yearbook from 1996 to 2011

16.3%

45,383.69

1995

Growth rate

GDP(100 billion)

year

15.9%

56,227.58

49,369.64

39,018.85

33,641.84

27,919.21

19,362.42

16,573.11

15,027.36

13,760.27

11,575.26

11,092.35

10,124.99

8621.86

6184.75

Value

12.87

13.51

14.16

14.56

14.12

14.29

14.04

14.08

14.16

13.54

13.40

13.16

12.57

13.63

Proportion

Fixed asset depreciation

Table 2.1 China’s national GDP and the proportion in GDP from 1995 to 2010 through the income method

17.4%

117,456.61

90,103.24

86,245.97

70,862.02

58,459.81

27,364.57

22,854.65

20,024.97

18,528.61

16,239.56

15,717.71

15,716.97

14,558.82

10,556.24

Value

26.88

24.67

31.29

30.67

29.56

20.19

19.36

18.76

19.06

18.99

18.99

20.42

21.23

23.26

Proportion

Operating surplus

76 2 An Analysis of the Current Situation of Income …

2.2 An Analysis of the Distribution Pattern of Chinese Income

77

Fig. 2.1 Changes in the composition of China’s GDP through the income method from 1995 to 2010

2010, an increase of nearly 12%. Among them, the company’s operating surplus declined during 1995–1998, from 23.26% in 1995 to 18.99% in 1998, a decrease of 4.27%. However, since 1999, the company’s operating surplus has raised year by year, reaching 31.29% in 2007, an increase of 12.3%. Figure 2.1 clearly shows the tendency in the proportion of labor, government, and enterprises ‘income in the primary distribution of GDP, from which we can see a decrease of the proportion of labor’s income, and an increase of the proportion of government and enterprises’ income is increasing. We calculated the average annual growth rate of GDP and its composition by using the income method based on the current price and found that the average annual growth rate of GDP was 16.3%, the average annual growth rate of labor compensation was 15.3%, the average annual growth rate of the net production tax was 18.2%, and the average annual growth rates of depreciation of fixed assets and operating surplus were 15.9% and 17.4%, respectively, during 1995–2010. By comparing this, we found that the average annual growth rate of labor compensation is not only lower than that of GDP but also lower than that of government and business income. Among them, the government’s income growth rate is the fastest.

2.2.2 Primary Distribution of Income of Residents, Enterprises and Government It is clearly stated in the 17th National Congress of the CPC that we must deepen the reform of the income distribution system and increase the income of urban and rural people, handle the relationship between efficiency and fairness both in the primary distribution and redistribution, and improve the proportion of labor compensation in the primary distribution. We are supposed to reasonably adjust and regulate the distribution relationship among the state, enterprises and individuals. Therefore, primary

78

2 An Analysis of the Current Situation of Income …

distribution is a very important part or the distribution of national income. In the past, people paid less attention to the issue of primary distribution because of the leading role of “efficiency first with due consideration of fairness”. The primary distribution structure is the core content and important direction of the study on primary distribution, which reflects the relative position and role of the various element owners in the primary distribution. As the income gap gradually widens, both investment and consumption are closely related to the primary distribution pattern of national income. Therefore, both policy makers and researchers are increasingly focusing on primary distribution. In economics, capital flow accounting3 is often used to describe income distribution, savings, nonfinancial investment, and financial investment in the economy and institutions as a whole. Table 2.2 and Fig. 2.2 report the composition of China’s gross national income sector from 1992 to 2008.4 Among these sectors, the business enterprise sector consists of a nonfinancial corporate sector and a financial institution sector. In Table 2.2, the total income of the primary distribution increased from 2693.72 billion yuan in 1992 to 316,228 billion yuan in 2008, an average annual growth rate of 16.6%. In 1992, the proportion of residents’ income in the primary distribution was 66.1% and then changed to 57.2%, a decrease of 8.9%. The proportion of enterprises’ income in the primary distribution was 17.4% and then increased by 7.9–25.3%. The proportion of government income in the primary distribution was 16.6% and then changed to 17.5%, an increase of 0.9%. Residents’ primary distribution income is mainly composed of labor compensation, operating surplus and net property income. The results in Table 2.2 show that from 1992 to 2008, the income of residents in the primary distribution increased from 1779.54 billion yuan to 180.90719 billion yuan, an average annual growth rate of 15.6%, which is 1 percentage point slower than the growth of gross national income (GNI) over the same period. Among them, the proportion of residents’ income in the primary distribution remained relatively stable in 1992–1999. However, it dropped rapidly from 65% in 1999 to 57.2% in 2008, a decrease of 7.8 percentage points. The primary income distribution, consisting of the total operating surplus and the net property income, rose from RMB 467.96 billion to RMB 7986.74 billion with an average annual growth rate of 19.4%, which was 2.8 percentage points faster than the gross national income (GNI) over the same period, thus increasing the share of enterprise’s primary income distribution in GNI from 17.4% in 1992 to 25.3% in 2008. The government primary income distribution, consisting of net taxes on production, total operating surplus and net property income, increased from RMB 446.22 billion in 1992 to RMB 5539.12 billion in 2008 with an average annual growth 3

Capital flow accounting refers to the overall composition of all resident units in China as the economic aggregate, and divides the economic aggregate into four domestic institutional sectors, which including the nonfinancial enterprise sector, financial institution sector, government sector, and household sector. 4 According to the published capital flow table ends in 2008 from the latest China Statistical Yearbook in 2011.

2.2 An Analysis of the Distribution Pattern of Chinese Income

79

Table 2.2 Structure of the primary distribution of inhabitants, enterprises and government Year

Initial distribution Total revenue (billion yuan)

Household sector

Corporate sector

government department

Value (billion yuan)

Value (billion yuan)

Value (billion yuan)

Percentage (%)

Percentage (%)

Percentage (%)

1992

26,937.2

17,795.4

66.1

4679.6

17.4

4462.2

16.6

1993

35,260.0

22,075.3

62.6

7086.8

20.1

6097.9

17.3

1994

48,108.6

31,341.1

65.1

8550.8

17.8

8216.8

17.1

1995

59,810.5

39,024.8

65.2

11,682.6

19.5

9103.1

15.2

1996

70,142.6

46,628.8

66.5

11,853.8

16.9

11,659.9

16.6

1997

78,060.8

51,537.6

66.0

13,188.8

16.9

13,334.4

17.1

1998

83,024.5

54,850.0

66.1

13,445.4

16.2

14,729.0

17.7

1999

88,479.2

57,553.4

65.0

15,755.1

17.8

15,170.7

17.1

2000

98,000.4

62,126.5

63.4

18,576.3

19.0

17,297.6

17.7

2001

108,067.3

66,252.1

61.3

21,821.6

20.2

19,993.5

18.5

2002

119,096.7

72,101.6

60.5

24,197.0

20.3

22,798.2

19.1

2003

135,174.5

80,699.6

59.7

28,291.5

20.9

26,183.4

19.4

2004

159,587.0

95,108.7

59.6

37,467.8

23.5

27,010.5

16.9

2005

185,808.6

110,306.1

59.4

43,088.0

23.2

32,414.5

17.4

2006

217,522.7

128,238.3

59.0

50,356.4

23.1

38,928.0

17.9

2007

267,763.7

155,654.1

58.1

63,099.5

23.6

49,010.0

18.3

2008

316,228.8

180,970.2

57.2

79,867.4

25.3

55,391.2

17.5

Source Calculated according to Fund Flow Sheet (Physical Transactions) in 2010 in Historical Data of China’s fund flow statement 1992–2004 and China Statistical Yearbook. The National Bureau of Statistics published

Fig. 2.2 Trends in the pattern of primary distribution among residents, businesses and government

80

2 An Analysis of the Current Situation of Income …

rate of 17.1%, which was 0.5 percentage points faster than the gross national income (GNI) over the same period, thus increasing the share of government primary income distribution in GNI from 16.6% in 1992 to 17.5% in 2008.

2.2.3 Redistribution of Income of Residents, Enterprises and Government Redistribution of national income is carried out through current transfers on the basis of primary distribution. Current transfers include the income tax paid by enterprises and individuals to the government, social insurance payments paid by enterprises and individuals to the social insurance sectors, social benefits received by households from the social insurance sectors, and claims received by the applicant from insurance companies. We still analyze the redistribution pattern of national income according to the flows-of-funds tables, which report, respectively, the disposable income of the enterprises, government and resident departments after primary distribution and redistribution. Table 2.3 reports the composition of total disposable income in the household, government and enterprise sectors of China in 1992–2008. The enterprise sectors consist of the nonfinancial business sector and financial institutions. According to Table 2.3, gross national disposable income (GNDI) increased from RMB 2700.09 billion in 1992 to RMB 31,940.96 billion in 2008, an average annual growth of 16.7%. In 1992, the proportion of total disposable income of residents was approximately 68.3%, down to 57.1% in 2008. The proportion of the total disposable income of enterprises was approximately 11.7%, up to 21.6% in 2008. The proportion of the total disposable income of the government was approximately 20%, up to 21.3% in 2008. During this period, household disposable income fell by 11.2 percentage points, corporate disposable income rose by 9.9 percentage points and government disposable income increased by 1.3 percentage points. Household disposable income consists of the primary income distribution and the net income of current transfers, which include income taxes, social security payments, social benefits and other income. As beneficiaries of income redistribution, residents can earn more from income redistribution because the current transfer income (social benefits and other income) is greater than the expenditure (income tax and social security payments). The results of Table 2.3 show that household disposable income rose from RMB 1845.28 billion to RMB 18,242.95 billion in 1992–2008, an average annual growth of 15.4%, which is 1.3 percentage points slower than the gross national disposable income (GNDI) over the same period. The proportion of household disposable income in the national disposable income fell from 68.3% in 1992 to 57.1% in 2008, dropping 11.2 percentage points. During 1992– 2008, the change in the proportion of household disposable income was relatively

2.2 An Analysis of the Distribution Pattern of Chinese Income

81

Table 2.3 Sector composition of gross national disposable income in 1992–2008 Year

Total disposal income (RMB 100 million)

Household sector

Corporate sector

Government sector

Value (billion)

(%)

Value (billion)

(%)

Value (billion)

(%)

1992

27,000.9

18,452.8

68.3

3159.3

11.7

5388.9

20.0

1993

35,327.5

22,827.1

64.6

5557.2

15.7

6943.3

19.7

1994

48,223.8

32,292.2

67.0

7005.0

14.5

8926.6

18.5

1995

59,930.2

40,291.6

67.2

9722.5

16.2

9916.1

16.5

1996

70,320.4

48,125.1

68.4

9624.9

13.7

12,570.3

17.9

1997

78,487.1

53,842.2

68.6

10,281.8

13.1

14,363.1

18.3

1998

83,379.0

57,043.5

68.4

11,216.0

13.5

15,119.5

18.1

1999

88,888.5

59,733.1

67.2

13,066.6

14.7

16,088.8

18.1

2000

98,522.9

63,251.7

64.2

16,354.8

16.6

18,916.4

19.2

2001

108,770.5

67,437.5

62.0

19,035.2

17.5

22,297.7

20.5

2002

120,171.8

73,304.9

61.0

21,631.4

18.0

25,235.6

21.0

2003

136,634.0

81,707.0

59.8

24,867.1

18.2

30,059.9

22.0

2004

161,484.8

96,513.7

59.8

33,751.6

20.9

31,219.5

19.3

2005

187,888.1

111,235.3

59.2

39,006.3

20.8

37,646.5

20.0

2006

219,850.5

129,047.5

58.7

43,659.5

19.9

47,143.5

21.4

2007

270,703.9

156,576.0

57.8

54,735.9

20.2

59,392.0

21.9

2008

319,409.6

182,429.5

57.1

69,002.7

21.6

67,977.4

21.3

Source Calculated according to the Fund Flow Sheet (Barter Trade) in 2020 of Historical Data on China’s Flows-of-funds Tables in 1992–2004 and The China Statistical Yearbook by National Bureau of Statistics (NBS)

stable during 1992–1999, but it fell rapidly from 65% in 1999 to 57.2% in 2008, dropping 7.8 percentage points (see Fig. 2.3). The disposable income of enterprises consists of the enterprises’ primary income distribution and the net current transfers. Generally, business sectors’ expenditure is greater than income in terms of current transfers. As a result, the revenue of the enterprise sector decreases through income redistribution. The enterprises’ disposable income rose from RMB 315.93 billion to RMB 6900.27 billion in 1992–2008, an average annual growth of 21.3%, which was 4.6 percentage points faster than the total national disposable income over the same period, thus making the share of enterprises’ disposable income in total gross national disposable income (GNDI) increase from 11.7% in 1992 to 21.6% in 2008, an increase of 9.9 percentage points. Government disposable income consists of primary income distribution and net current transfers. Generally, government departments’ revenue is greater than expenditure concerning current transfers. As a result, the revenue of government departments increases through income redistribution, government disposable income rose from RMB 538.89 billion to RMB 6797.74 billion in 1992–2008, an average annual

82

2 An Analysis of the Current Situation of Income …

Fig. 2.3 Trends in the pattern of redistribution of residents, enterprises and governments

growth of 17.2%, which was 0.5 percentage points faster than total national disposable income over the same period, thus making the share of government disposable income in total national disposable income increased from 20% in 1992 to 21.3% in 2008, an increase of 1.3 percentage points. Comparing the results of the primary distribution and redistribution among residents, enterprises and government departments (according to Tables 2.2 and 2.3), we found that the proportion of redistributed income of residential sectors increased by an average of 1.1 percentage points compared with that of primary income distribution through income redistribution in 1992–2008. Hence, we considered that the income situation of the residential sectors has not improved significantly; the share of corporate income falls by 3.2 percentage points, while the share of government revenues increases by 2.1 percentage points, which shows that income adjustment manifests the transfer of enterprise sectors’ income to the residents and government departments, and the redistribution of national income mainly tends to the government sector.

2.2.4 An Analysis of the Composition of Residents’ Income To further analyze the composition of disposable income and its trends, we calculate the proportion of disposable income of residents and its proportion according to the flows-of- funds tables, as shown in Table 2.4. According to Table 2.4, laborers’ remuneration, the main source of income, increased from RMB 1469.67 billion to RMB 1505.17 billion from 1992 to 2008, with an average annual increase of 15.7%. The proportion of household disposable income rose from 79.6% in 1992 to 82.5% in 2008, an increase of 2.9 percentage points.

22,827.1

32,292.2

40,291.6

48,125.1

53,842.2

57,043.5

59,733.1

63,251.7

67,437.5

73,304.9

81,707.0

96,513.7

111,235.3

129,047.5

156,576.0

182,429.5

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

150,511.7

127,918.9

106,369.0

93,148.0

80,950.8

66,832.2

60,654.2

54,374.3

50,019.6

47,134.6

44,320.4

41,870.4

37,085.8

32,087.4

25,206.0

18,173.4

14,696.7

82.5

81.7

82.4

83.7

83.9

81.8

82.7

80.6

79.1

78.9

77.7

77.8

77.1

79.6

78.1

79.6

79.6

7418.9

6862.0

5399.5

3579.5

2575.9

3272.6

3387.7

3266.8

3088.2

3021.1

3576.7

3351.8

3665.2

2954.1

2753.9

1788.5

1185.2

4.1

4.4

4.2

3.2

2.7

4.0

4.6

4.8

4.9

5.1

6.3

6.2

7.6

7.3

8.5

7.8

6.4

(%)

Total (billion)

Total (billion)

(%)

Net property income

Laborers’ remuneration

1459.4

921.8

809.1

929.2

1405.0

1007.4

1203.3

1185.4

1125.3

2179.6

2193.4

2304.7

1496.3

1266.8

951.1

751.8

657.3

Total (billion)

0.8

0.6

0.6

0.8

1.5

1.2

1.6

1.8

1.8

3.6

3.8

4.3

3.1

3.1

2.9

3.3

3.6

(%)

Net transfer income

23,039.6

20,873.3

16,469.9

13,578.6

11,582.0

10,594.8

8059.7

8611.0

9018.6

7397.8

6953.0

6315.3

5877.8

3983.3

3381.2

2113.4

1913.6

Total (billion)

Operating surplus

12.6

13.3

12.8

12.2

12.0

13.0

11.0

12.8

14.3

12.4

12.2

11.7

12.2

9.9

10.5

9.3

10.4

(%)

Source Calculated according to the Fund Flow Sheet (Barter Trade) in 2020 of Historical Data on China’s Flows-of-funds Tables in 1992–2004 and The China Statistical Yearbook by National Bureau of Statistics (NBS)

18,452.8

1993

Household disposable income (billion)

1992

Year

Table 2.4 Residents’ disposable income and its composition in 1992–2008

2.2 An Analysis of the Distribution Pattern of Chinese Income 83

84

2 An Analysis of the Current Situation of Income …

As shown in Fig. 2.4, the proportion of laborers’ remuneration to household disposable income experienced a trend of declining first (1992–1996), then increasing (1997–2004), then decreasing (2005–2007), and then rebounding in 2008, with an average of approximately 80%. Property income is an important source of income. The calculation of Table 2.4 shows that net property income rose from RMB 118.52 billion in 1992 to RMB 741.89 billion in 2008, an average annual increase of 12.2%. However, net property income as a share of household disposable income showed a downward trend, reducing from 6.4% in 1992 to 4.1% in 2008, a decrease of 2.3 percentage points. Figures 2.5 show the trend of the proportion of net property income to residents’ disposable income. The calculation of Table 2.4 shows that the net transfer income rose from RMB 65.73 billion in 1992 to RMB 145.94 billion in 2008, an average annual increase of 5.1%, whose proportion to the household disposable income decreased from 3.6% in 1992 to 2.9% in 1994 and then rebound to 4.3% in 1997. There was a decrease from 3.8% in 1998 to 0.6% in 2007. In 2008, it rose to 0.8% by 0.2 percentage points. As

Fig. 2.4 The proportion of laborers’ remuneration to household disposable income

Fig. 2.5 The proportion of net property income to household disposable income

2.2 An Analysis of the Distribution Pattern of Chinese Income

85

Fig. 2.6 Net transfer income as a share of household disposable income

Fig. 2.7 Operating surplus as a share of household disposable income

shown in Fig. 2.6, we can clearly see the trend of net transfer income as a share of household disposable income. At present, as the second largest source of income for residents, the operating surplus5 increased from RMB 191.36 billion in 1992 to RMB 2303.96 billion in 2008, an average annual increase of 16.8%, accounting for 12.8% of the household disposable income in 2008, which was up to 2.2 percentage points from 1992 (please see the Fig. 2.7). We find that the proportion of laborers’ remuneration in the primary distribution is low and trending down while excessive income distribution skewed to government and enterprises by analyzing the pattern of primary distribution and redistribution of national income. Although redistribution can play a certain role in adjusting residents’ income, the effect is not obvious.

5

The operating surplus of residents’ disposable income mainly comes from the operating profit and fixed assets depreciation of peasant and individual household.

86

2 An Analysis of the Current Situation of Income …

Fig. 2.8 National Gini coefficient of the income gap

The analysis results of the household disposable income and its composition show that the proportion of the laborers’ remuneration in primary distribution to the total residents’ income is approximately 80%, while the proportion of the primary distribution to the disposable income is more than 96%. As most of China’s income distribution gap comes from the primary distribution field, we believe that efforts should be made to rectify and standardize the order of primary distribution, as we seek to further deepen the reform of the income distribution system.

2.3 An Analysis of the Income Gap Among Residents 2.3.1 An Analysis of the Residents’ Income Gap in China How large is the income gap between our Chinese residents, which has long been of great concern to the general public, researchers and policymakers. An important indicator to measure the income gap is the Gini coefficient. However, the National Bureau of Statistics (NBS) has sampled urban and rural residents by adopting a method with a targeted place in a fixed period. However, they cannot obtain the first-hand data used to calculate the national Gini coefficient because no national population survey was conducted. Despite this, many scholars at home and abroad have achieved many valuable results by estimating the Gini coefficient from different angles and by different methods in the whole country. Figures 2.8 show changes in the Gini coefficient of national residential income in 1981–2001.6 At the beginning of the reform and opening-up in 1978, the national Gini coefficient was 0.31 in 1981 and 0.42 in 1993, breaking the international threshold of 0.4 without conducting living expenses among rural–urban and regional residents. Reducing slightly to 0.4 in 1996, the national Gini coefficient began to rise yearly 6

Ravallion and Chen (2007).

2.3 An Analysis of the Income Gap Among Residents

87

to 0.45 in 2001. However, despite the widened income gap, the Gini coefficient did not exceed the international threshold of 0.4, such as 0.28 in 1981 and 0.39 in 2001 after the adjustment of living expenses variance. The National Bureau of Statistics (NBS) published the Gini coefficient of China’s national residents’ income in 2003–2012 in January 2013, namely, they were 0.479, 0.473, 0.485, 0.487, 0.484, and 0.491 in 2003, 2004, 2005, 2006 2007, and 2008, respectively. Since then, they are 0.490, 0.481, 0.477, 0.474 in 2009, 2010, 2011, 2012, respectively, felling year by year,7 which shows that although China’s Gini coefficient fell from a peak of 0.491 in 2008 to 0.474 in 2012 after all levels of government in China have taken a series of strong measures to increase the residents’ income and narrow the income distribution gap since the outbreak of the financial crisis in 2008, the range between 0.47 and 0.49 is still not low. The results of the China Household Finance Survey (CHFS) of Southwest University of Finance and Economics (SWUFE) show that the Gini coefficient of household income in China was 0.61 in 2010, which shows the urgency of accelerating the reform of the income distribution system and narrowing the income distribution gap. The debate over China’s Gini coefficient has never ended and has recently worsened. In December 2012, the China Household Finance Survey (CHFS) of Southwest University of Finance and Economics (SWUFE) released the China Family Income Inequality Report, which noted that the Gini coefficient for Household Income in China in 2010 was 0.61 according to the China Household Finance Survey (CHFS) data. The report has caused a great sensation in both society and academic circles, causing great controversy. Li Shi (2013) pointed out that there were many problems with the method adopted in the report directly using income data from the study of financial and property issues to estimate the national Gini coefficient, thus misestimating the national income gap. A day later, Gan Li, director of the China Household Finance Survey (CHFS) of Southwest University of Finance and Economics (SWUFE), also published Revealing The Real China with an Open Science Sample Survey on the Wall Street Journal’s Chinese Website in response to questions about whether the sample of high-income people is too large and how were the data obtained for this study. Yu Xiaohua (2013) from Goettingen University in Germany believed that the statistics of the Bureau of Statistics might not include the superrich, such as those on the Hurun Rich List, as Wang Xiaolu (2011) pointed out the serious underreporting of high-income groups in China’s National Bureau of Statistics. According to the calculation of Wang Xiaolu, 4.8 trillion gray incomes was underreported in urban income alone; the income gap was 31 times between the top 10% of earners and the bottom decile in the combination of urban and rural income. However, Li Shi (2013) showed that the Gini coefficient of the National Bureau of Statistics basically reflected the basic situation of the income gap and his agreement on these data. This was mainly because Beijing Normal University published the national Gini coefficient of 2007 with an estimated result of 0.48, while the National Bureau of Statistics announced that the Gini coefficient was 0.484, so the errors between the two results were small. 7

Data coming from the website of National Bureau of Statistics (NBS): http://www.stats.gov.cn.

88

2 An Analysis of the Current Situation of Income …

However, Li Shi (2011) believed that China’s Gini coefficient would increase to approximately 0.52 if correcting the problem of understating the income of the highincome group and continued to show an upward tendency because China’s existing experience and data could not support Kuznets’ hypothesis of inverted U curve. The Gini coefficient calculated for this topic is slightly higher than that published by the statistical department, especially in 2009 and 2010, which both exceeded 0.5. The 2010 data are lower than the 0.61 published by the China Household Finance Survey and Research Center but close to the 0.52 calculated by Li Shi (2011), so the research data on this topic are representative within limits. In fact, China’s Gini coefficient is difficult to calculate accurately. Generally, the Gini coefficient, Theil index, and quintile index are the main indicators used to measure the income distribution gap, among which the Gini coefficient is the most widely used. The Gini coefficient of China’s residents’ income distribution gap cannot be obtained directly by calculating separately the Gini coefficient of the income distribution gap between urban residents and rural residents, for which the current National Bureau of Statistics and other major investigative agencies carry out sampling surveys on household income and expenditure separately for urban and rural areas. The urban and rural Gini coefficients were calculated to calculate the national Gini coefficient, and then different methods were used to combine the two results and obtain the nationwide result. Scholars also discussed and criticized the accuracy of the above two methods. Therefore, instead of investigating urban and rural areas, many current survey units and institutions directly conduct the nationwide household income survey under the schema design of a reasonable random sampling and strict survey implementation process, which directly integrates the income condition of both urban and rural areas, thereby reflecting the overall average. Academics have different views on the specific survey calculation of China’s Gini coefficient, and all believe that their calculations and survey methods are the most accurate. In fact, we should change our thinking because it is not necessary to focus on the size of the numeric value of the Gini coefficient in terms of the Chinese social background in the transition period, which does not make much sense. The numerical value of the Gini coefficient is related to the social mentality and social tolerance at the time, and the same goes for the discussion about whether the Gini coefficient exceeds the international warn standard. We should pay more attention to the cause analysis of the income gap instead of simply replacing the current income gap with the Gini coefficient and discuss what nonstandard factors lead to the current income gap. Standardized theoretical analysis and deep speculative discussions may be more convincing than Gini coefficient values and more conducive to making targeted policy suggestions.

2.3 An Analysis of the Income Gap Among Residents

89

2.3.2 An Analysis of the Income Gap Between Urban and Rural Residents 2.3.2.1

An Analysis of the Income Situation of Urban and Rural Residents

There has been a significant increase in China’s income of both urban and rural residents since the reform and opening-up (see Table 2.5). Among them, the per capita disposable income of urban residents has increased from 343.4 yuan in 1978 to 19,109.4 yuan in 2010, with an average annual growth of 13.38%; the per capita net income of rural households has rose from 133.6 yuan in 1978 to 5919 yuan in 2010, with an average annual increase of 12.58%; and the average annual GDP growth was 15.82% during this period. Calculated by the comparable prices in 1978,8 the average annual growth of the real per capita income of urban residents is 7.60%; the average annual growth of the real per capita net income of rural residents is 6.83%; and the real average annual growth rate of GDP is 9.91%. Furthermore, we multiply the per capita income of urban residents and the per capita net income of rural residents by the corresponding population to obtain the national resident gross income. The results in9 Table 2.5 show that the proportion of gross residents’ income of GDP increased from 45.2 to 63.02% during 1978–1983 and then began to decline year by year. The above proportion was 42.03% by 2008, which was reduced by 21 percentage points compared to 1983, and the share rose slightly to 42.92% by 2009 but fell to 41.8% in 2010.

2.3.2.2

An Analysis of the Income Gap Between Urban and Rural Areas

Although the per capita income of urban and rural residents has greatly improved, a fact that cannot be ignored is that the gap between the per capita income of urban and rural residents is increasing. Figure 2.9 clearly show the changing trend in the per capita income and income ratio of urban and rural residents in China during 1978–2010.

8

Here we regard the GDP deflator of 1978 as the base year to uniformly deflate GDP and the per capita income of urban and rural residents, then obtain real GDP and real per capita income of urban and rural residents. 9 Here we calculated that there is a certain deviation between the national total disposable income of residents and the total disposable income of the households in the flow of funds table. The main reason is that the high-income group is not enough in the sample of urban and rural household income survey data, and the respondents have the possibility of underreporting their actual income, which underestimates the income of residents obtained from the survey.

GDP (100 million yuan)

3645.22

4062.58

4545.62

4891.56

5323.35

5962.65

7208.05

9016.04

10,275.18

12,058.62

15,042.82

16,992.32

18,667.82

21,781.50

26,923.48

35,333.92

48,197.86

60,793.73

71,176.59

Year

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

4838.9

4283

3496.2

2577.4

2026.6

1700.6

1510.2

1375.7

1181.4

1002.2

899.6

739.1

651.2

564

526.6

491.9

477.6

387

343.4

37,304

35,174

34,169

33,173

32,175

31,203

30,195

29,540

28,661

27,674

26,366

25,094

24,017

22,274

21,480

20,171

19,140

18,495

17,245

Per capita income Urban population of urban residents (ten thousand (yuan) people)

Table 2.5 Urban and rural residents’ income from 1978–2010

1926.1

1577.7

1221

921.6

784

708.6

686.3

601.5

544.9

462.6

423.8

397.6

355.3

309.8

270.1

223.4

191.3

160.2

133.6

Per capita net income of rural residents (yuan)

85,085

85,947

85,681

85,344

84,996

84,620

84,138

83,164

82,365

81,626

81,141

80,757

80,340

80,734

80,174

79,901

79,565

79,047

79,014

Rural population (ten thousand people)

34,439.25

28,624.88

22,407.82

16,415.31

13,184.27

11,302.56

10,334.44

9066.13

7874.08

6549.51

5810.64

5065.60

4418.47

3757.39

3296.64

2777.20

2436.20

1982.09

1647.82

The gross income of residents (100 million yuan)

48.39

47.09

46.49

46.46

48.97

51.89

55.36

53.35

52.34

54.31

56.55

56.18

61.30

63.02

61.93

56.78

53.59

48.79

45.20

The share of residents’ gross income of GDP (%)

(continued)

2.51

2.71

2.86

2.80

2.58

2.40

2.20

2.29

2.17

2.17

2.12

1.86

1.83

1.82

1.95

2.20

2.50

2.42

2.57

Urban–rural income ratio

90 2 An Analysis of the Current Situation of Income …

78,973.03

84,402.28

89,677.05

99,214.55

109,655.17

120,332.69

135,822.76

159,878.34

184,937.37

216,314.43

265,810.31

314,045.43

340,902.81

401,202.03

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

19,109.4

17,174.65

15,780.76

13,785.8

11,759.5

10,493

9421.6

8472.2

7702.8

6859.6

6280

5854.02

5425.1

5160.3

66,978

64,512

62,403

60,633

58,288

56,212

54,283

52,376

50,212

48,064

45,906

43,748

41,608

39,449

Per capita income Urban population of urban residents (ten thousand (yuan) people)

5919

5153.17

4760.62

4140.4

3587

3254.9

2936.4

2622.2

2475.6

2366.4

2253.4

2210.3

2162

2090.1

Per capita net income of rural residents (yuan)

67,113

68,938

70,399

71,496

73,160

74,544

75,705

76,851

78,241

79,563

80,837

82,038

83,153

84,177

Rural population (ten thousand people)

167,715.39

146,322.03

131,990.97

113,189.64

94,786.27

83,246.58

73,373.29

64,525.86

58,046.64

51,797.77

47,044.78

43,743.03

40,550.43

37,950.70

The gross income of residents (100 million yuan)

Data source The results were obtained based on the calculation of the relevant years of the China Statistical Yearbook

GDP (100 million yuan)

Year

Table 2.5 (continued)

41.80

42.92

42.03

42.58

43.82

45.01

45.89

47.51

48.24

47.24

47.42

48.78

48.04

48.06

The share of residents’ gross income of GDP (%)

3.23

3.33

3.31

3.33

3.28

3.22

3.21

3.23

3.11

2.90

2.79

2.65

2.51

2.47

Urban–rural income ratio

2.3 An Analysis of the Income Gap Among Residents 91

92

2 An Analysis of the Current Situation of Income …

Fig. 2.9 The changing trend of urban and rural residents’ income during 1978–2010

In 1978, the per capita income ratio of China’s urban and rural residents was 2.57. The income of rural residents increased significantly during 1979–1985 because China’s reform and opening up first began with the implementation of the familycontract responsibility system in rural areas; thus, China’s rural–urban residents’ income continuously narrowed, and the ratio of urban and rural residents’ income declined to 1.86 times by 1985. As the structural reform of urban areas began to be implemented after 1985 and with the deepening of reform, the income of urban residents increased rapidly; the income gap between urban and rural residents began to enlarge; and the ratio of urban and rural residents’ income was 2.86 times in 1994. After the mid-1990s, the phenomenon of a large number of laid-offs and unemployment in the reform of large-scale state-owned enterprises narrowed the income gap between urban and rural residents, and the ratio of urban and rural residents’ income fell to 2.47 times that of 1997. Then, the urban–rural income gap further widened; the ratio of urban and rural residents’ income rose to 3.33 times that in 2009; and in 2010, the ratio of urban and rural residents’ income was 2.23 times and decreased by 0.1 times that in 2009. However, the per capita income of urban residents was 46,182 yuan in 2009 and 49,025 yuan in 2010 according to our sample questionnaire survey on the income of national urban and rural residents, and the per capita income of rural residents was 7288 yuan in 2009 and 9296 yuan in 2010. The urban–rural income ratio was 6.34 times in 2009 and 5.27 times in 2010, and the urban–rural residents’ income gap narrowed in 2010 compared with 2009.10 10

See the reports of Yang Canming and Sun Qunli: Investigation and Analysis Report of China’s Residents’ Income in 2009, The Results Reporting of the Center for Hubei Finance and Development Studies, No. 44, July 2010; Yang Canming and Sun Qunli: Investigation and Analysis Report of China’s Residents’ Income in 2010, The Results Reporting of the Center for Hubei Finance and Development Studies, No. 50, May 2011.

2.3 An Analysis of the Income Gap Among Residents

93

Fig. 2.10 The share of urban and rural residents’ income in gross residents’ income during 1978– 2010

Figure 2.10 shows the changing trend of the share of China’s urban and rural residents’ income in gross residents’ income during 1978–2010. The proportion of urban and rural residents’ income in gross residents’ income was 35.9 and 64.1% in 1978, respectively, which was 33.4 and 66.6% by 1983, respectively. During this period, the percentage of urban residents’ income in gross residents’ income decreased by 2.5 percentage points, and the percentage of rural residents’ income in total residents’ income increased by 2.5 percentage points. The share of rural residents’ income in gross residents’ income showed a downward trend year by year since 1983 and decreased by nearly 43 percentage points from 66.6% in 1983 to 23.7% in 2010; meanwhile, the proportion of urban residents’ income in gross residents’ income showed an ascending trend year after year and increased by nearly 43 percentage points from 33.4% in 1983 to 76.3% in 2010. The changing trend of the per capita price-to-income ratio of urban and rural residents as well as the national Gini coefficient is shown in Fig. 2.11, from which we can see that the fluctuations of national residents’ income gap and the per capita price-to-income ratio of urban and rural residents are basically consistent. In addition, we calculate that the correlation coefficient between the per capita price-to-income ratio of urban and rural residents and the national Gini coefficient is 0.967 from 1978 to 2008, which indicates that there is a very strong correlation between the national income gap and the income gap between urban and rural areas and that the national income gap is due in large part to the income gap between urban and rural areas.

2.3.2.3

An Analysis of the Income Gap Inside Urban Areas

While the income gap between urban and rural areas has widened, the income distribution gap among urban residents has also widened. China’s income inside the urban areas had a narrow gap during the early era of reform and opening-up. The urban

94

2 An Analysis of the Current Situation of Income …

Fig. 2.11 The price-to-income ratio between urban and rural areas and national Gini coefficient during 1978–2008 (Data source The national Gini coefficient refers to the paper of Wang Shaoguo: The Impact of China’s Income Distribution Gap on Economic Efficiency, and the paper of Liu Shucheng, Zahng Liancheng and Zhang Ping: Chinese Economic Growth and Business Cycle [2009], Beijing: China Economic Publishing House, 2009. The price-to-income ratio between urban and rural areas was obtained based on the calculation of the relevant years of the China Statistical Yearbook)

Gini coefficient was between 0.15 and 0.16 during 1978–1984, which also reflected the egalitarianism of China’s income distribution at that time. The Gini coefficient increased by 21 percentage points, from 0.19 to 0.3 during 1985–1999, and was still in a reasonable scope, although income widened.11 The urban Gini coefficient was 0.33 by 2002.12 As shown in Fig. 2.12, the Gini coefficient of the income gap of Chinese urban residents13 was calculated by adjusting the data of urban residents’ income in various provinces and municipalities. As seen from Fig. 2.12, the Gini coefficient of urban residents’ income was lower than 0.2 during 1978–1980, increased by 6 percentage points year by year from 0.21 in 1981 to 0.27 in 1993, and fluctuated at approximately 0.3 during 1994–1997. The Gini coefficient rapidly increased by 8 percentage points from 0.32 in 1998 to 0.4 in 2005, fell back since 2006 and decreased by 2 percentage points to 0.38 by 2008. In general, China’s income gap of urban residents exhibited a trend of expansion year by year from 1978 to 2008. 11

See National Bureau of Statistics: Judging The Gap Between Rich and Poor from Gini Coefficient, China National Conditions and Strength, No. 1, 2001. 12 Ravallion and Chen (2007). 13 Ma Caoyuan, Li Yunda, Song Shuren: The Overall Characteristic and Decomposition Analysis of The Change Orbit of Urban Residents’ Income Gap: 1988–2008, Research on Economic and Management, No. 9, 2010.

2.3 An Analysis of the Income Gap Among Residents

95

Fig. 2.12 The Gini coefficients of urban areas during 1978–2008

Table 2.6 The per capita disposable income of urban residents in five quintile groups (yuan) Year

Low Low middle Middle Upper High High income income income middle-income income income/low households households household households households income

2002

3020.63

4931.96

6656.81

2003

3272.39

5377.25

7278.75

9763.37

17,366.80

5.31

2004

3631.10

6024.10

8166.54

11,050.89

20,069.07

5.53

2005

4000.39

6710.58

9190.05

12,603.37

22,922.37

5.73

2006

4539.28

7554.16

10,269.70

14,049.17

25,410.73

5.60

2007

5339.32

8900.51

12,042.32

16,385.80

29,423.82

5.51

2008

6049.91

10,974.63

15,054.73

20,784.19

34,727.38

5.74

2009

6699.28

11,243.55

15,399.92

21,017.95

37,413.22

5.58

2010

7593.69

12,702.08

17,224.01

23,188.90

41,034.56

5.40

2.51

2.58

2.59

2.61

2.68

2010 is a multiple of 2002 Growth Rate (%)

12.2

12.6

12.6

8869.51

12.8

15,318.19

5.07

13.1

Data source The results were obtained based on the calculation of the data during 2003–2011 of the China Statistical Yearbook

The per capita disposable income of households in each income group during 2002–2010 is shown in Table 2.6. We sort the per capita disposable income of the urban households from low to high and divide them into five groups equally.14

14

Here we merged lowest income households into low income households, highest income households into high income households, and calculated the per capita disposable income of low -income households and high-income households according to the relevant households’ number in each group, the average population of per family and the average disposable income per person.

96

2 An Analysis of the Current Situation of Income …

Table 2.7 Statistical result of the per capita income of China’s urban residents in decile groups in 2010 Group

Intra-group per capita income (yuan)

The percentage of the income of each group in general income (%)

Ratio of the income of each group to minimum income group

1

11,503.38

2.35

1

2

18,328.19

3.74

1.59

3

23,243.16

4.74

2.02

4

27,046.21

5.52

2.35

5

31,466.91

6.42

2.74

6

36,608.83

7.47

3.18

7

42,935.65

8.76

3.73

8

52,812.25

10.77

4.59

9

70,252.98

14.33

6.11

35.91

15.30

10

176,052.5

From Table 2.6, we can see that the higher the income is, the faster the income growth, and the gap between high-income households and low-income households continues to widen. The per capita disposable income of low-income households increases by 2.51 times from 3020.63 yuan in 2002 to 7593.69 yuan in 2010, with an average annual growth rate of 12.2%, 0.9 percentage points less than that of 13.3% in high-income households. The per capita disposable income of high-income households rises by 2.68 times from 15,318.19 yuan in 2002 to 41,034.56 yuan in 2010. The average income of high-income households was 5.07 times that of lowincome households in 2002 and reached 5.40 times that of low-income households by 2010. The calculation results are reported in Table 2.7 by dividing the sample investigation data of the urban residents’ income in 2010 into decile groups.15 The results in Table 2.7 demonstrate that the per capita income of the bottom decile 10% of earners in cities and towns throughout the country is 11,503 yuan, which accounts for 2.35% in general income; the per capita income of the top 10% of earners is 1,76,052 yuan, which accounts for 35.91% in general income; the income of the top 10% of earners is 15.3 times greater than that in the bottom decile 10% of earners.

2.3.2.4

An Analysis of the Internal Income Gap of Rural Areas

Figure 2.13 shows the changes in the Gini coefficient of the urban residents’ income gap during 1978–2009. 15

See Yang Canming and Sun Qunli: Investigation and Analysis Report of China’s Residents’ Income in 2010, The Results Reporting of the Center for Hubei Finance and Development Studies, No. 50, May 2011.

2.3 An Analysis of the Income Gap Among Residents

97

Fig. 2.13 The Gini coefficient of rural areas during 1978–2009

Figure 2.13 shows that in the early stage of reform and opening up, there was a relatively small income gap of rural residents in China. During the period of 1978– 1985, the Gini coefficient fluctuated between 0.21 and 0.24. Since 1986, the Gini coefficient has risen from 0.3 to 0.39 in 2009 year by year with a 9 percentage increase. Compared with 1978, the Gini coefficient in 2009 increased by 18 percentage points, which is an increase of 86%, and the highest Gini coefficient was 1.86 times the lowest. Although the current Gini coefficient is in the relatively reasonable range of 0.3–0.4, it is expanding year by year. In other words, the income gap of rural residents is expanding year by year, which should attract enough attention. The five equal parts grouping data of per capita net income of rural residents is shown in Table 2.8. The results in Table 2.8 show the expanding gap between rural high-income households and low-income households, in which the net income per capita of rural low-income households rose from 857.13 yuan in 2002 to 1869.80 yuan in 2010, an increase of 2.18 times, with an average annual growth rate of 10.2%, while the net income per capita of high-income households increased from 5895.63 yuan in 2002 to 14,049.69 yuan in, an increase of 2.38 times, with an average annual growth rate of 11.5%. The income ratio of net income per capita of low-income households to high-income households increased from 6.88 times in 2002 to 7.51 times in 2010. Although the net income per capita of rural households in each income group grew faster, the growth rate of the low-income group and low-middle income group was significantly lower than that of the middle-income group and high-income group. The results of rural household income sample survey data in 2010 grouped in ten equal parts can be seen in Table 2.9,16 which shows that the income per capita of the 10% of people with the lowest income is 1,159 yuan in rural areas of China, accounting for 1.94% of the total income, while the income per capita of the 10% of people with the highest income is 16,577 yuan, accounting for 27.72% of the total 16

See Yang Canming, Sun Qunli: 2010 China Residents Income Survey and Analysis Report, Hubei Finance and Development Research Center Outcome Report, May 2011, No. 50.

98

2 An Analysis of the Current Situation of Income …

Table 2.8 Net income per capita of rural households with five equal parts (yuan) Year

Low-income household

Middle income household

Middle income household

Medium–high income household

High income household

High income/low income

2002

857.13

1547.53

2164.11

3030.45

5895.63

6.88

2003

865.90

1606.53

2273.13

3206.79

6346.86

7.33

2004

1006.87

1841.99

2578.49

3607.67

6930.65

6.88

2005

1067.22

2018.31

2850.95

4003.33

7747.35

7.26

2006

1182.46

2222.03

3148.50

4446.59

8474.79

7.17

2007

1346.89

2581.75

3658.83

5129.78

9790.68

7.27

2008

1499.81

2934.99

4203.12

5928.60

11,290.20

7.53

2009

1549.30

3110.10

4502.08

6467.56

12,319.05

7.95

2010

1869.80

3621.23

5221.66

7440.56

14,049.69

7.51

2.18

2.34

2.41

2.46

2.38

2010 is a multiple of 2002 Growth rate (%)

10.2

11.2

11.6

11.9

11.5

Source Data are from the China Statistical Yearbook 2003–2011 and calculated

Table 2.9 Statistical results of the 10 equal groups grouping data of income per capita of rural residents in 2010 Group

Income per capita (yuan)

Revenue of each group as a percentage of total revenue (%)

Ratio of income of each group to minimum income group

1

1158.77

1.94

1

2

2219.95

3.71

1.92

3

3046.68

5.09

2.63

4

3774.12

6.31

3.26

5

4575.99

7.65

3.95

6

5395.16

9.02

4.66

7

6392.22

10.69

5.52

8

7461.15

12.48

6.44

9

9203.64

15.39

7.94

16,576.65

27.72

14.31

10

income. That is, the income of the 10% of people with the highest income is 14.31 times that of the 10% of people with the lowest income. By comparing the income ratios of high-income households to low-income households in urban and rural residents in Tables 2.6 and 2.8, we find that the income gap within rural areas is higher than that within urban areas in 2002–2010 (seen Fig. 2.14).

2.3 An Analysis of the Income Gap Among Residents

99

Fig. 2.14 Income ratio of high-income households to low-income households in urban and rural residents

Table 2.10 Decomposition results of national income gap Income gap

Year 2009

Year 2010

GE(0)

Contribution rate (%)

GE(0)

Contribution rate (%)

Total income gap

0.67

100

0.56

100

Gap between urban and rural area

0.33

48.44

0.27

48.29

Urban and rural internal gap

0.35

51.56

0.29

51.71

Urban internal gap

0.39

34.82

0.31

33.57

Rural income gap

0.28

16.74

0.26

18.14

2.3.2.5

Decomposition of Urban–Rural Income Gap

With the data of the National Residents Income Sampling Survey in 2009 and 2010, we measure the income gap between national, urban and rural residents, on the basis of which we estimate the contribution of income disparity between urban and rural areas, within towns and within rural areas, to the national income gap by decomposing the generalized entropy index (GE index). The result is shown in Table 2.10. The results reported in Table 2.10 show that the national GE index was 0.67 in 2009 and 0.56 in 2010, which indicates a decline in the national income gap; correspondingly, the income gap in urban and rural areas between towns, towns and rural areas declined in 2010 compared to 2009. The GE index between urban and rural areas and within urban and rural areas was 0.33 and 0.35, respectively, in 2009 and 0.27 and 0.29, respectively, in 2010, which indicates that the income gap within

100

2 An Analysis of the Current Situation of Income …

urban and rural areas is slightly larger than the income gap between urban and rural areas. According to the decomposition of the GE index, the percentage of the income gap between and within urban and rural areas in the national income gap was 48.4% and 51.56%, respectively, in 2009 and 48.29% and 51.71%, respectively, in 2010, which indicates that nearly half of China’s income gap comes from urban and rural areas.

2.3.3 An Analysis of Regional Income Gap The income of residents varies greatly due to large differences in resource endowments and imbalanced economic development in various regions in China for a long time. Since the reform and opening up, the eastern region has taken the lead in development because a series of preferential policies of government have been implemented in the eastern coastal areas, including favorable economic policies that attract a large amount of foreign capital, more technology and talent invested in the eastern region, perfect education facilities and abundant educational resources that make the residents there highly educated. In addition, the developed transportation makes the southeastern coastal area more competitive than the central and western regions. All of the abovementioned factors lead to significantly higher residential income in the eastern regions than in the central and western regions and a larger income gap in regions.

2.3.3.1

Analysis of Income Gap in the Eastern and Central Regions

The residential income gap in China is mainly reflected in the gap between the developed regions in the east and the underdeveloped regions in the central and western regions.17

Income Gap Between Urban Residents in the Eastern, Central and Western Regions The disposable income per capita of urban and rural residents in the eastern, central and western regions from 1997 to 2010 is shown in Table 2.11. In urban areas, the income per capita of the eastern region is higher than that of the central and western regions, while the disposable income per capita in the western region was slightly higher than that of the central region in 1997–2004, and the condition is just the 17

The eastern region includes 11 provinces and cities including Beijing, Tianjin, Hebei, Liaoning, Shandong, Jiangsu, Shanghai, Zhejiang, Fujian, Guangdong and Hainan; the central region includes 8 Henan, Hubei, Hunan, Anhui, Jiangxi, Shanxi, Jilin and Heilongjiang. The province includes 12 provinces and cities including Inner Mongolia, Yunnan, Guizhou, Guangxi, Sichuan, Chongqing, Shaanxi, Ningxia, Gansu, Qinghai, Xinjiang and Tibet.

10,365.80

11,522.87

12,883.97

14,482.57

16,488.95

18,788.17

20,484.90

2003

2004

2005

2006

2007

2008

2009

10.29

8452.70

15,592.41

14,062.43

12,948.96

11,409.68

9803.10

8743.16

7828.80

7036.36

6369.45

5654.52

5169.21

4845.44

4509.48

4364.79

9.71

8568.32

15,389.2

13,896.02

12,741.78

11,149.77

9545.11

8700.14

7996.08

7235.39

6674.90

6171.79

5647.88

5284.23

4913.42

4610.70

1.45

1.48

1.47

1.47

1.48

1.52

1.48

1.44

1.43

1.40

1.40

1.39

1.38

1.36

1.38

0.99

1.01

1.01

1.02

1.02

1.03

1.00

0.98

0.97

0.95

0.92

0.92

0.92

0.92

0.95

Central region/western region

Source Calculated based on the relevant years of the China Statistical Yearbook

10.29

9355.67

2002

Growth Rate

8609.98

2001

22,789.9

7849.88

2000

12,426.32

7284.27

1999

Average

6679.13

1998

2010

6382.47

Eastern region/western region

8.45

5050.96

8925.87

7855.26

7238.78

6395.92

5656.43

5123.40

4564.78

4160.42

3916.27

3686.74

3475.72

3344.58

3261.45

3107.82

Eastern region

Western region

Eastern region

Central region

Rural area

Urban area

1997

Year

8.31

3089.01

5654.51

4880.92

4551.04

3917.94

3359.14

3029.16

2770.18

2407.36

2292.22

2177.46

2074.72

2065.24

2063.43

2002.76

Central region

Table 2.11 Per capita income of urban and rural residents in the eastern, central and western regions (yuan)

8.78

2387.56

4392.42

3788.36

3481.26

3004.22

2575.73

2355.61

2135.78

1920.96

1791.73

1692.96

1632.31

1604.07

1580.09

1470.32

Western region

2.12

2.03

2.07

2.08

2.13

2.20

2.17

2.14

2.17

2.19

2.18

2.13

2.09

2.06

2.11

Eastern region/western region

1.29

1.29

1.29

1.31

1.30

1.30

1.29

1.30

1.25

1.28

1.29

1.27

1.29

1.31

1.36

Central region/western region

2.3 An Analysis of the Income Gap Among Residents 101

102

2 An Analysis of the Current Situation of Income …

Fig. 2.15 Trend of per capita income of urban residents in eastern, central and western regions

reverse since 2006 (see Fig. 2.15). The disposable income per capita increased from 6382.47 yuan in 1997 to 22,789.9 yuan in 2010 in the eastern region with an average annual increase of 10.29%; from 4436.79 yuan in 1997 to 15,592.41 yuan in 2010 in the central region with an average annual growth of 10.29%; and from 4610.7 yuan in 1997 to 15,389.2 yuan in 2010 in the western region with an average annual increase of 9.71%. In general, the disposable income per capita of urban residents in the eastern and central regions is roughly the same but faster than that in the western region. Based on the disposable income per capita of urban residents in the western region, the per capita income ratio of urban residents in the eastern and western regions increased from 1.38 times in 1997 to 1.52 times in 2006, which then decreased year by year to 1.48 times in 2010. The income ratio of urban residents in the central and western regions had a small fluctuation of approximately 1 during the period of 1997–2010.

Income Gap of Rural Residents in the Eastern and Central Regions In rural areas, the eastern region has the highest per capita net income, followed by the central region and the western region (seen in Fig. 2.16). The per capita net income increased from 31,078.82 yuan in 1997 to 8925.87 yuan in 2010 in the eastern region, with an average annual increase of 8.45%, from 2002.76 yuan in 1997 to 5654.51 yuan in 2010 in the central region, which increased with an average annual growth rate of 8.31%; from 1470.32 yuan in 1997 to 4392.42 yuan in 2010 in the western region with an average annual growth rate of 8.78% (see Table 2.11). Comparing the growth rate of per capita net income of rural residents in the eastern, central and western regions, we found the highest growth rate in the western region, the second highest in the eastern region and the lowest in the central region. Similarly, based on the per capita net income of rural residents in the western region, the per capita income ratio of rural residents in the eastern and western

2.3 An Analysis of the Income Gap Among Residents

103

Fig. 2.16 Change in per capita net income of rural residents in eastern, central and western regions

Fig. 2.17 Urban–rural income ratio in the eastern, central and western regions

regions had a slight change, which was 2.1–2.2 times during the period of 1997– 2010; the income ratio of rural residents in the central and western regions was approximately 1.3 times. This indicates that the per capita net income gap of rural residents in the eastern, central and western regions was relatively stable during the period of 1997–2010. Measuring on the basis of region, we further compared the urban–rural income gap between the eastern, central and western regions (see Fig. 2.17). The urban–rural income ratio in the eastern region increased from 2.05 times to 2.55 times from 1997 to 2010; that in the central region rose from 2.18 times in 1997 to 2.92 times in 2003 and then decreased slightly to 2.76 times in 2010. The urban–rural income in the western region climbed from 3.14 times in 1997 to 3.77 times in 2003 and then declined somewhat from 2004 to 3.5 times in 2010. We found that the urban–rural income gap in the eastern region is the smallest, followed by the central region and the western region, where the urban–rural income gap is the largest. In other words, a higher per capita income means a smaller income gap between urban and rural areas where the economy is more developed, and vice versa.

104

2 An Analysis of the Current Situation of Income …

Table 2.12 Per capita disposable income gap of urban residents in different provinces and municipalities Year

The highest income Province

1997 Guangdong 1998 Guangdong

The lowest income The highest Coefficient of income/the variation Per capita Province Per capita income (yuan) income (yuan) lowest income 8561.71

Gansu

3592.43

2.38

0.260

8839.70

Gansu

4009.60

2.20

0.264

1999 Shanghai

10,931.6

Shanxi

4342.60

2.52

0.278

2000 Shanghai

11,718.01

Shanxi

4724.11

2.48

0.285

2001 Shanghai

12,883.46

Henan

5267.42

2.45

0.289

2002 Shanghai

13,249.80

Guizhou

5944.08

2.23

0.267

2003 Shanghai

14,867.49

Ningxia

6530.48

2.28

0.277

2004 Shanghai

16,682.82

Ningxia

7217.87

2.31

0.281

2005 Shanghai

18,645.00

Xinjiang

7990.20

2.33

0.287

2006 Shanghai

20,667.91

Xinjiang

8871.27

2.33

0.290

2007 Shanghai

23,622.73

Gansu

10,012.34

2.36

0.272

2008 Shanghai

26,674.90

Gansu

10,969.41

2.43

0.267

2009 Shanghai

28,837.78

Gansu

11,929.78

2.42

0.266

2010 Shanghai

31,838.08

Gansu

13,188.55

2.41

0.262

Source Calculated based on the relevant years of the China Statistical Yearbook

2.3.3.2

Income Gap Between Provinces and Cities

There is a large difference in the income of residents in the eastern, central and western regions. Similarly, the income gap between urban and rural residents in various provinces and cities in China is also large.

The Per Capita Disposable Income Gap of Urban Residents in Different Provinces and Cities Table 2.12 reports the income gap between provinces with the highest per capita disposable income and provinces with the lowest per capita disposable income of China’s urban residents from 1997 to 2010. As seen from Table 2.12, Guangdong Province had the highest per capita disposable income of 8561.71 yuan, while Gansu had the lowest per capita disposable income of only 3592.43 yuan in 1997, in which the difference was 4496.28 yuan and the former was 2.38 times the latter. From 1999 to 2010, Shanghai had the highest per capita disposable income, while the provinces with the lowest incomes were generally in the western regions, such as Ningxia, Xinjiang, and Gansu. In 2010, per capita disposable income was 31,838.08 yuan in Shanghai and 13,188.55 yuan in

2.3 An Analysis of the Income Gap Among Residents

105

Fig. 2.18 Variation coefficient of per capita disposable income of urban residents in different provinces and municipalities

Gansu, between which the difference was 18,649.53 yuan. The per capita disposable income of Shanghai was 2.41 times that of Gansu. In 1997–2010, the income ratio of provinces with the highest per capita disposable income to provinces with the lowest per capita disposable income of urban residents in China was between 2.2 and 2.5, indicating the obvious income distribution gap between urban residents in various provinces in China. By calculating the coefficient of variation of per capita disposable income of urban residents in various provinces and cities from 1997 to 2010, as shown in Fig. 2.18, it can be seen that the variation of the coefficient of variation goes through two stages. The first stage is 1997–2002, during which the coefficient of variation rose from 0.26 in 1997 to 0.289 in 2001 and then decreased to 0.267 in 2002. The second phase was 2002–2010, during which the coefficient of variation increased from 0.267 in 2002 to 2006. 0.29 and then began to fall year by year to 0.262 in 2010. This shows two changes in the per capita disposable income gap in urban areas of China, which means that the income gap first expanded and rapidly reduced and then expanded and slowly slowed down. It also shows that in recent years, while the per capita disposable income of urban residents has increased rapidly, the relative gap of income between regions has narrowed.

The Per Capita Net Income Gap of Rural Residents in Various Provinces and Cities Table 2.13 reports the income gap between the province with the highest per capita net income and the province with the lowest per capita net income of rural residents in China from 1997 to 2010. It can be seen from the table that from 1997 to 2010, Shanghai had the highest per capita net income, and the provinces with the lowest income were located in the western regions, such as Gansu, Tibet and Guizhou. In

106

2 An Analysis of the Current Situation of Income …

Table 2.13 The income gap between different provinces Year

Top income

Bottom income

Top income/Bottom income

Coefficient of variation

1185.07

4.45

0.423

Gansu

1231.50

4.39

0.411

Tibet

1309.50

4.13

0.416

5596.37

Tibet

1330.81

4.21

0.434

5870.87

Tibet

1404.01

4.18

0.444

Shanghai

6223.55

Tibet

1462.27

4.26

0.448

2003

Shanghai

6653.92

Guizhou

1564.66

4.25

0.448

2004

Shanghai

7066.33

Guizhou

1721.55

4.10

0.431

2005

Shanghai

8247.77

Guizhou

1876.96

4.39

0.456

2006

Shanghai

9138.65

Guizhou

1984.62

4.60

0.462

2007

Shanghai

10,144.62

Gansu

2328.92

4.36

0.444

2008

Shanghai

11,440.26

Gansu

2723.79

4.20

0.430

2009

Shanghai

12,482.94

Gansu

2980.10

4.19

0.434

2010

Shanghai

13,977.96

Gansu

3424.65

4.08

0.422

Province

Per capita income (yuan)

Province

Per capita income (yuan)

1997

Shanghai

5277.02

Gansu

1998 1999

Shanghai

5406.80

Shanghai

5409.10

2000

Shanghai

2001

Shanghai

2002

Source Calculation on the basis of the China Statistical Yearbook

1997, Shanghai’s per capita net income was 5270.02 yuan, the lowest in Gansu, only 1185.07 yuan, the difference between the two was 4091.95 yuan, and Shanghai’s per capita net income was 4.45 times that of Gansu. In 2010, per capita net income was 13,977.96 yuan in Shanghai and 3244.65 yuan in Gansu, between which the difference was 10,553.31 yuan. Shanghai’s per capita disposable income was 4.08 times that of Gansu. In 1997–2010, the income ratio of provinces with the highest per capita net income to provinces with the lowest per capita net income of urban residents in China was between 4.1 and 4.6, indicating the conspicuous income distribution gap among rural residents in various provinces in China. We calculated the variation coefficient of per capita net income of rural residents in different regions from 1997 to 2009, as shown in Fig. 2.19, which shows the large fluctuation of the variation coefficient of per capita net income of rural residents. During the twelve years, the coefficient of variation fell from 0.423 in 1997 to 0.411 in 1998, then rose to 0.448 in 2003 year by year, down to 0.431 in 2004, to a peak of 0.462 in 2006, and then to 0.422 in 2010.

2.3 An Analysis of the Income Gap Among Residents

107

Fig. 2.19 Coefficient of variation of per capita net income of rural residents by province and urban area

2.3.3.3

Decomposition Analysis of Income Gap Among Different Regions

Using the data of our sampling survey for national income in 2007, 2009 and 2010, we estimated the percentage of the income disparity among different regions and within regions in the national income gap by decomposing the generalized entropy index, which was used to measure the income gap among people across countries, regions and within regions. The result is shown in Table 2.14.

2.3.4 An Analysis of Income Gap Between Different Industries 2.3.4.1

Comparison of the Industries with the Highest and Lowest Average Wages for Workers

It is generally believed that there is a large income gap between industries, while the excessive income of monopoly industry is considered to be an important manifestation of income inequality in China. The monopoly income and profits of the stateowned monopoly industry can easily be converted into the income and welfare of employees within the industry due to its abundant resources and industrial segmentation existing in different industries, as well as the interest protection of the monopoly industry. Thus, there are higher wages, welfare and job stability in the monopoly industry than in the competitive business industry, which has led to widening income disparities between industries (Knight and Li 2005).

108

2 An Analysis of the Current Situation of Income …

Table 2.14 Decomposition result of income gap among different regions Income disparity

2007 GE(0)

Percentage (%)

GE(0)

Percentage (%)

GE(0)

Percentage (%)

Total income disparity

0.36350

100

0.67313

100

0.56355

100

Disparities among regions

0.00704

1.94

0.00912

1.35

0.00715

1.27

Disparities within regions

0.35647

98.06

0.66400

98.65

0.5564

98.73

including: 0.37529 Disparities within regions in eastern China

27.49

0.67931

24.15

0.60708

27.74

Disparities 0.37248 within regions in central China

57.63

0.64896

53.26

0.48994

38.99

Disparities within regions in western China

12.95

0.68632

21.24

0.6134

32.00

0.27469

2009

2010

Table 2.15 shows the income gap between the industries with the highest and lowest average wages for workers since the reform and opening up. It can be concluded from Table 2.15 that the average wage of workers in social services [China has adjusted the division of industries from 16 to 19 industries, after which the social services industry was canceled in 2003.] is the lowest from 1978 to 1987; the lowest average wage of workers occurred in agriculture, hunting, forestry and fishing industries from 1988 to 2010; in 1978–2010, during which the workers of production and supply of electricity, gas and water industries get the highest average wage in the early days of reform and opening up from 1978 to 1984, the industry with the highest average wage of workers changed greatly; the industry with the highest average salary of employees had become geological prospecting and water conservancy industry from 1985 to 1988 while extractive industry had become the highest in 1989; the production and supply of electricity, gas and water industry remained high-income industries while finance, insurance, scientific research and comprehensive technology service began to be one of the highest income industries after 1994; information transmission, computer services and software industry, the financial industry have become the highest through the readjustment of the division of industries in 2003. In conclusion, there is a higher income in monopoly industries, capital-intensive industries, technology-intensive industries and emerging industries in China, while relatively low incomes occur in industries with low capital content, low technology content, labor-intensive and sufficient competition. We can find a widening income gap among different industries and growing polarization by comparing the ratio of the highest and lowest average wages of

2.3 An Analysis of the Income Gap Among Residents

109

Table 2.15 Difference in average wages of employees by industry Year

Industry with the lowest average wage for workers Industry

Industry with the highest average wage for workers

Average wage Industry

Highest/lowest

Average wage

1978 Social Services

392

Production and Supply of Power, Gas and Water

850

2.17

1979 Social Services

421

Production and Supply of Power, Gas and Water

941

2.24

1980 Social Services

475

Production and Supply of Power, Gas and Water

1035

2.18

1981 Social Services

478

Production and Supply of Power, Gas and Water

1045

2.19

1982 Social Services

484

Production and Supply of Power, Gas and Water

1067

2.20

1983 Social Services

508

Production and Supply of Power, Gas and Water

1104

2.17

1984 Social Services

588

Production and Supply of Power, Gas and Water

1321

2.25

1985 Social Services

777

Geological Prospecting and Water Conservancy

1406

1.81

1986 Social Services

980

Geological Prospecting and Water Conservancy

1604

1.64

1987 Social Services

1085

Geological Prospecting and Water Conservancy

1768

1.63

1988 Agriculture, Hunting, Forestry and Fishing

1280

Geological Prospecting and Water Conservancy

2025

1.58

1989 Agriculture, Hunting, Forestry and Fishing

1389

Extractive Industry

2378

1.71

(continued)

110

2 An Analysis of the Current Situation of Income …

Table 2.15 (continued) Year

Industry with the lowest average wage for workers Industry

Industry with the highest average wage for workers

Average wage Industry

Highest/lowest

Average wage

1990 Agriculture, Hunting, Forestry And Fishing

1541

Extractive Industry

2718

1.76

1991 Agriculture, Hunting, Forestry and Fishing

1652

Extractive Industry

2942

1.78

1992 Agriculture, Hunting, Forestry and Fishing

1828

Production and Supply of Power, Gas and Water

3392

1.86

1993 Agriculture, Hunting, Forestry and Fishing

2042

real estate

4320

2.12

1994 Agriculture, Hunting, Forestry and Fishing

2819

Finance and Insurance Industry

6712

2.38

1995 Agriculture, Hunting, Forestry and Fishing

3522

Production and Supply of Power, Gas and Water

7843

2.23

1996 Agriculture, Hunting, Forestry and Fishing

4050

Production and Supply of Power, Gas and Water

8816

2.18

1997 Agriculture, Hunting, Forestry and Fishing

4311

Finance and Insurance Industry

9734

2.26

1998 Agriculture, Hunting, Forestry and Fishing

4528

Finance and 10,633 Insurance Industry

2.35

1999 Agriculture, Hunting, Forestry and Fishing

4832

Finance and 12,046 Insurance Industry

2.49

2000 Agriculture, Hunting, Forestry and Fishing

5184

Scientific Research and Technical Services

13,620

2.63

2001 Agriculture, Hunting, Forestry and Fishing

5741

Scientific Research and Technical Services

16,437

2.86

(continued)

2.3 An Analysis of the Income Gap Among Residents

111

Table 2.15 (continued) Year

Industry with the lowest average wage for workers Industry

Industry with the highest average wage for workers

Average wage Industry

Highest/lowest

Average wage

2002 Agriculture, Hunting, Forestry and Fishing

6398

Finance and 19,135 Insurance Industry

2.99

2003 Agriculture, Hunting, Forestry and Fishing

6969

Information 32,244 Transmission, Computer Service and Software Industry

4.63

2004 Agriculture, Hunting, Forestry and Fishing

7611

Information 34,988 Transmission, Computer Service and Software Industry

4.60

2005 Agriculture, Hunting, Forestry and Fishing

8309

Information 40,558 Transmission, Computer Service and Software Industry

4.88

2006 Agriculture, Hunting, Forestry and Fishing

9430

Information 44,763 Transmission, Computer Service and Software Industry

4.75

2007 Agriculture, 11,086 Hunting, Forestry and Fishing

Finance

49,435

4.46

2008 Agriculture, 12,958 Hunting, Forestry and Fishing

Finance

61,841

4.77

2009 Agriculture, 14,356 Hunting, Forestry and Fishing

Finance

60,398

4.21

2010 Agriculture, 16,717 Hunting, Forestry and Fishing

Finance

70,146

4.20

Source Calculation on the basis of the China Statistical Yearbook

workers in different industries (see Fig. 2.20), which is approximately 2.2 during 1978–1984, lower in 1985 of 1.8, falling to a low of 1.58 in 1988, reaching nearly 3 in 2002 with the growing industry income gap of China increasing year by year since 1989, increasing at 4.63 in 2003 after the adjustment for industry division, peaking at 4.88 times in 2005, falling to 4.77 in 2008 and 4.20 in 2009 and 2010.

112

2 An Analysis of the Current Situation of Income …

Fig. 2.20 Ratio of the highest to the lowest average wage of employees among all industries

Fig. 2.21 Average wage gap among employees in monopoly and competitive industries

2.3.4.2

Average Wages Gap of Staff Between Monopoly Industries and Competitive Industries

Information transmission, including traditional postal and telecommunications industry, is in monopoly industry although it belongs to higher-paying industry together with other high-tech industry like computer services and software industry at the same time. We should attach great importance to the changes in the average wage gap between staff in monopoly industries such as electricity, telecommunications, finance and competitive industries, which leads to the main income gap between industries in our country. In Fig. 2.21, we calculate the ratio of the average wage of employees in finance, electricity and information transmission industries to the average wage of staff in the manufacturing industry by comparing the income gap referring to the average

2.3 An Analysis of the Income Gap Among Residents

113

wage of manufacturing workers. As seen in Fig. 2.21, the average wage of staff in the financial sector and manufacturing industry was basically the same and that of the information transmission industry was approximately 1.14 times that of the manufacturing industry, while the average wage of workers in the power industry was approximately 1.3 times that of the manufacturing industry in 1978–1991. The average wage gap of workers between monopoly industry and manufacturing has gradually widened since 1992, from which the ratio of average wages of workers in the financial sector to manufacturing industry rose from 1.12 in 1993 to 2.27 in 2010; the ratio of the average wage of workers in the information transmission industry to manufacturing sector increased from 1.18 in 1993 to 1.46 in 2002, and increased sharply to 2.44 in 2003, then falling to 2.08 in 2010; the ratio of average wages in the power sector to manufacturing industry rose slowly from 1.29 in 1992 to 1.62 in 2008, and declined over the next two years to 2.08 in 2010 with a small change.

2.3.4.3

Decomposition of Income Gap Among Different Industries

According to the data of our sampling survey for national residential income in 2007, 2009 and 2010, we estimated the percentage of the income disparity between different regions and within regions in the national income gap by decomposing the generalized entropy index, which was used to measure the income gap among people across countries, regions and within regions. By the report of Table 2.16, we found that the income gap within the industry widened in 2007 and 2009 with GE(0) indices of 0.35 and 0.38, respectively, and the income gap within the industry is wider than that between different industries, which mainly comes from the former. The contribution of the income gap within industries to the total income gap increased from 84.47% in 2007 to 86.9% in 2009, compared with 96.69% in 2009, where the contribution of the income gap within competitive industries increased from 84.47% in 2007 to 86.9% in 2009, while the contribution Table 2.16 Decomposition result of the income gap among different industries Total Income Gap

2007

2009

GE(0)

Percentage (%)

GE(0)

Percentage (%)

Total Income Gap

0.36350

100

0.38872

100

Income Gap Among Different Industries

0.01202

3.31

0.00488

1.25

Income Gap Within Industries

0.35148

96.69

0.38384

98.75

Including: Income Gap Within Monopoly Industries

0.52407

12.28

0.36838

11.85

Income Gap Within Competitive Industries

0.33563

84.47

0.38605

86.90

114

2 An Analysis of the Current Situation of Income …

of income inequality within monopoly industries decreased from 12.28% in 2007 to 11.85% in 2009. Furthermore, we decompose the income gap between monopoly and competitive industries in the whole country and that in the eastern, central and western regions of China based on the decomposition method proposed by Oaxaca (1973) and Blinder (1973) according to the data of our sampling survey for national residential income in 2010, which drew a conclusion as shown in Table 2.17. The decomposition result of the national sample shows that the unexplained part, which means the rate of unreasonable part of the industry income gap among industries is over 50% in the gap between monopoly and competitive industries by whether canonical decomposition or reverse decomposition occurs, while the decomposition result of the sample of eastern, central and western regions of China reports that the rate of unreasonable part is also more than or close to 50%. That is, 50% of the income gap in our industry is unreasonable and unexplained due to the segmentation of sector, prejudice and so on.

2.4 Summary This chapter further analyzes the distribution pattern of the primary distribution and redistribution of national income based on the review of the reform of the income distribution system since China’s reform and opening-up. Additionally, combining the data of our three sampling surveys for national residential income, we systematically and comprehensively analyzes the income gap between urban and rural areas, different regions and industries, as well as the income disparity within urban areas and rural areas in terms of the income distribution gap of residents. Through the analysis of the composition of GDP through the income method, we find that the proportion of workers’ remuneration to GDP is on a downward trend, while the proportion of government and enterprise income to GDP is on the rise during 1995–2010. We also notice that the average annual growth rate of workers’ compensation is lower than both the average annual growth rate of GDP and that of the income of government, which obtains the fastest growth and the average annual growth of enterprises during this period. In addition, we find that the proportion of government and enterprise income is on the rise, while the proportion of household income fell in whether the first or second distribution was based on the analysis of the flow of funds accounts 1992–2008. Meanwhile, the proportion of residential property income and transfer income to residents’ disposable income also dropped. The second distribution, which did not show a significant result despite some improvement of residential income, is actually a transfer of income from the enterprise to residents and the government, especially the latter. According to the measurement of the Gini coefficient, which reflects the income gap between residents, the internal income disparity between residents in both rural areas and urban areas is expanding, while there is a greater income gap in rural areas.

58.3

100

Inexplicable part

Total

100

55.5

44.5

100

64.7

35.3

Canonical decomposition

41.7

Eastern China

Canonical decompos-ition

Reverse decomposition

Nationwide

Explicable part

Degree of explanation

100

49.8

50.2

Reverse decomposition

100

48.8

51.2

Canonical decomposition

Central China

Table 2.17 Decomposition of the income gap between monopolies and competitive industries (%)

100

65.2

34.8

Reverse decomposition

100

63.5

36.5

Canonical decomposition

Western China

100

59.8

40.2

Reverse decomposition

2.4 Summary 115

116

2 An Analysis of the Current Situation of Income …

The income gap between urban and rural areas, different regions and industries in China is widening with first the increasing ratio of per capita income of urban residents to the per capita income of rural areas, the decline of rural residents’ gross income as a proportion of the total income of the residents and the constant rise of urban residents’ according to the decomposition result of the income gap between rural and urban areas, which shows that nearly half of the income gap in our country consists of that between urban and rural areas. Second, according to the analysis of different regions, the income gap between urban and rural areas is the smallest in the eastern region, followed by the central region, while the largest gap is in the western region. In other words, there is a higher income per capita and smaller income gap in the more economically developed region, and vice versa. Finally, in China, the income gap between competitive industries, such as social services, agriculture, hunting, forestry and fishing, which possess the lowest average wage of workers, and monopoly industries, such as electricity, communications, finance and insurance, which possess the highest average wage of workers, is widening. According to the analysis, the unreasonable portion of the income gap between monopoly and competitive industries exceeds 50%. Through the analysis of the primary distribution and redistribution of national income, as well as the analysis of the income distribution of residents in our country, we believe that there are still the following problems in the income distribution. First, the income distribution pattern of residents, enterprises and government departments is unreasonable; Second, the efforts of government is inadequate and the effect to regulate the redistribution of income is insignificant; Third, the residents’ income gap is still wide, which are not in line with the requirements of the reform of China’s income distribution system. Therefore, we will focus on capital-labor relations, recessive income, income from power and so on based on the disordered part of the income distribution in the subsequent sections of this report with a main line of standardizing the income distribution order.

References English Reference Knight, J., and Li Shi, 2005, Wages, firm profitability and labor market segmentation in urban china, China Economic Review, Vol. 16. Ravallion, M., and Shaohua Chen, 2007, China’s (uneven) progress against poverty, Journal of Development Economics, Vol. 82, pp. 1–42.

Chapter 3

A Qualitative Analysis of Income Distribution Chaos in China

The issue of income distribution comes with the development of the economy. It not only reflects distribution methods and the fairness of economic results but also affects the driving force, sustainability and social harmony of economic growth directly or indirectly in China’s economic transformation. Since it involves a wide range of subjects, diverse sources, quantitative differences, and development imbalances, it has always been one of the core issues in China’s economic and social development. From February to December 2011, the People’s Daily published 30 articles1 on income distribution systems, industry gaps, distribution values, and the process of capital accumulation and flow with increasing income, which pushed the topic of income distribution back in the spotlight. At present, China’s distribution relationship is unreasonable, manifested in “two declining proportions”, “four wide income gaps”, “one relationship that needs to be smoothed out”, “four low incomes”, “one slow growth rate” and “two existing problems”, with infringement, unfairness, disorder, variety, anomie, and illegality.2 It 1

This mainly refers to the fact that income differentiation is gradually accompanied by economic development, which is closely related. 2 Among them, the two declining proportion refer to the declining proportion of residents’ income in the big cake of national income and the falling proportion of labor remuneration in the primary distribution. Four wide income gaps mean the large income disparities between urban and rural areas, regions, industries and groups. One relationship needs to be smooth out refers to the distribution relationship between organizational levels. Four low incomes mean that of farmers, urban and rural poor residents, some retirees and ordinary workers. One slow growth rate is for workers’ wage growth. Two existing problems point that there are both underpaid wages and relatively high wages in some low-end jobs, and some senior executives get excessive wages and a few senior executives get relatively low wages. The “infringement, unfairness, disorder, variety, anomie, and illegality” of the distribution order mainly manifested as escaping without paying salaries and arrear of workers’ wages, unpaid wages for equal work, disorderly payment of wages in special circumstances, some high income outside employer systems, improper distribution of income in the factor market, and a significant proportion of illegal income. For details, see Su Hainan: Current Income Distribution Problems in China and Its Reform Ideas and Policy Measures, Chinese Worker, No. 8 of 2011, pp. 14–22. © Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_3

117

118

3 A Qualitative Analysis of Income Distribution …

can be found out that the major task of the government in this field is how to strengthen the innovation of the social management system, advance the reform of the income distribution system, straighten out the income distribution relationship, standardize the income distribution order, and adjust the income distribution pattern. In response, the State Council approved the Suggestions on Deepening the Reform of the Income Distribution System on February 9, 2013, which provided a programmatic document for improving the income distribution structure and system, increasing the income of urban and rural residents, reducing the income distribution gap, and regulating the order of income distribution. Since the reform and opening up, the income growth of urban and rural residents in China has shown a typical trend of differentiation.3 In 2008, the Gini coefficients of nominal disposable income of urban residents and nominal net income of rural residents reached 0.509 and 0.454, respectively, far higher than 0.45 in previous years. The national income distribution pattern is not optimistic: China’s Gini coefficient reached 0.585 and registered 0.479 and 0.402 in urban and rural areas in 2009, respectively.4 Although the Gini coefficient of national residents’ income declined considerably in 2010, it was still as high as 0.54. According to the Finance Research Center of the Chinese Family of Southwestern University of Finance and Economics, the Gini coefficient of Chinese household income in 2010 reached 0.61, which is rarely seen in the world.5 On January 18, 2013, the National Bureau of Statistics officially announced China’s Gini coefficient of national residents’6 income from 2003 to 2012. A number of reasons have led to this situation, of which two major changes in the income distribution system since 1989 have played an important role:

3

From 1978 to 2010, the growth rate of disposable income of urban residents has been steadily higher than the growth rate of rural residents’ net income, and their average annual growth rates were 5.45 and 5.15%, respectively. As far as the income of urban and rural residents is concerned, from 1990 to 2011, the average wage income of urban residents in China increased by 11.9 times, while the growth rate of net operating income and property income was 76.2 and 33.4 times, respectively. In 2011, the proportion of wage income in urban residents’ income was 64%, an increase of 12.4% over 2010, and the growth rate after excluding price factors was 6.7%. In the same year, the proportion of rural residents’ wage income in net income was 43%, with a growth rate of 21.9% and a growth rate of 15.4% after excluding price factors. 4 Yang and Sun (2010). 5 The authenticity of this data has aroused much controversy in both the academic world and society. For example, there are many doubts about the sampling method and the accuracy of the estimation about income of the lowest income group. For details, see Li Shi and Yue Ximing’s academic debate with Gan Li on this issue. Although the specific values are yet to be verified, the abovementioned studies have pointed out to varying degrees that the pattern of China’s residents’ income distribution since 2000 is indeed not optimistic. For details, please refer to Gan Li, Yin Zhichao, etc.: China Household Finance Survey Report 2012, Southwestern University of Finance and Economics Press, 2012. 6 The specific values are 0.479 in 2003, 0.473 in 2004, 0.485 in 2005, 0.487 in 2006, 0.484 in 2007, and 0.491 in 2008. Then, it gradually declined to 0.490 in 2009, 0.481 in 2010, 0.477 in 2011, and 0.474 in 2012. For details, please refer to the Gini Coefficient of Mainland China Published by the Bureau of Statistics from 2003 to 2012, January 18, 2013.

3 A Qualitative Analysis of Income Distribution …

119

first, the gradual elimination of rural collective distribution methods and the participation of rural production factors in the decision process of farmers’ income. The widespread establishment of bonus and piece rate wage systems in urban enterprises has led to a further increase in the imbalance of the sharing of income and results. The distribution of total income is not only an economic issue but also a social issue. Objectively, critical thinking is required to deeply understand the problem of income distribution. To date, the previous research tends to focus on the value, system, situation, cause and countermeasure of income distribution, rather than the research on causes of the disorder of income distribution, such as labor relations, political power, and recessive economy. Of course, some scholars have carried out some relevant research and pointed out the general idea of adjusting the income distribution pattern and regulating the order of income distribution as follows: creating a good system to strengthen the role of taxation on income redistribution to achieve a systemic restriction on the high income of monopoly industries; promoting salary reforms in public institutions; increasing employment rates; improving retirees’ salary system and the subsistence allowance system, realizing the stable transfer of rural migrant workers in cities; and gradually realizing the olivary structure of income distribution.7 In the process of primary distribution, redistribution, and third distribution, the fundamental role of the primary distribution cannot be underestimated, which should be stressed. The chaotic income distribution order in the primary distribution and hidden rules have led to a greater downside risk8 to the income of Chinese residents, which is also an important point in the top-level design process and a difficult problem to be solved. Only if the formation mechanism of the primary distribution is reasonable and can tolerate the demands of various groups for such income formation can redistribution on this basis promote social justice more effectively. This chapter will focus on three major issues that cause disorder in China’s income distribution, especially in the field of primary income distribution, namely, the imbalance in the relationship between labor and capital distribution, the interference of public power with private rights, and the widespread existence of invisible income. In the primary distribution, the labor-management relationship is one of the problems that every income class cannot ignore. The first section specifically discusses the manifestation of state-owned and non-state owned systems in accordance with their types. In the transition process, the labor-capital relations between the two ownership systems have some similarities but also many differences.9 The second section explores the relationship between public and private rights. It mainly analyzes observable improper interventions and unobservable power-for-money deal, which shows that some intervention of political power in the economic market has gradually degraded the pattern of residents’ income distribution, causing social disharmony to a certain extent. The third section focuses on the explicit economy and recessive 7

Yang, Guo et al. (2010). Yu (2011). 9 Due to the limited information set and inconsistent behaviors during the implementation of policies, labor-capital relations have evolved in two types of enterprises. 8

120

3 A Qualitative Analysis of Income Distribution …

economy. The recessive economy has existed since the founding of the People’s Republic of China in 1949, which changed over time. Because it has always existed in the wage system, it is mainly reflected in the change of wage components. Compared with the explicit economy, the recessive economy has some forms that are legal but unreasonable, its comparable standards are lacking, and its specific connotation is very complicated. Therefore, the characteristics of the recessive economy are difficult to summarize. Here, we summarize the hidden economy in China mainly in accordance with the provisions of the SNA (1993) accounting system to illustrate the potential negative effects of this type of economic form on income distribution.

3.1 Labor-Capital Imbalance and Income Distribution Chaos To a certain extent, there is a close internal relationship between the deterioration of labor-capital relations and the disorder of income distribution. When the chaotic income distribution order appears, it usually means that the basic values of distribution have been distorted to some extent, which manifests as the unfair distribution of labor and capital in the forming process of labor income. In addition, the deterioration of labor relations has a demonstration effect, which easily expands from a single industry to multiple industries, especially when the illegal cost is low. In this process, the destruction of the income distribution order will inevitably spread from the part to the whole, eventually leading to a chaotic income distribution order. In this sense, the imbalance of labor-capital relations has a significant negative impact on the income distribution order. Overall, the development of China’s labor-management relations has characteristics of stage, region, and diversity. However, the specific situation of labor-capital relations cannot be fully discussed. Therefore, by comparing the labor-capital relations between nonstate-owned enterprises and state-owned enterprises in China since the founding of the People’s Republic of China from the aspects of time10 and ownership, this chapter will provide a corresponding factual basis for the current situation analysis and policy making.11 First, in the first part, the four main stakeholders in labor-capital relations are clarified. Then, in the second and third parts, the conflicts of interest between the laborers and the managers in the non-state owned enterprises and the state-owned enterprises will be discussed. In addition, we will analyze the root causes of labor-capital conflicts, summarize their characteristics, and explore the development trend of labor-capital 10

The analysis here will mainly focus on the time after the reform and opening up. After 1978, China’s labor-capital relations began to show new trends. Here, the four aspects of labor conflicts between labor-management stakeholders, nonstate-owned enterprises, and labor-management relations in state-owned enterprises and transmission mechanisms will be described, respectively. 11 The first chapter has explained the current situation of labor relations from a macro level. This section focuses on the impact of imbalances in labor-capital relations on the disorder of income distribution from a micro-level to avoid repetition.

3.1 Labor-Capital Imbalance and Income …

121

relations after reform and opening up. Based on these characteristics, the fourth part will analyze how the imbalance of labor-capital relations leads to a chaotic income distribution order.

3.1.1 Stakeholders The labor-capital relationship is one of the basic relationships in the process of economic and social development12 and is also one of the three major relationships that need to be adjusted in the reform of China’s income distribution system. Engels once pointed out, “The relationship between capital and labor is the axis of rotation on which all our modern social systems depend.” With the rapid development of China’s economy, the subjects involved in the distribution process of labor and capital have become increasingly diversified. In this environment, labor-capital relations gradually show multistage and dynamic characteristics. The overall situation of China’s labor-capital relations is great, but it should be worried about in some areas. Moreover, the system is gradually completed, and the operation is not good enough.13 At present, the four main bodies of interest in China’s labor relations are labor suppliers, capital owners, production operators and governments. Among them, labor suppliers are the groups of the right age with working ability and are willing to work and have jobs. With the change of corporate governance structure and the implementation of shareholding reform, capital owners have gradually evolved from simple funders to complex and dispersed equity owners. Production managers are actually enterprise managers, and they have differentiated selection and appointment methods under different types of ownership. Although these three types of subjects maximize their interests under the premise of market rules, it is still difficult to avoid the conflict between individual rationality and collective rationality. Therefore, it is necessary for the government to intervene to compensate for the possible deficiencies in the market process. Thus, the labor-capital relations analyzed in this section are mainly based on the interaction between the abovementioned four subjects in the forming process of workers’ wages.

12

The State Council approved the Several Opinions on Deepening the Reform of the Income Distribution System on February 9, 2013, stating that handling major relationships between labor and capital, cities and rural areas, and the government and the market is a way to deepen the reform of the income distribution system and promote the development of reforms in related fields in depth to improve the socialist market economic system. 13 Research Group of National Federation of Trade Unions: Influencing Factors and Development Trends of China’s Labor Relations in the “Twelfth Five-Year Plan” Period, Research of Labor Movement, No. 16 of 2012.

122

3.1.1.1

3 A Qualitative Analysis of Income Distribution …

Labor Supplier

In recent years, labor-capital relations have tended to diversify. With the relative change of the relationship, there is a drop14 in the evaluation of labor suppliers’ performance in labor-capital relations (hereinafter referred to as labors). While the number of labor disputes has gradually increased, the unilateral winning rate of labor has gradually decreased. This not only shows that workers’ awareness of solving their own problems through legal approaches has been significantly enhanced but also reflects the lack of basic legal knowledge of workers. The lower confidence of laborers in labor unions and the limited number of actual requests for help indicate to a certain extent that the defenders of laborers’ interests in labor-capital relations—the trade unions—have experienced an executive crisis or even a trust crisis in some links. If the voice of vulnerable groups such as laborers is ignored, society will gradually lose mutual trust and begin to become violent,15 which is obviously not conducive to the construction of a harmonious labor-capital relationship with a focus on the market, contracts, legal system, and effective supervision.16 An important social phenomenon occurs when the identity of workers changes, that is, the lack of workers’ rights in the transition period, which means the rights of workers (such as stable employment, wages, and welfare benefits, etc.) in the planned economy no longer exist. However, the laborers’ rights that should be in the market economy, such as social security, the representatives of trade unions, collective negotiation, and collective action, have not yet been put in place, which directly leads to difficulty in realizing the basic labor rights of workers.17 This is one of the unique situations in China’s economic transition,18 and it is also a relatively weak part of labor-capital relations. The resolution of conflicts in this area is related not only to whether the immediate interests of specific workers can be protected but also to whether China’s market economic system construction can be smoothly and orderly advanced in accordance with the designed goals.

14

At present, employees have different of understanding about the levels of occupations. In terms of job stability, managers have the steadiest jobs. In terms of security, blue-collar and white-collar workers are even more vulnerable. Here, the safety of the three types of employees is relatively high, but there is relatively little room for growth. As for the distribution of managers’ political identities, the distribution of political identities of blue-collar workers is exactly the opposite. For detailed data analysis, please refer to the National Workforce Status Survey Office of the National Financial Association: The Fifth Analysis Report on the Statistics of the Fifth Workforce Survey in 2002, The Fifth Survey of the Status of Chinese Workers, Beijing: Chinese Workers Press, 2006. 15 Gao (2013). 16 Research Group of China Labor Movement Research Institute: Development Trends and Countermeasures of China’s Labor-capital Relations in the “Twelfth Five-Year Plan Period”, Modern Finance and Economics (Journal of Tianjin University of Finance and Economics), No. 5 of 2012. 17 Chang (2004). 18 From 2003, when Premier Wen helped Xiong Deming, a migrant worker in Chongqing, to ask for salary until 2013, due to the excessive cost of asking salary, many migrant workers in China still have difficulty getting rid of their unpaid fate. For details, see Zhang Moning: Migrant Workers’ Salary: Ten-Year Rights Dilemma, South Reviews, No. 3 of 2013.

3.1 Labor-Capital Imbalance and Income …

123

The earned income of workers based on their economic contribution is partly deprived of by managers,19 so there is a more significant stratification between workers and managers. As far as workers’ overall understanding of labor-capital relations is concerned, employees with different occupations in different ownership enterprises have various opinions, which is consistent with changes in social stratification to some extent.20 Actually, this production method is moving in the wrong direction. Marx made the following assertion about the alienation of economic development: if laborers become pure production tools, the more goods they produce, the lower the relative social status they have.21 On a macro level, the share of labor’s income in GDP has the tendency of first increasing and then declining. It reached a peak of 53.6% in 1982 and then continued to decline. It was 51.4% in 1995 and only 45.4% in 2007. In 1995, the share of labor income in GDP in the United States, Japan, and South Korea was 62.2, 66.1, and 74.3%, respectively, and it accounted for 61.7, 58.5, and 67.6% (ILO) in 2007. As the education structure of laborers22 continues to optimize, although the proportion of laborers’ wage share in GDP in the world is declining, the data in China, a developing country, have gradually decreased to approximately 45%, which is an important practical issue that cannot be avoided. There are many factors leading to this problem, the most important of which is that after the financial crisis in 1997, in addition to the higher wage growth of workers in the mining and financial industries, the actual wage of workers in some industries in China has basically shown low growth, zero growth or even negative growth, which has restricted the increase in the share of labor wages in GDP to a large extent.

19

Lu (2002, p. 157). For detailed data analysis, please refer to the National Workforce Status Investigation Office of the National General Staff: Statistical Data Analysis Report of the Fifth National Workforce Status Survey, the Research of Labor Movement, No. 2 of 2005. 21 China (Hainan) Institute for Reform and Development: Advices on China’s Reform: Theory, China Economic Publishing House, 2011, p. 83. 22 If workers with a high school degree or above are regarded as highly skilled workers, then the proportion of high-skilled workers in the total social workers in China in 1990 and 2010 was 10.60 and 23.98%, respectively. It has more than doubled, with an average annual growth rate of approximately 7%. If a worker with a college degree or above is regarded as a high-skilled worker, a worker with a junior high school or high school degree is a medium-skilled worker, and a worker with degree below junior high school is a low-skilled worker. Then, in 1990 and 2010, the proportion of high-skilled laborers in China’s total laborers was 1.6 and 10.09%, and the proportion increased by more than eight times in more than a decade, with an average annual growth rate of approximately 15.35%. In 1990 and 2010, the proportion of skilled workers in the whole society was 62.9 and 27.27%, respectively. The proportion of skilled workers fell by 60% in more than ten years, with an average annual decrease of about −6.96%. In 1990 and 2010, the proportion of high-skilled laborers in China’s total laborers was 35.5 and 62.64%, which nearly doubled in more than a decade, with an average annual growth rate of approximately 4.73%. In this sense, one of the more significant changes in education over the past two decades is that the proportion of workers with junior high school degree or below has continued to decline among all workers, and the proportion of workers with junior high school degree or above, especially those with junior college degree or above, has increased significantly. 20

124

3.1.1.2

3 A Qualitative Analysis of Income Distribution …

Capital Owner

When laborers began to divide within themselves, the connotation of capital owners also changed greatly. We analyze the subject of the capital owner first and then the original sin of the capital owner in our country to discuss the conflict of labor-capital relations later.

Subject of Capital Owner After the shareholding reform, the specific identities of labor and capital in stateowned enterprises began to undergo important changes. First, the shareholdings of enterprise employees make some of the stockholders also become the owners of stateowned enterprises and enjoy the residual claim of the enterprise,23 which is one of the new problems in the process of shareholding reform that has led to changes in labor relations within state-owned enterprises. Therefore, the conflict and coordination of labor-capital relations are more concentrated in enterprise unions and the management of the enterprise to a certain extent. As the employee’s representative and the trade union also enjoy indirect control over part of the equity of the enterprise. In this case, the trade union is representative of both labor and capital. Second, the active introduction of foreign capital in shareholding system reform has also expanded the scope of the concept of capital in the enterprise. In this connection, the capital representatives of state-owned enterprises include the state, phantom entrepreneurs, foreign investors, laborers, other independent legal persons and individuals. For a single enterprise, although there are certain differences in the structure of the management, the diversification of management has become an inevitable trend in the process of shareholding reform.

The Original Sin of Capital In fact, the original sin of capital is not a new concept. Generally, most poor people and the few wealth people began with this original sin: Regardless of how the former works, there is still nothing to sell except themselves, while the latter has did not work for a long time, but their wealth has continued to increase.24 As far as the concept of the original sin of capital in a capitalist country is concerned, it is a direct deprivation, 23

The policies issued in this regard include that on March 16, 1993, State Commission for Restructuring the Economic System convened a meeting of some provinces and cities on strengthening the management of internal employee stock ownership. On July 3, it issued the Regulations on the Management of Shares Held by Internal Employees in Targeted Raising Co., Ltd., which stipulated the scope and transfer of internal employee shares. With the changes in the economic environment, the State Commission for Restructuring the Economic System issued the Notice on Immediately Stopping the Examination and Approval of Directly Raising Co., Ltd. and Reiterating the Cessation of the Approval and Issuance of Internal Employee Shares on June 19, 1994. 24 Marx (1975, p. 78).

3.1 Labor-Capital Imbalance and Income …

125

that is, exploitation, of people’s rights to life and property in other regions during its early development.25 The original sin of this primitive accumulation of capital is obvious. According to today’s classification of color income, it can be classified as black income and red income. The social division of labor is rapidly advanced due to the primitive accumulation of predatory capital, which causes an increasing number of workers to be involved in the production process so that the general relationship of exploitation appears. In the process of capital deepening (capital substitutes labor), the appreciation ability of capital has gradually increased, to a certain extent, leading to a continuous decline in the proportion of labor income in the primary distribution. Although the consideration of increasing workers’ pay will help improve this situation to a certain extent, it is carried out under the premise of recognizing the legality of capital and labor, which is a strong assumption. The increase in the organic composition of capital will inevitably lead to an increase in the wage of workers, but it is not necessary to ensure that there is consistency in the rising rate of the two. The scale effect of capital for seeking profits urges capital owners to shift toward industries that are more profitable. Capital with an original sin is a necessary carrier for accelerating the process. That premise will be questioned here. This part will analyze the formation of labor income in the evolution of labor division from the perspective of original sin in the process of capital accumulation. In our country, the formation of capital has specific historical characteristics. To better analyze the labor-capital relationship under the two ownerships, it is necessary to objectively introduce and analyze the original sin of capital in the two ownership enterprises. In our country, the original sin of capital accumulation may exist in state-owned capital joint stock companies and other types of enterprises. In addition to the abuse of strong capital’s right to dominate labor surplus products, the original sin here also includes derived benefits arising from such dominance.26 As far as the identification of original sin is concerned, there are generally two perspectives of income and expenditure. However, after part of capital with original sin was obtained, it would be hoarded and withdrawn from the circulation field, which is hard to reflect in expenditure. Therefore, it is more reasonable to identify the problem of original sin from the perspective of income. In this case, the income earned by violating the rules of the market economy, beyond the provisions of the law, or challenging social ethics can be defined as income with original sin. The characteristics of the original sin mainly include the following aspects. First, there is a high degree of concealment. Such activities are difficult to observe in public statistics, as they involve fundamental principles of competition in social markets. 25

Exploitation is the coexistence of labor and capital. In this sense, exploitation determines the inequality of income distribution, especially the impropriety in primary distribution process. If there is a problem with the primary distribution mechanism, the adjustment effect of redistribution will be greatly reduced. Therefore, we believe that a reasonable and effective primary distribution system is an important institutional prerequisite for income distribution order to be recognized and accepted by society. 26 According to the current method of dividing income with five colors, some gray and all black and black income can be classified into this category.

126

3 A Qualitative Analysis of Income Distribution …

The second is the weak legal supervision. The original sin in early capital accumulation can hardly be studied due to vacancies or negligence in legal supervision and technical reasons. These not only give acquiescence to the previous means of capital accumulation but also guide future capital accumulators to accumulate capital, taking advantage of the legal deficiencies of one or more countries. The third is strong social guidance. Because it is stressed to use the forces besides the market to achieve profitability for micro-entities, the impact of this demonstration effect is usually negative. Fourth, the potential harm is great. The capital accumulation generated in this way is a challenge to the fairness of social wealth distribution, so it is likely to have a potential impact on income groups at different levels and even the basic concept of social income distribution justice. In addition, it is easy to stimulate contradictions among different income classes and lead to the growing psychological identity of the hatred of the rich in society due to the relatively low cultural quality of the extremely wealthy class generated in this process. In addition to the abovementioned basic characteristics, there are some differences in the mechanism and manifestations of the original sin between the enterprises in state-owned capital joint stock enterprises and other types of enterprises. The underestimation of the value of labor from state-owned capital in development belongs to the improper trade-off between accumulation and consumption within the people. The exploitation of capitalists to the labor force means that a minority person’s benefit directly invades the majority person’s individual benefit. The former has certain stages, which will be continuously adjusted and regulated along with the development of state-owned capital. The latter is an endogenous problem that exists in all stages of development of the capitalist mode of production. Specifically, the original sin of capital accumulation in state-owned enterprises is mainly reflected in the following three aspects: First, before the reform and opening up, there was also a relatively severe lowwage system in the operation of state-owned capital in China when the value of labor was artificially underestimated. Since 1978, this underestimation has continued to exist within a certain range, but it has been transformed into an incomplete basic welfare system for employees. Second, most state-owned capital in China was generated and accumulated after the founding of the People’s Republic of China. For a long period of time, China has implemented a planned economy management model, and the operation of stateowned capital has received too much interference from leaders. Such subjective allocation of resources will inevitably conflict with market demand for resources. One of its serious consequences is the prevalence of speculative behavior caused by the double-track price system. In addition, the workers of state-owned capital are basically urban residents. In the process of maintaining and increasing the value of the entire social capital, it is difficult for rural residents to share the benefits equally because they have not been included in this production process. Therefore, state-owned capital uses the resources of the whole society to better serve urban residents, which has a certain inhibiting effect on objectively increasing the individual income of rural residents.

3.1 Labor-Capital Imbalance and Income …

127

In comparison, because the principle of distribution can be fully and effectively implemented in practice, the original sin in the capital accumulation process is usually seen in private enterprises and other types of institutions. Among its many characteristics, the most obvious is that the erosion of the individual capital owner’s compensation to workers has an individual motive for profit. Since the reform and opening up, the original sins in non-state owned enterprises are mainly reflected in the following three aspects: First, the original sin was caused by the conflict between rapid economic development and institutional control. This is mainly because the existing system followed the old system, in which the old model and new model are incompatible with each other in the process of rapid marketization. This kind of original sin has specific historical stages. Second, to grow larger, private enterprises continue to erode the basic interests of workers and deliberately ignore the implementation of relevant welfare policies, which is also related to the lack of capital but relative abundance in labor resources in China in the past 30 years. The existence of this pattern of benefit distribution can also be seen as a concrete manifestation of improperly handling accumulation and consumption issues at the micro level. During the system transition, the original sin of nonstate-owned capital was particularly obvious, such as the period of the double-track price system, the period of decentralization of powers, and the period of the shareholding system reform since 2000. The most typical one is the neglect of employee wage arrears and their related benefits. The black income and the red income of the five color income forms are also closely related to the profit-seeking process of such non-state capital. If this type of capital is linked to political power and thus generates a chain of income benefits, then the original sin raised from it cannot be ignored. It can be said that clarifying the original sin of capital helps to further explore the specific formation and historical evolution of labor-management relations in state-owned and nonstate-owned enterprises. This section analyzes the labor-capital relations in nonstate-owned enterprises and state-owned enterprises based on a brief description and evaluation of the current situation of the labor-management relation.

3.1.1.3

Producer

The state-owned economy still occupied a dominant position in the national economy amidst the development of the nonstate-owned economy. The identity and role of production managers are different in these two types of ownership enterprises. In the early 1990s, a discussion about the reform of state-owned enterprises’ shareholding system appeared in China. The contracting system of state-owned enterprises and corporate agents (namely, phantom entrepreneurs) promoted the extensive growth of enterprises to a certain extent. For most enterprises, the realization of national tasks under contract systems and the improvement of employee benefits are more achieved through price and output adjustments rather than product

128

3 A Qualitative Analysis of Income Distribution …

technology upgrades and management structure optimization. In other words, quantitative change has become the main means of adjustment, deviating from the original intention of the state-owned enterprise trustees to improve the efficiency of business operations to some extent. In addition, the devolution of the residual claims was not implemented in line with the supplement of the detailed plan, which made the functional positioning of the owners and agents specific areas blur that the final responsible person cannot be figured out in the production and operation process. In private enterprises, the producer and operation manager is often the owner of the capital who performs the right of possession and control at the same time. Therefore, they directly control the residual claims.

3.1.1.4

Government

In the process of economic development, the pursuit of profit can be described as an eternal theme in the market. The old sayings from Sima Qian that the world bright, all come for benefits, the world rejects, all go to for benefit fully proves this.27 In fact, although the market provides good guidance for micro-subjects, it is also difficult to effectively regulate in some areas. Therefore, it is necessary for the government to give some proper guidance to a certain extent as a way to compensate for the limitations of the market. At the same time, compared with capital owners, workers are in a weak position, so the adjustment of labor-capital relations also requires the government to play its due role. Both of these reflect the objective necessity of government intervention. In the process of concretely adjusting labor relations, it is one of the important responsibilities of the government to establish general norms so that such rules can be implemented effectively. The government should mediate the conflict or provide arbitration services if labor disputes or other issues that may disrupt labor-capital relations appear. In addition, because the state-owned economy occupied a dominant position in the national economy, the government has dual identity. Therefore, whether the government can fairly handle labor-capital relations in the process of preserving and increasing the value of state-owned assets has become one of the important topics in the development of state-owned enterprises. In this sense, the role of government in labor relations can be defined as follows: (1) Protectors of basic labor rights; (2) Facilitators of collective bargaining and employee participation; (3) Mediators of labor disputes; (4) Planners of employment security and human resources; and (5) Employers in the public sector.28

27 28

Sima Qian: Social Economy Commentary Section of the Historical Records. Cheng (2007, pp. 140–141).

3.1 Labor-Capital Imbalance and Income …

129

3.1.2 Conflict of Interest: Labor Relations in Nonstate-Owned Enterprises Under the premise of clarifying the stakeholders of labor relations, the first thing that needs to be examined is the disorder of labor-capital relations in nonstate enterprises. Clarifying the institutional causes of the disordered labor-capital relations in the private economy helps to understand the root causes of the chaotic income distribution order in the state-owned economy. At present, non-state-owned economy is gradually becoming an important component. We can ignore it. In some provinces, labor relations have deteriorated in recent years, which led to a series of mass incidents, such as the Foxconn and Honda incidents in Hubei in 2010. According to the actual investigation in Hubei Province, there are three main reasons leading to the Foxconn incident: severe imbalance between labor payment and remuneration (62.7%), high labor intensity and long labor hours (59.7%), and improper corporate management because of the lack of humane care (49.8%).29 Therefore, analyzing and summarizing the characteristics of labor-capital relations in nonstate-owned enterprises has certain reference significance for correctly understanding the income distribution order in nonstate-owned enterprises and even the income distribution order in various ownership industries across the country. Thus, we will provide a specific summary of the characteristics of labor-management relations in the nonstate-owned economy after the reform and opening up from the four aspects of the wage system, social security, labor contracts and union systems.

3.1.2.1

Wage System

The wage formation mechanism and growth level are the core issues of labor relations in enterprises. After the reform and opening up, the adjustment of the wage level of nonstate-owned enterprises is both a compensatory adjustment under a certain profit30 and a policy adjustment under the background of public–private partnerships. Since the two types of adjustments were carried out at the same time, the wage level within and between industries became the core issue of labor-capital relations during this period. The negotiated wage level between the employer and the employee directly determines the actual relationship between the two parties in the production and operation process.

29

Research Group of Hubei Federation of Trade Unions: Investigation Report on Labor Relations and Trade Union Work in Nonpublic Enterprises, Research of Labor Movement, No. 16 of 2011. 30 Compensatory adjustment means that nonstate-owned enterprises have raised the lower wage of previously exploited workers at a growth rate exceeding normal rate after the establishment of the master position of the labor.

130

3 A Qualitative Analysis of Income Distribution …

Since 1978, the labor-capital relationship in nonstate-owned enterprises has been closely related to the form of their income, especially for labor-intensive nonstateowned enterprises. It should be pointed out that before the 1990s, China’s nonstateowned economy was mainly concentrated in rural areas. Thus, the labor-capital relations in nonstate-owned enterprises in this period were simple employment and production, so that they did not form intricate labor-capital relations. Due to the limited number, the scope of labor relations in such enterprises is relatively small. It can be said that labor-capital relations in nonstate-owned enterprises in this period were generally in a restricted state. With the continuous deepening of reform and opening up, nonstate-owned enterprises have also gained wider development space, showing a rapid development trend. Since the 1990s, labor-capital relations in nonstate-owned enterprises have shown a trend of diversification and sharpening conflicts in the process. In particular, as the elements participating in the income distribution, the benefits obtained by managers are part of corporate profits, which are difficult to compare with pure cost compensation benefits.31 In summary, the core of the wage problem in labor-capital relations in nonstateowned enterprises is concentrated in the following three areas: relatively low wage levels, delayed payment deductions, and overtime work.

Relatively Low Wage Levels Generally, wages are lower in nonstate-owned enterprises, especially workers in labor-intensive industries. This low wage level is a reality due to abundant labor resources in China,32 which is widespread in labor-exporting provinces.33 However, according to Huang Mengfu (2011),34 it seems different from the actual situation in specific provinces, which may be due to the smaller number of samples or the choices of samples. According to its analysis results, the current labor-capital relationship will not be so complicated. Due to the stark contrast between the low cost of illegal business owners and the high cost of regulatory agencies, this lower level of wages is widespread across the country. The extreme form of this paradoxical reality has directly caused workers to provoke mass incidents because their rights cannot be realized. Therefore, the 31

Liu (2005, p. 293). For detailed data analysis, please refer to the Labor Relations Research Group of the Shaanxi Federation of Trade Unions: Research on the Harmony of Labor Relations in Non-Public Owned Enterprises, Research of Labor Movement, No. 5 of 2007. 33 For detailed data analysis, please refer to the Research Group of Hubei Federation of Trade Unions: Investigation Report on Labor Relations and Trade Union Work in Nonpublic Enterprises, Research of Labor Movement, and No. 16 of 2011. 34 His survey results show that in 2010, his survey results show that in 2010, 85.3% of mediumsized enterprises determined wages above the minimum wage level, so do 83.2% of the small-sized enterprises. For details, please refer to Huang Mengfu: Survey of Wages of SME Workers in China, Social Sciences Academic Press, 2011, p. 28. 32

3.1 Labor-Capital Imbalance and Income …

131

existence of low and medium wages in nonstate-owned enterprises has a negative impact on their own business development and social harmony and stability. This disharmonious relationship can only be resolved by indirect means due to the lack of rich means of regulation in state-owned enterprises. Therefore, the evolution of laborcapital relations in nonstate-owned enterprises is closely linked to the sustainable development of society.

Delayed and Deducted Wages In recent years, the delayed and deducted wages of workers in nonstate-owned enterprises have occurred from time to time, some of which have developed into labor-capital conflicts. In fact, many labor disputes and mass disturbances in the real world are closely related to delayed and deducted wages of workers. There are three specific negative effects of this: business owners have access to interest-free loans for workers at the economic level. They violate workers’ labor rights at the legal level. They undermine the basic concept of fairness and justice of distribution at the social level.35 This phenomenon also has obvious geographical characteristics; for instance, in recent years, there have been more extreme events caused by labor disputes in the Pearl River Delta than in the Yangtze River Delta due to the lack of a “human” management model.36 The All-China Federation of Trade Unions (ACFTU) issued a Notice on Further Promoting the Solution of Migrant Workers’ Wages Delayed in early 2010 as it seeks to regulate this situation, further ensuring that migrant workers can obtain wages in a timely manner. The Notice of Several Opinions on Deepening the Reform of the Income Distribution System approved by the State Council on February 9, 2013 also stipulates the following: Improving the wage payment guarantee mechanism requires bringing things such as sectors with salient issues of delayed wages and industries prone to delayed wages into the key monitoring range, while the plan on differentiated margin wages payment related to enterprise credit rating needs to be improved. It is necessary to implement the responsibility system of the general contracting enterprises for the liquidation of unpaid wages, the system of the joint action of administration and judicial judiciary to combat the malicious underpayment of wages, and the system of ensuring the responsibility of the territorial government for the payment of wages.

35

From January to July 2011, cooperating with relevant departments to carry out special inspections of migrant workers’ wages, the All-China Federation of Trade Unions (ACFTU) recovered 2.54 billion yuan of arrears of wages for 1.058 million workers, 2.34 million migrant workers of which recovered 2.26 billion of arrears of wages. See 934,000 Migrant Workers Recover 2.26 billion Yuan in Arrears of Wages wrote by Jiang Yunzhang, Economic Observer Network, August 18, 2011. 36 Liu et al. (2011).

132

3 A Qualitative Analysis of Income Distribution …

The Ubiquitous Phenomenon of Overtime It is difficult for workers to take their holiday entitlement because of the high labor intensity and long working hours in some labor-intensive industries, which has long existed in the main labor-exporting and importing provinces of China. Over time, the situation has seen a wider and longer period of excess labor rather than being effectively improved, which is actually a violation of the workers’ right to work. Moreover, this overwork is in fact a squeezing use of workers’ values. Overwork remained in many industries in 2010, especially in contract manufacturing enterprises, textile and garment processing and some service industries. For example, the phenomenon of high labor intensity and a three shifts system is common in some textile enterprises37 that employed low-level labor in low-value-added labors, while workers’ income rights are difficult to effectively guarantee, thus having fewer opportunities for workers to improve their income. As a result, it makes labor relations in textile industries vulnerable and sensitive, posing an increasing frequency of mass incidents.

3.1.2.2

Social Security

Theoretically, social security is closely related to the vital interests of workers. At present, the participation rate of social security in nonstate-owned enterprises is low due to insufficient premium payments, a lack of awareness and weak supervision. Nonstate-owned enterprises have the lowest rates of coverage for the five insurances,38 which is related to the increasing disputes between workers in society, especially those in nonstate-owned enterprises, and employers in recent years.39 As far as the specific structure is concerned, there are great differences in different types of insurance coverage. Generally, the insurance coverage of old age and unemployment is higher,40 while the other three types are relatively low (more details can be seen in the practice report41 ). Under the background of the global financial crisis, social security funds have become one of the means for the state to adjust the burden

37

For detailed data analysis, please refer to the Research Group of Hubei Federation of Trade Unions: Investigation Report on Labor Relations and Trade Union Work in Non-Public Enterprises, Labor Movement Research, No. 16, 2010. 38 They are pension, maternity, work injury, medical and unemployment insurance. 39 National Workforce Survey Office of the All China Federation of Trade Union (ACFTU): Analysis Report on the Fifth Workforce Survey Statistics in 2002, China Workers Press, 2006. 40 For detailed data analysis, please refer to the Research Group of Hubei Federation of Trade Unions: Investigation Report on Labor Relations and Trade Union Work in Non-Public Enterprises, Labor Movement Research, No. 16, 2010. 41 For detailed data analysis, please refer to the China Private Enterprise Research group: China Private Enterprise Report of Social Practice Survey in 2011, 2011.

3.1 Labor-Capital Imbalance and Income …

133

of enterprises.42 Although this method alleviates the survival pressure of nonstateowned enterprises to a certain extent, it provides more development space for enterprises seeking low labor costs, which in turn harms the basic interests of workers and provides no room for the upgrading of industries.43

3.1.2.3

Labor Contracts

This mainly refers to the disorder of labor-capital relations due to problems in the conclusion and enforcement of labor contracts,44 which is more common in specific industries. The results of the sixth national survey on the status of the national workforce conducted by the All China Federation of Trade Unions (ACFTU) in 2007 show45 that the mechanism for coordinating labor relations and safeguarding the rights and interests of workers in China’s enterprises is still not perfect, and the rate of establishment of the collective contract system and the proportion of collective wage negotiations are low.46 Compared with SOEs, the coverage of labor contracts in nonstate-owned enterprises is limited.47 In addition, there are many noncompliance situations in the payment of laborers’ remuneration during the employment period, 42

. For details, please refer to the Ministry of Human Resources and Social Security, the Ministry of Finance, and the State Administration of Taxation (SAT): Notice on Taking Proactive Measures to Reduce the Burden on Enterprises and Stabilizing the Employment Situation, No. 117 [2008] of the Ministry of Human Resources and Social Security. 43 Professor Wang Yijiang believes that relying on cheap labor to achieve the rapid development of SMEs is an important aspect of China’s structural adjustment and sustainable growth. That it can infringe on laborers’ interests, which is a staged problem in the development process. Along with the improvement of workers’ own skills, the level of income they can obtain will also improve accordingly without excessive government intervention. However, this view is questionable. After the workers have accumulated a certain amount of work experience, whether they can truly improve their own skills, and whether they are willing to change the work unit which means change their children school, and whether they can achieve flexible employment, all of which are still unproven propositions in China. In addition, the fact that China’s urban–rural and regional divisions (such as limited docking between social security regions) also makes this logic lack a realistic basis in China. Government intervention in SMEs is necessary in the development process. Although the general trend is that the burden on SMEs should be gradually reduced, it does not mean that the system will tilt to one side toward these extensive SMEs. The current labor resources and preferential policies should be enjoyed more by innovative small and medium-sized enterprises (SMEs) to realize the upgrading of the industrial structure. For details, see Wang Yijiang, A Discussion on Development and Distribution Issues of the People’s Wealth, CITIC Press, 2010. 44 Only 64% of employees signed contracts in private companies in 2011. For details, please refer to the China Private Enterprise Research group: China Private Enterprise Report of Social Practice Survey in 2011, 2011. 45 The survey is by far the latest survey by the All China Federation of Trade Unions (ACFTU). 46 China’s Workforce in the New Journey of Building a Well-off Society in an All-round WayGeneral Report on the Sixth National Survey of the Status of the Workforce, Worker Movement Research, No. 16, 2008. 47 For detailed data analysis, please refer to the All-China Federation of Industry and Commerce, China Civil (Private) Economic Research Association: China Private Economic Yearbook: 2008.6– 2010.6, China United Business Industry Press, 2011.

134

3 A Qualitative Analysis of Income Distribution …

including the small number and the limited variety. With the low signing rate of labor contracts of some labor-intensive small and medium-sized enterprises and nonpublic enterprises in 2010,48 there were some signed labor contracts with nonstandardized content and inadequate performance. Some local governments are still unaware of the labor and labor contract signing of enterprises.49 Theoretically, labor contracts are a basic contract system to safeguard the legitimate rights and interests of workers. However, the current situation is that many labor contracts are not perfect, and even the basic wages of workers are not clearly stated. Some employers set unreasonable terms by fraud, coercing and so on in the signing of labor contracts, which seriously infringes on the legitimate rights and interests of migrant workers. The most common are as follows: first, a contract of survival and death; second, king contract; third, a deposit contract; fourth, a contract of selling yourself.50

3.1.2.4

The Trade Union Institution

The trade union system plays an important role in nonstate-owned enterprises in the new period, which is not only because the trade union system itself has broad coverage and more cohesion but also because of the stronger awareness of the right awareness and law of the new generation of the labor force. Specifically, trade union organizations have two responsibilities: first, they, representing the interests of workers, work hard to maintain and improve workers’ wages and welfare benefits. Second, they need to encourage workers to better participate in the construction and development of enterprises by promoting labor-capital cooperation and striving to build harmony between labor and capital.51 At present, there are defects such as low coverage, relatively poor independence and weak execution in small nonpublic enterprises in the construction of trade unions of nonstate-owned enterprises in China, which affect the harmonious development of labor-capital relations to a certain extent.

The Union Coverage Expands in a Gradual and Flexuous Way The establishment of a trade union system in China’s nonstate-owned enterprises has gone through a process from nil to existence. The expansion of trade union coverage is one of the important aspects of improving workers’ bargaining ability with capital 48

For detailed data analysis, please refer to the Research Group of Hubei Federation of Trade Unions: Investigation Report on Labor Relations and Trade Union Work in Non-Public Enterprises, Labor Movement Research, No. 16, 2010. 49 Law Enforcement Inspection Team of the Standing Committee of the National People’s Congress: Report on Law Enforcement Inspection of the Labor Contract Law, October 24, 2010. 50 Research Group of Shaanxi Federation of Trade Unions: Research Report on Establishing Harmonious Labor Relations in Enterprises, Worker Movement Research, No. 6, 2006. 51 Hu (2011).

3.1 Labor-Capital Imbalance and Income …

135

owners. The Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures, enacted in 1979, does not explicitly empower workers the relevant rights. The Trade Union Act of 1992 formally clarified the establishment and development of the trade union system in the private sector. According to the relevant statistics, we can see that the trend of the tortuous expansion of the coverage of trade unions is more obvious.52 The construction of a trade union system in nonpublic enterprises,53 the main driving force of this change, is not only one of the concrete measures for the protection of Chinese workers but also the requirement of promoting social harmony. As far as specific provinces are concerned, there are still differences in the construction of trade union systems.54 Although the rate of union formation is increasing in the whole country, it should not be ignored that interprovincial differences are gradually emerging. The national level is the average data, which mainly reflects the measurement data over a certain period of time. The interprovincial level is a sample that shows data within the limited space scope. In fact, only if both figures have been improved can the construction of the trade union system be said to be a trend toward good.

The Relatively Poor Independence of Trade Unions With the relatively poor independence of trade unions, nonstate-owned enterprises are more presented as the subordination of labor relations, making it difficult for workers to reconcile the contradictions between the employee and employer, such as workers in state-owned enterprises. There are many reasons for the poor independence of trade unions, the most important of which include the election of chairman of the trade union with the absence of workers, the excessive part-time work of trade union chairman, the poor awareness of right-protection, all of which exist in many provinces, such as Hubei and Chongqing. The ability of trade unions to safeguard the basic rights and interests of workers will be directly weakened due to the poor independence of the trade union of nonstate-owned enterprises, where the effective operation of trade unions can be far more positive to workers than state-owned enterprises. This is because workers are mainly flexible workers with a wide range of features. At the same time, it is usually difficult to maintain workers’ rights and

52

For detailed data analysis, please refer to the All-China Federation of Trade Unions: Blue Book on Legal Protection of Workers ‘Rights and Interests by Chinese Trade Unions in 2005’, China Workers Publishing House, 2006. 53 For detailed data analysis, please refer to the All-China Federation of Trade Unions Research Office: Statistical Communiqué on the Trade Union Organizations and Development Status of its Work in 2010, Worker Movement Research, No. 13, 2011. 54 For detailed data analysis, please refer to the Research Group of Shaanxi Federation of Trade Unions: Research Report on Establishing Harmonious Labor Relations in Enterprises, Worker Movement Research, No. 6, 2006.

136

3 A Qualitative Analysis of Income Distribution …

interests because they are violated from time to time.55 It will be of great help to the long-term development of enterprises and the vital interests of their employees if trade unions can gradually resolve the accumulated labor-capital conflicts in this regard.

Weak Execution of Trade Unions in Small Nonpublic Enterprises There was a bottleneck in trade union work due to the lack of independence. With a commitment to the leadership of the Communist Party of China (CPC), Chinese trade unions have failed to make greater strides in democratization, popularization and becoming workers’ own organizations concerning worker organization. Moreover, the involvement and control of trade unions by employers is very serious in the existing nonstate-owned trade unions,56 which directly limits the ability of trade unions to defend the interests of workers. If a nonstate-owned enterprise appoints the chairman or vice-chairman of a trade union as the actual head of or the manager of the enterprise, it is bound to lead a dilemma: on the one hand, the leader of the trade union, a manager, is conducive to negotiating with the capital manager on behalf of their staff. On the other hand, trade union leaders need to publicize corporate policies from the perspective of their business managers. Therefore, it is difficult to determine which side the trade union favors in terms of specific problems due to role conflict. Therefore, the enterprise’s intervention in the independence of trade unions is bound to make the potential deviation of the trade union from possibility to reality. Moreover, the rights of trade unions within the scope of their duties are often difficult to effectively realize because the awareness of formal institutionalization in small nonstate-owned enterprises is relatively weak.57 Workers may gradually lose their trust and sense of belonging to trade unions if their interests cannot be resolved through trade unions in small nonstate-owned enterprises, thus turning to informal institutions to meet their own interests, which is also one of the specific manifestations of the weak bargaining power of workers.

55

For detailed data analysis, please refer to the research group of “Basic Situation of New Generation Migrant Workers”: Face squarely to New Generation of Migrant Workers, Research the World, No. 3, 2011. 56 The Federation of Trade Unions in Shengyang investigated the status of 88 nonpublic enterprise unions in 2007. As a result, all 88 trade union chairmen are part-time, 11 of which are deputies and 77 are middle-level cadres. The administration of trade union functions, which is, “focusing on business, counting on the boss” has become the main work content of nonpublic enterprise trade unions. 57 For detailed data analysis, please refer to the Shanxi Province Worker’s Union: Research Report on the Role of Enterprise Union, Worker Movement Research, No. 14, 2010.

3.1 Labor-Capital Imbalance and Income …

137

3.1.3 Conflict of Interest II: Labor-Capital Relations in State-Owned Enterprises The labor-capital relations of state-owned enterprises and nonstate-owned enterprises are not only similar in the specific time dimension and spatial dimension but also have their own differences. The difference in labor-capital relations between 1949– 1977 and 1978 to present in state-owned enterprises is obvious. The labor-capital relations mainly focused on the adjustment of existing labor-capital relations and the transformation of labor-capital relations in joint state-private enterprises in 1949– 1977, when the major work of trade unions was to address these two problems. With the clear orientation of adjustment and coherent measures, there is no more repetition of labor-capital relations. In fact, the real change in labor-capital relations in state-owned enterprises has been reflected in the historical period since 1978,58 whose specific situation is worthy of in-depth study. Here, the main brief analysis of the development of labor-capital relations started from the wage system, social security, political identity and trade union system.

3.1.3.1

Wage System

Theoretically, the government’s intervention in the labor-capital relations of SOEs mainly manifests as the adjustment of the wage system and expansion of the coverage of the social security system. The so-called adjustment of the wage system mainly manifests as the change in the total wage formation provisions. The source of wages gradually diversified, which also became the institutional reason severing recessive income. The expansion of the coverage of social security has enabled more workers to obtain the qualification of protection. However, there are still more practical problems concerning the specific implementation. As far as China’s SOEs are concerned, the long-term existence of egalitarianism has prominent representation. After the reform and opening up in 1978, the problem of the wage system in SOEs was mainly embodied in the following four aspects: vague distribution quantitative standard, minimum wage system out of national conditions, egalitarianism of wage reform and chaotic bonus mediation system.

No Specific Quantization Standard on Distribution The distribution according to essential factors of production has gradually become one of the principles in China’s income distribution59 after the reform and opening 58

This is mainly in terms of the change in the principle of distribution. This policy became national will in The National Economic System Reform Working Conference held in February 1991, the Fourteenth National Congress of the Communist Party of China held on October 12, 1992 and the Third Plenary Session of the Fourteenth Central Committee in 1993.

59

138

3 A Qualitative Analysis of Income Distribution …

up, while the wage system has been adjusted accordingly.60 However, there is always a lack of a unified understanding of which elements can participate in the distribution and how specific quantitative approaches to the distribution process are determined, which leads to a lack of concrete or quantitative standards in the implementation process. Insufficient factor marketization and the overmarketization of factors coexist in this environment, which led to a shift away from the original intent of distribution policy according to factor contribution to a certain extent. For this reason, it is still difficult to assert the difference between the technology, management and optimal allocation of capital elements and reality based on a certain class or a specific criterion. In general, wage income accounts for approximately 30% of the total annual salary for business managers, while income coming from factor management accounts for approximately 70%.61

The Separation of a Minimum Wage System from National Conditions Whether the minimum wage shall be there or not and its amount are closely linked to the level of surplus labor force in a country to some extent. By the end of 2010, Hong Kong still had no minimum wage, and Taiwan and South Korea had largely raised the minimum wage substantially after the surplus labor transfer was completed. Therefore, the construction of China’s minimum wage system needs to be linked to the actual size of the surplus labor force. At present, the top issue should encourage the government to actively improve its own social security functions rather than to push the pressure of wage adjustment to enterprises and society. As China’s market economy system is still in the process of perfection, it is difficult for workers in some enterprises to take as much as you give. Therefore, to a certain extent, the construction of China’s minimum wage system62 aims to compensate for the shortfall in this market process. However, some nonstate-owned enterprises and small state-owned enterprises set the absolute wage level of workers according to the minimum wage line. It can be said that the slow construction of the minimum wage system objectively slows down the process of the resolution of labor disputes in the market of low illegal cost. However, if we only talk about the reform of the minimum

60

On the basis of wage reforms before 1992, in response to the iron rice bowl idea that is common among employees of state-owned enterprises, the Ministry of Labor, the Production Office of the State Council, the State System Reform Commission, the Ministry of Personnel, and the National Federation of Trade Unions jointly issued the Suggestions on Deepening Enterprise Labor and Personnel, Wage Distribution and Reform of the Social Insurance System (No. 2, 1992) by the Ministry of Labor and Department of Finance. 61 Liu (2005). 62 To protect the basic rights of enterprise employees, the Provisions on Minimum Wages of Enterprises was issued in 1993, requiring local governments to establish minimum wage protection systems. The Labor Law promulgated on July 5, 1994, and the Minimum Wage Regulations promulgated by the Ministry of Labor in March 2004 replaced the regulations issued in 1993 in this regard.

3.1 Labor-Capital Imbalance and Income …

139

wage system but ignore the government’s responsibilities in social security, then the judgment derived from this logic is inevitably biased. After being put into the schedule of the relevant departments since 2008, the Wage Regulations that are closely related to workers have not published its details, which may be introduced in 2012 as soon as possible. It may be a while before full implementation of it. However, with the global financial crisis, Jiangsu Province in 2010 took the lead in raising the minimum wage level nationwide, encouraging a number of provinces nationwide to adjust the minimum wage.63 In addition, some provinces and cities are also trying to establish a linkage mechanism among minimum wage and price level, which was the prelude to the adjustment of minimum wage in a number of provinces nationwide.64 Shenzhen’s minimum wage was also raised by 15% in January 2012.65 It should be noted that the increase in the minimum wage66 has a certain role, but its potential disadvantages also need to be highly vigilant.67

Equalitarianism of Wage Reform Since the founding of the People’s Republic of China in 1949, China’s state-owned enterprises achieved breakthroughs at the institutional level after 1985,68 before 63

There are a total of 30 provinces across the country adjusted the minimum wage standard in 2010, the average monthly minimum wage growth rate of 22.8%; 29 provinces across the country issued wage guidance lines, and the average increase rate of the salary cap was approximately 3% over the previous year, and the average increase rate of the datum line was approximately 2% over the previous year. For details, please refer to Average Growth Rate of Adjusted Minimum Wage Standards in 30 Provinces is approximately 22.8%, People’s Daily, January 26, 2011. 64 Why not raise the minimum wage slightly more, People’s Daily, June 7, 2010. 65 Chen Chen: Shenzhen plans to raise the minimum wage by 15% next year, expecting to exceed 1,500 yuan, Xinhua, November 26, 2011. 66 The gap between the minimum wage level in China and most countries in the world is still large. According to OECD standards in 2005, the minimum wage level in most of our provinces is still lower than that of the less developed European economies. As far as the standardization and settlement of labor-capital relations are concerned, it mainly depends on law and negotiation. With the exception of New Zealand, a large-scale coverage and national-level coordination of minimum wage have basically been achieved. 67 Aiming at promoting the rationalization of social income distribution order through standardizing the minimum wage level to effectively protect the basic labor rights and interests, the State Council’s Notice on Several Opinions on Deepening the Reform of the Income Distribution System, approved on February 9, 2013, states that wages Guideline system should be improved, establish a unified and standardized enterprise salary survey and information release system. Based on factors like economic development, price changes, the minimum wage standard should be adjusted in a timely manner. Then, we will see that the minimum wage standard in most regions will reach more than 40% of the average wage of local urban employees by 2015. 68 On February 25, 1982, the State Council promulgated the Overall Plan on the Reform of the Economic System which proposed a reform of the equalitarianism distribution system. On January 5, 1985, the State Council formally required the implementation of a method that requires the total wages of employees and the economic benefits of enterprises are proportionally adjusted. The specific floating ratio shall be determined by the state. The National Economic Work Conference on February 5–14, 1985, once again emphasized the reform measures mentioned above. The labor

140

3 A Qualitative Analysis of Income Distribution …

which the distribution of equalitarianism had been basically maintained for a long time. As the reform details for equalitarianism are not clear in this period, there are some differences in the level of improvement in wages between industries. With the diversification of the distribution principle, there exists many fuzziness standards in the reform of the wage system, which to some extent reflects the incomplete and halfway reform of wage egalitarianism, leaving many problems to be settled.

Bonus Adjustment System Chaos After the reform and opening up, the state also began to adjust the bonus tax for employees, but the adjustment measures changed quickly.69 The frequent adjustment of standards not only shows that the income problem is in urgent need of policy guidance and adjustment but also reflects the difficulty of balancing the interests of all parties in the formulation of specific adjustment schemes. The eight-grade wage system began to shift to the fifteen-grade wage system in 1985. In general, both wage systems are theoretically based on technical grades, but that was not the case. Wage adjustment has affected the economic responsibility system to a certain extent because of the imperfect technical evaluation after 1979, which poses a local imbalance in income distribution. With the rereform of the wage system in the 1990s, the bonus system began to take on a variety of new features. It is difficult to assess the actual efficiency because many bonuses are not regulated and the amount of bonuses paid varies.

3.1.3.2

Social Security

Since the founding of the People’s Republic of China in 1949 to approximately the 1990s, the flawed construction of a basic security system for workers in state-owned enterprises in China has existed, the most prominent of which was the establishment and implementation of the standardized system of “five insurance and one fund” of workers. In our country, the flawed coverage of the guarantee includes not only the contract system was also promoted on a trial basis in some regions in 1985. The Solutions to Tax for Profits of State-owned Enterprises, promulgated on April 24, 1983, restricted the stateowned enterprise’s retained earnings and the proportion of employee distribution. These measures mentioned above actually adjusted the income distribution among enterprise and their employees with giving priority to the development of the enterprise, which had certain positive significance for the rapid development of state-owned enterprises during this period. 69 The adjustment measures mainly include as follows, the State Council began to levy bonus tax on the part of the standard salary of more than two and a half months on June 28, 1984. The threshold changed to a four-month standard salary on July 3, 1985, which is specifically a four-tier progressive tax system with a tax rate of 30–300%. The threshold was adjusted again on September 20, 1985, with an outstanding feature of expanding the scope of adjustment from state-owned enterprises to all types of enterprises and showing a asymmetric changes between enterprises and institutions. For enterprise units, the threshold is readjusted to a three-month basic salary, while the starting point for public institutions is a basic salary of one and a half to two months.

3.1 Labor-Capital Imbalance and Income …

141

speed of promoting the system but also the willingness of microsubjects to participate.70 This means that there are a large number of institutional vacancies in the income distribution of workers in state-owned enterprises for a long time, which may lead to the disorder of internal distribution. Employee security is one of the important income streams in addition to wages. Employee welfare is also one of the important forms of income71 received for most workers who are living in difficult circumstances. The State Council issued the Regulations on Unemployment Insurance for Employees of State-owned Enterprises on April 12, 1993. Medical construction began mainly in 1994.72 The State Council issued the Regulations on Unemployment Insurance and the Interim Regulations on the Collection and Payment of Social Insurance Premiums on January 22, 1999. The state began to issue relevant documents in 1996 to take care of workers who have trouble in enterprises.73 The difficulty of actually enjoying security also involves two aspects: one is the efficiency of the operation of the system itself, and the other is the validity of the subject qualification. The former includes the information management of the system 70

For detailed data analysis, please refer to China Finance, Trade, Textile and Tobacco Trade Union, All-China Handicraft Industry Cooperative, Investigation Report on the Pension and Medical Insurance Status of Employees in Urban Collectively owned Enterprises, Labor Movement Research, No. 10, 2011. 71 The main institutional arrangements are as follows: As early as 1950, the total salary regulations issued by the State Council stipulated employee benefits, which was further refined after 1990 when the method of determining wages was defined. The construction of this system has officially started since 1991. The State Council promulgated the Decision on the Reform of Old-age Pension Insurance System for Enterprise Employees on June 26, 1991, the Notice on Deepening the Reform of Old-age Pension Insurance System for Enterprise Employees on March 17, 1995. The State Council introduced the Notice on Deepening the Reform of Old-age Pension Insurance System for Enterprise Employees on March 1997 and the Decision on Establishing a Unified Basic Old-age Pension Insurance system for Enterprise Employee which was issued again on July 16, 1997. The General Office of the State Council issued the Notice on Ensuring the Basic Living Expenses of Laid-off Employees of State-owned Enterprises and the Pension Payment for Retired personnel of Enterprises on February 3, 2000. The Decision of the State Council on Improving the Basic Old-age Pension Insurance System for Employees was discussed and adopted at the State Council Executive Meeting on October 19, 2005. 72 Major system constructions include the Opinions on the Pilot Reform of the Staff Medical System jointly issued by the State Commission for Restructuring the Economic System, the Ministry of Finance, the Ministry of Labor, and the Ministry of Health in April 1994 and the Decision of the State Council on Establishing the Basic Medical Insurance System for Urban Employees issued by the State Council on December 14, 1998. 73 It mainly includes the Notice on Further Solving the Difficulties in the Life of Some Employees of Enterprises issued by the General Office of the CPC Central Committee and the State Council in October 1996, and the Notice on Resolving Difficulties for Enterprises Employees and employment and reemployment work jointly issued by the Ministry of Labor, the State Development Planning Commission, the State Economic and Trade Commission, the State Commission for Restructuring the Economic System, the Ministry of Finance, the Ministry of Personnel, the Ministry of Public Security, the People’s Bank of China, the State Administration of Taxation, the State Administration for Industry and Commerce, the General Office of the CPC Central Committee, the Letters and Visits Bureau of the General Office of the State Council, and the National Federation of Trade Unions on May 22, 1997.

142

3 A Qualitative Analysis of Income Distribution …

itself and its administrative efficiency, while the latter mainly refers to whether the insured person pays the guarantee funds in full and on time. At present, the efficiency of system operation is more prominent. In 2009, the Ministry of Human Resources and Social Security and four other ministries jointly issued the Notice on the Proper Settlement of Retirees in Closed Bankrupt Stateowned Enterprise and other Medical Security-related Issues, which pointed out that the overall solution to the medical security of other types of urban personnel, including retirees in closed bankrupt collective enterprises and workers of difficult enterprises, should also be carried out by collectively owned enterprises in towns. However, there is often a large difference between the actual implementation process and policy intention. At the same time, the problem of the validity of the subject qualification also exists within a certain range. Specifically, it is difficult to effectively strive for a balance between premium payment and security benefits in the process of social security implementation. Specifically, workers who pay premiums often encounter procedural difficulties when they need protection, the main reason for which is that individuals or units owe premiums leading to false protection. This situation exists in both small state-owned enterprises and nonstate-owned enterprises. Workers working in urban collectively owned enterprises enjoy little guarantee even if they were insured in 2010. Of the 121 enterprises sampled, 115 failed to pay insurance premiums, representing a high rate of 95%.74

3.1.3.3

Political Identity

The positive effect of political identity on income has been recognized by an increasing number of scholars. As the main symbol of political status, the proportion of workers in the organs of state power, such as National People’s Congress and the CPPCC, has decreased year by year,75 which shows that the overall development of workers’ protection is off track by gradually reducing the way for them to safeguard their rights? The expansion of the social network boundaries of Party members has gradually deepened the capital they own and can use, which is manifested by positive income streams, leading directly to identify income differences. It should be noted that this logical relationship and the de facto income gap do not support the hypothesis that party members are more inclined to rent-seeking.

74

China Finance, Trade, Textile and Tobacco Trade Union, All-China Handicraft Industry Cooperative, Investigation Report on the Pension and Medical Insurance Status of Employees in Urban Collectively owned Enterprises, Labor Movement Research, No. 10, 2011. 75 Chinese workers accounted for 26% of the 5th NPC deputies, 23% of the 7th NPC, 11.5% of the 8th NPC, 10.8% of the 9th NPC, and 10% of the 10th NPC. For details, see Zhang Fuliang: Improving the People’s Congress System to Guarantee Farmers’ Democratic Political Rights, People’s Congress Studying, No. 10, 2004.

3.1 Labor-Capital Imbalance and Income …

143

Political identity can influence real income through personal capacity, social capital and power rent-seeking, the latter two of which can also be called “political relations”.76 The survey data analysis of rural fixed observation points of the Ministry of Agriculture shows that party members are 5% more likely to up by 1 or 2 quantiles than nonparty members, and the probability of moving 1 or 2 quantiles down is 5 percentage points lower.77 The political identity structure of blue-collar and regulators was the opposite in 2002. The proportion of nonparty members of the former is close to that of the party members of the latter. The proportion of Communist Party members among white-collar workers is only 37%.78

3.1.3.4

The Trade Union System

Generally, the union plays a dual role of both the representative of the worker’s interests and the spokesman of the capitalist. Workers take the roles of both “master” and workers in state-owned enterprises. How to coordinate between the two identities is one of the important duties of the trade union. After the reform and opening-up in 1978, the slow construction of the trade union system in China not only led to difficulty in effectively fighting for the interests of workers in labor conflict but also intensified labor conflict to a certain extent. The new period of the construction of the trade union system in state-owned enterprises in China began with the promulgation of the Trade Union Law in 1992.79 More definitions of the power of workers’ trade unions are found in the legislation of many state-owned enterprises, including the Regulations on the Work of Directors of Industrial Enterprises Owned by the Whole, the Regulations on the Congress of Workers and Staff of Industrial Enterprises Owned by the Whole, the Provisional Provisions on the Implementation of the Labor Contract System in State-owned Enterprises, and the Regulations on the Conversion of Operational Mechanism of Industrial Enterprises Owned by the Whole. Wei Jianxing, chairman of the 13th Executive Committee of the All China Federation of Trade Unions (ACFTU), pointed 76

Yang, Wang et al. (2010). Zhang et al. (2007). 78 National Workforce Survey Office of the All-China Federation of Trade Union (ACFTU): Analysis Report on the Fifth Workforce Survey Statistics in 2002, China Workers Press, 2006. 79 After the Trade Union Law was promulgated in 1992, the lack of function orientation of trade union was caused by the lack of corresponding enforcement details, which was not improved to some extent until the amendment of the Trade Unions Act in 2001. However, the newly amended Trade Union Law does not provide more detailed regulations in many aspects, resulting in many vague areas in the implementation process. The Opinions on the Implementation of Trade Union Work and the Democratic Management of Employees in the Pilot Program of a Hundred Modern Enterprises Determined by the State Council, issued by the All-China Federation of Trade Unions, the State Economic and Trade Commission, and the State Commission for Restructuring the Economic System On April 1, 1996, stated that no excuses were allowed to withdraw unions or merge into other departments concerning enterprise reorganization. It is necessary to effectively strengthen and improve the work of trade unions and the democratic management system of employees in the pilot. 77

144

3 A Qualitative Analysis of Income Distribution …

out that efforts should be made to strengthen the role of trade unions in adjusting the mechanism of labor relations and strive to achieve “five breakthroughs and one strengthening”80 at the 13th Fourth Executive Committee of the General Assembly on January 13, 2002. At present, the main problems of the construction of the trade union system in state-owned enterprises in China include the twists and turns in the construction of the trade union system, the deviation of trade unions from their behavior in ensuring a fair position in labor-capital conflicts, and the slow construction of the union linkage mechanism.

The Twists and Turns in the Construction of Trade Union System With the restructuring process of state-owned enterprises in China, the number of trade unions experienced a periodic change that was especially marked after 1989. The slow construction of the trade union system makes it difficult for the majority of workers to realize their rights in terms of participation rate and ability to defend rights. The number of workers congresses declined to various extents in various places from 1989 to the end of the twentieth century.81 With the deepening of the construction of the market economy system, the formation rate of trade unions in different years and between different types of units, although there is some volatility, features

80

“Five breakthroughs and one strengthening” was proposed by Wei Jianxing at the Second Executive Committee Meeting of the 13th National People’s Congress. The “Five Breakthroughs” refers to assisting the party and government to do a good job in ensuring the basic livelihood of laid-off workers, stressing the main points in the “Warmth Project”, and taking the responsibility of the “first person responsible” for the extremely poor workers; achieving breakthroughs in equal negotiation and signing of collective contracts; achieving a breakthrough in the democratic management of employees; making sure the work of wholly state-owned and state-owned holding companies in which the board of directors and the supervisory board must have employee representatives; to achieving a breakthrough in maximizing the organization of workers in newly established enterprises into unions. “One strengthening” is to strengthen the reform and construction of trade union leadership at all levels. For details, see Wei Jianxing pointed out the role of the working-class main force should be given full play at the Second Executive Committee of the Thirteenth National People’s Congress of the People’s Republic of China, People’s Daily, 5th edition, December 18, 1999. 81 The total number of National Workers’ Congresses was 371,228 at the end of 1989. The formation rate dropped to 63%, which was the first negative growth since 1981. Although the total number of workers’ congresses increased to a certain extent in 1990, the formation rate dropped further to 61.7%. The total number of grassroots units that established the system of workers’ congresses nationwide was 286,263 in 1997 with the continuously decline of formation to 56.11%. All-China Federation of Trade Unions: Statistical Yearbook of the Chinese Trade Unions (1998), China Statistics Press, 1999, p. 184.

3.1 Labor-Capital Imbalance and Income …

145

a sound overall situation.82 It will be more difficult to obtain the institutional maintenance of the union to protect workers’ interests if the coverage of the trade union system is not completed. The significance of this protection of interests to micro-workers is obviously self-evident.

The Deviation of Trade Unions from Their Behavior in Ensuring a Fair Position in Labor-Capital Conflicts Despite the need to be accountable to workers, the administrative trade union is directly responsible for superiors, which leads to the lack or deviation of trade union positions in labor disputes. The negotiation in a practical case will be conducted on the basis of the administrative positions of the trade union president, and the enterprise leader due to the Trade Union Law clearly stipulates that the principle of equality should be followed in negotiation, which in turn leads to inequality. The Ma Ruixing event that occurred in 2005 reflected this to some extent.83 It will be difficult for the trade union to play the role of coordinating labor relations and maintaining social stability if they cannot work properly after the establishment and fail to fulfill their duty of safeguarding the rights and interests of its employees, which means that it will lose the meaning of existence.84

The Slow Improvement of the Union Linkage Mechanism With a large-scale movement of the labor force between regions in China, trade unions are fragmented in the interindustry and different areas, which lead to a certain degree of lack of coordination capacity, directly affecting the protection of workers’ rights and personal safety. For example, the “Hubei migrant workers were beaten for asking the unpaid salaries in Shaanxi” incident occurred in August 2010. If interregional trade unions find it difficult to share information and act together in dealing with labor disputes, there will inevitably be many practical obstacles to solving the problem of migrant workers maintaining basic labor rights.

82

For detailed data analysis, please refer to the All-China Federation of Trade Unions Research Office: Statistical Communiqué on the Trade Union Organizations and Development Status of its Work in 2010, Worker Movement. 83 The Ma Ruixing incident mainly refers to the fact that the chairman of the union serving as the director of the unit’s office fought Ma Ruixing in this court in the process of the early retirement of the internal staff, in which the deviation of chairman from his behavior in ensuring a fair position in labor-capital conflicts. 84 Jun (2011).

146

3 A Qualitative Analysis of Income Distribution …

At present, China has produced only modest accomplishments, although effort has been made in this field. Sichuan Province is well experienced in this area.85 Nevertheless, as the union linkage mechanism has not yet been established throughout the country, it will take some time to improve the system of defending the rights of workers in many provinces and the cross-provincial labor force.

3.1.4 The Conduction Mechanism After analyzing the influence of the interest subject of labor-capital relations and the influence of labor-capital relations chaos in the two kinds of ownership enterprises on its income distribution, it is necessary to examine the conduction mechanism between the labor-capital relations chaos and social income distribution disorder objectively to clarify the inner relationship between them. Combined with Adam Smith’s four analytical logics,86 this conduction mechanism is analyzed at the moral, legal, institutional and economic levels. Generally, morality is the basis of law and system, law is the premise of market economy, and system is the guarantee of economy. Economic development will also have an impact on the construction of the first three. It is also in this sense that the analysis of these four aspects can be organically unified.

3.1.4.1

Moral Level

Generally, the generation and maintenance of morality are compatible with certain material production conditions. People establish corresponding social relations according to their own material productivity, and it is these people who have created corresponding principles, concepts and categories according to their social relations.87 Under the current level of economic development in China, the labor-capital conflicts in state-owned enterprises and nonstate-owned enterprises are transmitted to the level of social income distribution through morality, which is prominently reflected in both corporate social responsibility and market integrity.

Corporate Social Responsibility Due to China’s abundant labor resources, the wage level of workers has been at a relatively low level for a long time. This development view that relies on eroding 85

For detailed data analysis, please refer to the Joint Research Group of the All-China Federation of Trade Union: Investigation Report on the Trade Union Rights Protection Linkage Mechanism, Labor Movement Research, No. 6, 2011. 86 The complete sequence is about religion, morals, law, and economics in Adam Smith’s teaching content, which are the four dimensions of his analysis. 87 Marx: The Poverty of Philosophy (the first half of 1847), Marx and Engels Anthology (Volume 1), People’s Publishing House, 2009.

3.1 Labor-Capital Imbalance and Income …

147

laborers’ benefits is not only the result of rational choice of market micro-subjects but also the concrete manifestation of lack of corporate social responsibility. Engels believes that the economic relations of established society first show itself in benefit. However, “the basic principle that governs everything else” is fairness, not interest.88 Therefore, emphasizing corporate social responsibility is an important issue for a comprehensive understanding of Marxism, effectively implementing the scientific outlook on development, and achieving harmonious social and economic development. In 2008, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) issued the Guidelines for Central Enterprises to Fulfill Social Responsibilities, which stipulated the social responsibility of central enterprises from four aspects that involve the interests of employees, consumers and community residents, being of great significance to guide the central enterprises and nonpublic enterprises to clarify and implement their own social responsibilities. Corporate social responsibility, a realistic requirement of the market spirit on enterprises in the process of economic development, is also one of the important ways for enterprises to achieve harmonious development with society in the process of their own development. Corporate social responsibility not only involves enterprises and consumers but also covers aspects such as enterprises and the environment, workers and community residents. Among them, enterprises actively assume and fulfill their social responsibilities to employed workers, abide by basic national laws and regulations, and implement the wage and welfare system of workers, all of which are effective in alleviating labor-capital conflicts, building harmonious laborproduction relations and rationalizing income distribution order.

Market Faith Theoretically, effectively resolving labor disputes depends on the mutual trust among laborers, labor unions and entrepreneurs. The only way of labor-capital relationship development is to establish a mutual trust mechanism between laborers and labor unions, laborers and enterprises, labor unions and enterprises. The inherent contradictions can easily accumulate and expand if there is a lack of mutual trust or a condition of undermining mutual trust, which will impede the harmonious development of the labor-capital relationship and the orderly manner of production and management; then, the micro order of income distribution will inevitably be damaged. It should be pointed out that mutual trust here also reflects the internal demands of the market environment. In fact, the basis for the generation and maintenance of mutual trust is the basic rules of market and national laws and regulations. At present, some problems, such as the nonpayment of labor wages in China’s labor disputes, are related to the lack of a mutual trust mechanism to a certain extent. Market faith and the mutual trust between labor and capital are some of the most important aspects for enterprises to realize sustainable development in the process of constructing spiritual civilization. 88

Engels (2009).

148

3.1.4.2

3 A Qualitative Analysis of Income Distribution …

Legal Level

In modern society, law provides basic norms and guiding principles for social development, and the perfection of legal construction directly affects whether the constructive system has positive guidance on human behavior. Although China’s legal construction about the labor-capital relationship is still in the process of perfection, low-level legislation, ambiguous concrete norms, poor enforceability, unclear legal liability and limited punishment strength all affect the adjustment of the laborcapital relationship in the process of economic development and lead to disorders in the pattern of income distribution to a certain extent. The low-level legislation is mainly because the most relevant regulations are departmental regulations or laws and regulations, which cannot rise to legal dimensions due to the limited applicable areas and groups. Deng Xiaoping,89 Chen Yun90 and Li Xiannian91 have expounded the fundamental connotation of labor-capital relationship development since the reform and opening up, respectively. China has enacted some relevant laws about Labor Law, including a law, a judicial interpretation and eighteen departmental regulations. The formulation and modification of these laws and regulations were basically in the 1990s. The Labor Contract Law was introduced with nine relevant departmental regulations by 2008. In 2009, “The Report from the Financial and Economic Affairs Committee of the National People’s Congress (NPC) on the Results of the Deliberation on the Proposal Put Forward by the Delegates of the Presidium of the Second Session of the Eleventh NPC” formally put forward that Wages Act was advised to introduce immediately to normalize and adjust national income reassign and labor-capital relationship because of the large wage gap between enterprise workers and civil servant and employees in public institutions.92 This suggestion also clearly shows that the wage distribution needs to be regulated at the legal dimension. However, the Amendment to Criminal Law did not began to pay attention to the wage arrear phenomenon until 2011 and specifically stipulated the crime of malicious wage arrears in the Criminal Law. Some concrete norms are more ambiguous in relevant laws and have obviously poor enforceability. For instance, the Labor Contract Law lacks both the specific provisions for the operational processes of dispatched workers and the referenced model laws for migrant workers to safeguard their own rights and interests. On the one 89

Deng Xiaoping has made three major speeches for this, namely Studying New Situations and Addressing New Problems (December 13, 1987), Chinese-Style Modernization Must Start from the Chinese Characteristics (March 30, 1979) and The Only Way to Transfer Agricultural Labor Force (March 27, 1987). 90 This speech was Food First, Construction Second (June 1981). 91 This speech was given by Li Xiannian at the Central Working Conference on April 5, 1979, and the topic was “Adhere to the Guiding Principle of Over-All Consideration, Resolve the Allocation of Labor Forces”. 92 “The Report from the Financial and Economic Affairs Committee of the National People’s Congress (NPC) on the Results of the Deliberation on the Proposal Put Forward by the Delegates of the Presidium of the Second Session of the Eleventh NPC” was approved by the Eleventh Standing Committee Meeting of the Eleventh National People’s Congress on October 31, 2009.

3.1 Labor-Capital Imbalance and Income …

149

hand, it is easy to anomie employment procedures in enterprises; on the other hand, it also leads to high legal thresholds for workers’ rights protection, restricting their use of legal norms to effectively safeguard their legitimate rights and interests. This situation has gradually changed in some provinces and cities since 2010. “People’s Supreme Court Made Explanation on Several Questions of Law Application in the Trail of Labor Disputes Cases (Three)”,93 which was approved on July 12, 2010, and began to improve the details of law application. In December 2010, Hubei Province promulgated the “Regulations on Trade Unions of Enterprises in Hubei Province”, which stipulated the wage adjustment mechanism and specific methods. On this basis, in April 2011, Hubei Province promulgated the “Working Standards for Wage Collective Bargaining in Hubei Province Enterprises”, which provided standards for collective bargaining to follow, and provided 12 different model contracts to help laborers pursue the maximizing of self-interest by clarifying the rights related to themselves in the process of negotiation. In addition, unclear legal liability and limited punishment strength are issues that cannot be ignored. Since the enactment of Labor Law in 1994, only Article 92 of the law was revised in August 2009. Although the law has stipulated the labor safety of laborers, it has stipulated only one article about labor safety: “The responsible person who causes loss of laborers’ lives and properties in serious accidents shall be investigated for criminal responsibility in accordance with the provisions of Article 187 of Criminal Law”. In other cases, the specific standards of execution are so unclear; only the labor administration departments or the related departments are stipulated to order the responsible personnel to make corrections and impose fine and suspended production for rectification. This causes many practical problems, for which objectively grants executive subjects enough discretion. Many labor infringement problems have not been investigated in a timely and effective manner because China’s labor legal system is still not perfect; the major problems related to labor wages, collective contracts, democratic management and social insurance have not yet been legislated; many labor laws and regulations have problems, such as many principle requirements, less rigid penalties and weak operability; and the weak force of labor enforcement and supervision.94

3.1.4.3

Institution Level

Institutional justice is the starting point of distributive justice in the field of distribution. The income distribution order will certainly be difficult to establish and maintain 93

On July 12, 2010, the 1489th Session of the Judicial Committee of the Supreme People’s Court approved the “People’s Supreme Court Made Explanation on Several Questions of Law Application in the Trail of Labor Disputes Cases (Three)”, which would be implemented since September 14, 2010. 94 The Research Group of Hubei Federation of Labor Unions: The Investigation Report on the Labor Relation of Non-Public Enterprises and Working Conditions of Labor Union, Research on the Labor Movement, No. 16, 2010.

150

3 A Qualitative Analysis of Income Distribution …

if the income distribution flaws in the institutional arrangement. In China, the problems at the institutional level mainly include many aspects, such as non-institutional conflict resolution, the absence of system performance, the lagging market-oriented resolution mechanism of disputes, blocked benefit expression channels, the single subject of supervision and the predicament of interest coordination under diversified identities.

Non-institutional Conflict Resolution The speed of labor union construction has comparatively obvious differences among enterprises with different ownership levels.95 The differences in labor union coverage have led to the guarantee mechanism of workers’ rights and interests in enterprises with different ownership levels appearing to be new problems between the specific industry and specific enterprises in the process of continuous improvement of the socialist legal system. The legitimate rights and interests of workers are more likely to be violated if the illegal cost of business owners is lower. It is extremely easy to cause opposition between labor and capital in the absence of a reasonable and effective mediation system. At present, a considerable number of labor relations disputes are resolved by friends or acquaintances, while the resolution of such problems by formal systems only accounts for a limited proportion. On the one hand, it reflects that workers lack a sense of protecting their legitimate interests through the formal system; on the other hand, it also embodies that there is a long way to go to construct and improve the formal system. Only when institutionalized norms take the leading position in solving such problems can those problems be settled effectively. Labor union is not the main way for laborers to get help whether the labor union is established or not; instead the relatives or fellow-villagers help them to solve most of their problems through informal approaches.96 This not only reflects that laborers’ assistance seeking awareness and ability through the labor union need to be improved but also shows that the positive role of labor union on some issues involving the vital interests of laborers is not significant. The opposition between labor and capital will inevitably accumulate and intensify if the labor union cannot effectively play a coordinating role in labor disputes; then, it will affect the harmony of enterprises and society. In response, “The Notice on Several Opinions of Deepening the Reform of the Income Distribution System”, approved by the State Council on February 9, 2013, has pointed out that the liquidation of the back salary systems should be implemented, such as general construction contractors’ responsibility system, the 95

See the detailed statistical analysis in All-China Federation of Trade Unions National Staff Condition Survey Office: Statistical Data Analysis Report of the Fifth National Staff Troop Condition Survey, Research on the Labor Movement, No. 2, 2005. 96 All-China Federation of Trade Unions National Staff Condition Survey Office: Statistical Data Analysis Report of the Fifth National Staff Troop Condition Survey, Research on the Labor Movement, No. 2, 2005.

3.1 Labor-Capital Imbalance and Income …

151

administrative justice jointly combat on malicious arrear system and the local government accountability system of guaranteeing wage payment. The system dealing with labor disputes should be improved, and labor guarantee law-enforcement supervision should be strengthened. These factors provide the guiding ideology of reform to institutionally solve this problem.

The Absence of System Performance Both state-owned enterprises and nonstate-owned enterprises have flaws in the social security system in recent years. On the one hand, this is the lack of awareness of micro individual premium payment; on the other hand, this also shows that the compulsory insufficiency of the social security system leads to the phenomenon of insurance insufficiency and absence. The non-institutionalization of the abovementioned contradictions reflects that many limitations exist in the current labor security supervision to a certain extent. The problems of low wages for labor dispatchers cannot be solved fundamentally because of the direct participation of government departments in the operation.97 The absence of such system performance mainly has derived from the double soft constraints of morality and law, which has made the executive subject tend to engage in opportunistic behavior rather than legal behavior in the process of behavior selection. As a result, the system’s preset purpose has not been achieved, while visible or invisible damage occurs in the income distribution order.

The Lagging Market-Oriented Resolution Mechanism of Disputes The establishment of the collective bargaining mechanism is one of the important ways for laborers to practically and effectively safeguard their rights under the organization of labor unions. However, the enterprise that established wage negotiation mechanism among the nonstated-owned enterprises accounted for 59.61% in 2010.98 Generally, the salaries of staff in the enterprises that implement the wage negotiation mechanism are generally 10–15% higher than those enterprises that not implement such mechanism in the industry.99 The labor union plays a limited role in alleviating labor-capital contradictions due to the existence of many absences and the slow establishment of wage negotiation mechanism in the process of performing the duties of labor union. In addition, the long-term absence of this negotiation mechanism causes 97

The Special Research Group from the Financial and Economic Affairs Committee of the National People’s Congress: Research on Several Problems of National Income Distribution, China Financial & Economical Publishing House, 2010. 98 All-China Federation of Industry and Commerce, China Private Economy Research Association: China Private Economy Yearbook: 2008.6–2010.6, China Business Administration Press, 2011. 99 “Most Anticipated” Pay Rise Average Wage Raise of 15% with the Help of Collective Negotiation, people.com.cn, October 9, 2008.

152

3 A Qualitative Analysis of Income Distribution …

the staff in a weak position in bargaining ability with the capital, and it is difficult for staff to effectively safeguard their own interests. This situation has gradually improved in some provinces across the country since the global financial crisis in 2008. The All-China Federation of Trade Unions proposed in January 2011 that the collective wage negotiation system would be established in more than 80% of the enterprises with established existing labor union organizations from 2011 to the end of 2013, which showed that the realization of the collective consultation on wages was widely accepted among those enterprises.100

Blocked Benefit Expression Channels The blocked benefit expression channel is actually one of the important manifestations of the incomplete construction of laborers’ wage insurance system. In China, laborers’ speaking rights continue weakening, and interest demands are often difficult to resolve in appropriate ways due to the limitations of trade unionism and the relatively laggard construction of the tripartite coordination mechanism.101 Whether the labor union is established or not, laborers’ relationships or friendships are the main channels to seek help when they encounter specific problems that need to be resolved. This shows that the credibility of the formal system has not been universally recognized and has not become the main way for laborers to seek solutions in the process of the harmonious development of the labor-capital relationship. The number of mass incidents has been increasing year by year because of the blocked interest expression mechanism through formal channels.102 The mass incidents in 2010 were characterized mainly by pay raise as the specific requests, stoppage and strike as the practical means, the spontaneity as the type and the rapid and wide expansion.103 This kind of mass incidents reflects the awakening of laborers’ consciousness of right, and causes certain harm to social stability. Therefore, the long-term blocked channels of laborers’ interest expression lead to the frequent mass incidents and social problems it brought. The emergence of events with this nature is actually a bottom-up realistic demand for changing interests. In addition, the potential employee participation rate is also high in such mass incidents. 61% of employees express a propensity to participate when collective labor

100

The Work Plan of All-China Federation of Trade Unions to Further Promote Collective Consultation on Wages from 2011 to 2013, Issued by ACFTU [2011] No. 4, January 18, 2011. 101 China began to form tripartite coordination mechanism in 2001. Only 15 irregular meetings have been held at the national level from 2001 to June, 2011. Five advisory committees were established in 2006, but these committees played a more limited role. 102 See the detailed data analysis from Hu Angang: The Empirical Analysis on the Changing Trend of China’s Social Instability Factors, Discovery, No. 6, 2007. 103 Ouyang (2011, pp. 20–23).

3.1 Labor-Capital Imbalance and Income …

153

disputes in enterprises lead to mass incidents.104 In this sense, the demonstration effects of mass incidents generation or resolution cannot be ignored.105 “Mediation” is more productive than “obstruction” and requires more courage in the resolution of labor disputes. The flexible political environment and allowing for freely collective negotiation will contribute to the formation of reformism because repression can only motivate the working class to favor radicalism.106 The current situation is that some violence behaviors from public power happen in advance before the occurrence of the violent mass incidents in China in recent years, and the solutions for mass incidents show the way from violence triggering further violence to restrict violence with power.107 In this case, the use of public power has become the biggest obstacle for bottom residents to safeguard their own interests. The use of public power not only does not promote the fairness and justice of society but also violates the demands of this group to maintain their basic distribution rights.

The Single Subject of Supervision The single subject of supervision brings two problems: one is that the fairness of supervision is usually hard to guarantee, and the other is that the effectiveness of supervision has some deficiency. China’s subject of supervision for labor-capital relationship adjustment is mainly the All-China Federation of Trade Unions and the branches under its jurisdiction. This kind of supervision plays a quite limited role if, according to the analysis of the above, it is difficult for labor unions in state-owned and nonstate-owned enterprises to seek the benefits laborers need. The fair income distribution order will certainly not be truly reflected in the distribution between labor and capital if the supervisory agency is unable to effectively regulate the existing labor disputes to mitigate the contradiction between labor and capital.

The Prediction of Interest Coordination Under Diversified Identities In China, the government is both the ultimate controlling party of the state-owned enterprises of the market microeconomic subject and the main ruler maker of the market’s macro-rules; these two identities exist a degree of unity to some extent within the state-owned enterprises. Therefore, compared with nonstate-owned enterprises, the treatment of labor-capital relationships in state-owned enterprises has more administrative characteristics. 104

The research group of “the status of labor relations” from the lab of All-China Federation of Trade Unions: The Research on China’s Status of Labor Relations in Enterprise and Public Institution and the Construction of Labor Relations Adjustment Mechanism, Research on the Labor Movement, No. 16, 2008. 105 Wu (2011). 106 Shan (2010). 107 Xing (2011).

154

3 A Qualitative Analysis of Income Distribution …

There is a certain dilemma between rule mediation and benefit distribution in terms of the adjustment of the labor-capital relationship in nonstate-owned enterprises. The treatment of the labor-capital relationship in nonstate-owned enterprises, compared with the practices of state-owned enterprises, still has some difficulties in China’s current economic environment. However, it will easily cause the question of equity and the concept of justice from society if the treatment of nonstate-owned enterprises for this issue is far from the established standards. Therefore, the treatment of the labor-capital relationship in nonstate-owned enterprises is usually regulated according to market means within the permissible range of established laws and regulations, and there is generally no diversified means for regulating the labor-capital relationship in state-owned enterprises. The identity of government as a regulator is often interwound with the identity of the employer in this process; in particular, the emergence and maintenance of administrative monopoly industries is related to the frequent conversion of such multiple identities to a certain extent. One consequence of such conversion is the ambiguity of property rights in the public domain, making it difficult to find reasonable and effective standards for established labor capital adjustment policies. The reform of the distribution system will be difficult to advance or even distorted if there is a lack of effective supervision and restriction for power.108 Then, the income distribution disorder caused by this disorder of the labor-capital relationship will always exist within a certain range if it is difficult for the government to truly become an independent third party in the labor-capital relationship.

The Backward Arbitration System Construction The labor arbitration system is an important after-the-fact solution for labor disputes, and it is also one of the important aspects affecting whether labor disputes can be effectively resolved. China’s arbitration system legislation develops relatively limited, and its detailed regulations update relatively slow. At present, there are only two laws that come into effect to regulate the labor-capital relationship,109 namely, “The Arbitration Law of the People’s Republic of China” promulgated on August 31, 1994 and “Law of the People’s Republic of China on Mediation and Arbitration of Labor Disputes” issued on December 29, 2007. In general, China’s labor arbitration system has not begun to develop substantially until recent years, but the construction level exhibits large geographical differences. In addition, the arbitration committee has led to the weakening role, and principles of 108

Yu Bin: The Predicament and Outlet of National Income Distribution 2011, China Development Press, 2011. 109 In fact, the relevant provisions on arbitration institutions were also promulgated in the early days of the founding of the People’s Republic of China. For example, the “Instructions on Labor Disputes in Private Enterprises”, promulgated by the Central Committee of the Communist Party of China on July 15, 1949, has positioned the function of the Labor Bureau as the sole arbitration institution for labor disputes, and stipulated the relevant labor disputes procedures.

3.1 Labor-Capital Imbalance and Income …

155

three sides have not been implemented to reach the designated position, both because the size s of the staff, funds and workplaces are not addressed by bringing into the channels of the Ministry of Human Resources and Social Security in action.110 Principled guidance on issues such as labor dispute arbitration can be provided from the “Labor Contract Law”, enacted on January 1, 2008, and the “Law of the People’s Republic of China on Mediation and Arbitration of Labor Disputes”, came into force on May 1, 2008. The main characteristics of China’s labor arbitration are the rapid growth of case numbers and the high rate of laborers’ defeats after 2008. Both of these characteristics are related to the cancellation of the case acceptance costs in arbitration. On the one hand, this shows that laborers’ awareness of protecting their rights is gradually promoting; on the other hand, this also shows that laborers’ legal knowledge should also be improved accordingly. As the “Labor Dispute Mediation and Arbitration Law of the People’s Republic of China” came into effect for three years, the “Provisions on Enterprise Labor Dispute Consultation and Mediation”111 was officially promulgated by the Ministry of Human Resources and Social Security on November 30, 2011, and it also provided an implementation of the institutional norms for the aforementioned law. The provision clearly stipulates the limits on the length of time for arbitration and the calculation of time.

3.1.4.4

Economic Level

The transmission mechanism of the economic aspect is the most direct way for the imbalanced labor-capital relationship to affect the income distribution disorder.112 Interest appeals show a multidimensional tendency due to the continuous change of subject identity during the transition period. In China, this kind of transmission channel mainly contains four aspects, namely, differentiated interests but ambiguous morphology in the process of institutional transformation, the concentrated outbreak of inhibitory labor disputes, asymmetrical factor liberalization and corrupt managers.

110

The specialized committee research group for labor dispute settlement: “Tracking Research on the Implementation of the Labor Dispute Arbitration Law”, “China Labor”, No. 6, 2011. 111 The provision would become effective from January 1, 2012. 112 Economic inequality is the most external and intuitive manifestation of inequality. However, there is a certain bias in treating political inequality as a one-dimension result of economic inequality. Economic inequality will be inevitably caused if it is difficult to effectively realize the entire income of individuals in a market economy environment. There should be a two-dimension relationship between them. They also need to be treated more carefully when dealing with specific issues.

156

3 A Qualitative Analysis of Income Distribution …

Differentiated Interests but with Ambiguous Morphology in the Process of Institutional Transformation Interest differentiation is one of the important reasons that many labor disputes arise. The reasons and forms of interest differentiation are quite complex because they involve issues such as subject diversity, institutional compatibility, legal system standardization and opportunistic tendencies in the background of China’s socioeconomic transformation. However, the effectiveness of the adjustment of income distribution order has been restricted. The ambiguous interest morphology contributes many difficulties to the relevant solution channels in this complicated situation. Most of the reason stems from certain differences between the mechanism of interest expression and the degree of interest appeal in the new and old system environment. Laborers are often considered to be representatives of the interests of weak groups during this transition. This ambiguous morphology is also related to laborers’ understanding of the laborcapital relationship. The proportion of the population with small labor conflict or no conflict was close to 75.5% according to the 2002 Chinese Urban Residents’ Social Conception Survey. This gap between perception and reality is more significant, especially for those groups that specifically involve labor disputes.

The Concentrated Outbreak of Inhibitory Labor Disputes The accumulation and expansion of labor disputes exists to a certain extent in the different processes of China’s economic development, and the accumulation of inhibitory labor disputes is more worthy of concern. Japanese scholar Kiyoshi Kashihara believes that the existence of official unions has inhibited the explication of labor disputes and delayed the process of resolving labor disputes by establishing a legal system due to the benefit consistency of the working class in socialist countries. Even the appearance of labor disputes can be considered an organization cadres’ quality and leadership problems, and the different interests among different social groups are not recognized.113 The current labor-capital relationship of our country features both frequent new problems and centrally highlighted old problems. Among them, many new problems have some commonality with the old problems. Therefore, the improper adjustment of the labor-capital relationship, such as dealing with the new and old problems by oversimplified solutions or ignoring the possible connection between the new and old problems, will cause new obstacles for the development of the labor-capital relationship and is not conducive to the improvement of the social income distribution order.

113

Kiyoshi Kashihara: The “Non-Existence” of Socialist Ideology and Labor Disputes—the Concepts about Labor Relation and Labor-Capital Relationship, Research on Trade Unions Theory, No. 1, 1999.

3.1 Labor-Capital Imbalance and Income …

157

The Asymmetrical Factor Liberalization The most significant change in the distribution system from 1979 to 2011 was that the participation of factors in distribution114 began to be recognized gradually and became one of the important supplements to distribution according to work. The participation of factors in distribution occupies an important place in diversified modes of distribution. The distribution share of factors is not only related to the initial quantity of factors but also closely related to the division of ownership of the factor. In addition to the influence of statistical caliber factors, obtaining decent and commensurate returns on labor factors is an important aspect to increase the proportion of labor income in national income. The division of the factors’ rights profoundly and comprehensively affects the stability or sustainability of their owners’ revenue under the value of diversified distribution. As an important supporting measure, it is increasingly important to continue institutional reform to improve resource factor prices. However, the opportunities for windfall profits and unreasonable high income mainly appear in the process of trading in the factor market from the view of market structure.115 This causes the income distribution order to show a certain degree of disorder and affects the residents’ actual income levels in the process of factor liberalization. Halfway market system reform, distorted factor prices and the distorted market main body have led to the misallocation of resources and relatively deteriorating laborers’ status.116 The income situation of labor, capital and technical owners has begun to divide since 1971.117 It should be adjusted through secondary distribution if this income differentiation is generated on the basis of the legitimate realization of factor rights. It is imperative to standardize order and perfect standards in the field of primary distribution if much of the gap is caused by distribution disorder or a lack of distribution standards.

114

In reality, allocation according to factor often leads to criticism for exploitation. In fact, this is more of an issue with different perspectives: if the acquisition of factor ownership carries the original sin and the income distribution process is based on this form of ownership, then the unearned income in this process has an exploitative component. However, if the factors of production without the original sin participate in the distribution process according to their contribution to production and receive corresponding returns, then there is no exploitation in this unearned income. The main representatives of the second viewpoint are Cai Jiming and Yang Canming. It should be said that the latter view is officially recognized. The 15th National Congress of the Communist Party of China pointed out: In the primary stage of socialism, it is necessary to adhere to a system in which distribution according to work is the predominant mode of distribution, while diversified modes of distribution coexist, and to combine distribution according to work with distribution according to production factors. 115 Li and Zhao (2011). 116 Yu (2011). 117 See the detailed data analysis from Chen Xiu Mei: “Research on Factor Participation in Income Distribution—Labor and Capital in Income Distribution”. Economic Science Press, 2010.

158

3 A Qualitative Analysis of Income Distribution …

The Corrupt Managers The corruption of managers has some correlation with the deterioration of the laborcapital relationship in the real socioeconomic field. To a certain extent, this has differentiated the principle of management elements participating in the distribution, which has harmed the long-term development of employees and enterprises. Yu Jianrong once analyzed the reasons for more than 200 protests of state-owned enterprise workers, among which the corruption problem of state-owned enterprise leaders accounted for 6%.118 The reason is mainly related to the uses and supervision ways of power, and sees the analysis in Section two for details.

3.2 The Intervention of Public Power on Private Right and Income Distribution Disorder The intervention of public power on private rights is relatively extensive in the real social economy. It has many characteristics, the most important of which are its historical continuity, spatial diversity and specific context. Generally, the power of the market economy should play a crucial role in the market economy, while political interference should exist as a supplementary form. The Keynesian school and the neoclassical synthesis advocated that the government should implement active intervention to moderate economic fluctuations and bring the economy to an equilibrium point. This theory did provide the necessary “theoretical basis” for the behavior of government intervention in the market from the twentieth century to the present day. However, the negative effects are quite obvious to a certain extent both for the economy as a whole and for micro-individuals. In our country, the intervention of public power in the economic market has largely continued the management characteristics of the planned economy. The effect has remained limited, although there has been a change in function orientation. However, the domestic and foreign economic crises that have occurred in recent times have objectively prompted the government to continue to strengthen its intervention in the economic market, which has lagged the elimination of backward enterprises and the upgrading of the industrial structure. In addition, the excessive interference of public power on private rights has also worsened the labor-capital relationship to a certain extent, which was not conducive to the improvement of residents’ income and directly or indirectly caused disorder in the social income distribution order. Therefore, paying attention to the interference of public power on private rights has become an important part of understanding the root cause of income distribution disorder. In our country, the administrative industry monopoly and divided management for household registers can be described as the two basic factors that cause the imbalance in the primary distribution and the important factors that affect the effect of the 118

See Yu Jianrong: “China’s Social Conflict and Order Reconstruction during the Transition Period”, China Reform Forum Website, May 14, 2010.

3.2 The Intervention of Public Power on Private …

159

redistribution adjustment.119 In fact, there are many connotations of public power’s interference in private rights, the most important of which include explicit improper intervention and hidden power-for-money deals. In a certain sense, these two interventions have caused the tendency of disorder in the existing income distribution order and affected the actual growth of resident income to varying degrees. Specifically, the explicit improper interventions mainly include eight aspects: GDP-oriented performance appraisal mechanism, receipts of enterprises monopolizing because of the administration factor, land marketization intervention, equalitarianism continuation, the improper distribution of profits in the reform of state-owned enterprises, the extended invisible income in the system, the household registration restrictions in the process of redistribution and asymmetric benefits in tax reform. The hidden power-for-money deal is prominently shown by the generalization of self-serving behavior in some government officials and the government officials’ income from hidden rules and information advantages.

3.2.1 The Explicit Improper Intervention Generally, explicit improper intervention mainly refers to the government excessively adjusting other micro bodies in the market by using public power.120 Such direct damage to the basic rules of the market economy reflects the rights authority.121 Income from this rights authority can be viewed as a power economy. Specifically, the power economy is a form of alienation in which power penetrates into the economy field and mainly includes three levels: leading to misallocation of resources because of decision-making, gaining gray income through power and leading to corruption by power.122 The originally assumed socialist market economy is likely to evolve into a kind of “crony capitalism” under the influence of this.123 In China’s existing 119

Song (2011). In our country, public power’s interference in private rights involves many levels of government. Among them, the abuse of power by county-level governments has become increasingly concerned by society. To seek to change this situation, Central Commission for Discipline Inspection of the Communist Party of China and the organizing department of the Central Committee of the Communist Party of China issued “Opinions on the Pilot Work of Open and Transparent Operation of County Party Committee Powers” on November 18, 2011 to regulate the exercises of power of grass-roots governments after the Hubei province’s introduction of “Early Warning Prevention and Control Measures for the Post of County Party Committee Secretaries” on September 12, 2010. 121 The rights authority was a viewpoint put forward by Cui Jianhua (2010). He believed that the main feature of this alienation of power was the privatization of public power, which existed the motivations and results for private interests. In our country, the essence of rights authority was that the main body of power harmed the reasonable interests of the labor for protecting the unreasonable interests of the capital. For details, please refer to Cui Jianhua, “Research on the Abnormal Problems of Governmental Public Power Intervention in China’s National Income Distribution”, “Economic Issues”, No. 11, 2010. 122 David (2005). 123 Wu (2004). 120

160

3 A Qualitative Analysis of Income Distribution …

income distribution field, improper government intervention covers the two main stages of income distribution, which are the primary distribution and redistribution and have multiple effects on the formation and change of residents’ income.

3.2.1.1

The Primary Distribution Field

The government’s improper interventions could be described in many aspects in the primary distribution, the most important of which was reflected at the macro and micro levels.

Macro Level Improper government interventions at the macro level mainly included three aspects, namely, politically oriented GDP, administrative monopoly and land marketization intervention. (i)

GDP-oriented Achievement View

The level of total GDP and growth rate have become important goals for officials to pursue personal development since the total GDP and growth rate play an important role in Chinese officials’ performance. As a rapidly rising developing country, the higher growth rate of GDP is reasonable. While the long-term failure of residents’ income to grow in step with GDP reflects the limited extent of residents’ benefits to a certain extent, the ratio imbalance of accumulation and consumption objectively leads to the slow growth of domestic demand. The main reason for this situation is that the stability and development of the ruling party’s status does not depend on the preaching and propaganda of its ideology but on the basis of legitimacy generated by its political and economic performance.124 Then, promoting economic development in this way not only deviates from the scientific development concept but also increases the potential social risks of economic development if the rapid growth of GDP breaks away from the welfare of the majority.125 China’s economic development model of “emphasis on growth but distribution” has once again manifested, and the contradictions of people’s livelihoods created by restrained distribution have become increasingly prominent since the global financial crisis in 2008. All residents’ living standards and happiness have been trending down because of the limited benefits they received from economic growth and asymmetric channels. In general, China’s total fiscal expenditure and growth rate have played an important role in GDP growth. In 2010, the average growth rate of fiscal expenditure in 31 provinces across the country was 22.06%, which was much higher than the GDP 124

Wang (2004, p. 121). China (Hainan) Reform and Development Institute: Straightforward China Reform: Theory Articles, China Economic Publishing House, 2011, p. 220.

125

3.2 The Intervention of Public Power on Private …

161

growth rate in the same period and significantly higher than the growth rate of urban and rural residents’ income. Its growth rate gradually increased from east to middle to the west in terms of region. In terms of the growth rate of GDP and urban and rural residents’ income, the former was higher than the latter in all provinces, which was more prominent in the central provinces. The difference in growth always existed in the provinces all over China from 1992 to 2010. It could be said that the government’s pursuit of GDP and the increase in high fiscal expenditures have led to very limited improvements in people’s actual income and consumption capability. At the same time, the economic structure of society failed to be upgraded and adjusted at the right time; instead, a state-led market conversion process emerged, and the government further strengthened its control over the micro-economy. (ii)

The Administrative Monopoly of Government

The definition of a monopoly subject is relatively complete in the Anti-Monopoly Law and takes into account the potential administrative monopolistic behavior of national executing agencies and the power of agencies. Many obstacles have been encountered in the implementation of this law due to the failure of antitrust agencies to obtain the corresponding enforcement power. In terms of applicable objects, it is not subject to this law for the central government to perform administrative authority on behalf of sovereign states. In general, there are four main aspects that can reflect the formation of income in monopoly industries and its many impacts on income distribution order: The first is the artificially determined profit-sharing groups. This is mainly reflected in the fact that national asset income is obtained more by internal staff within enterprises than by external staff; state-owned enterprises have handed less or no profits to the country, especially since 1994, which has led to the rapid differentiation of the income gap between industries. The second is the income distribution with strong subjective color. The specific income distribution has more subjectivity due to the lack of corresponding social supervision in the process of Chinese residents’ income formation. This mainly embodies the group differences in profit sharing and the differences in the degree of return to the given labor and given input, such as the underestimation of human capital to some extent. The third is the gradual generalization of monopoly benefits. In addition to directly causing losses in product pricing and sales in two dimensions space of supply and demand, the loss of social welfare caused by monopoly enterprises also includes that this kind of enterprise obtains social public goods and services at extremely low costs. This type of loss is also known as “monopoly benefits”, which is one of the important factors to aggravate income differentiation in society and the important cause to give rise to a differentiated anxiety mentality. The fourth is that virtual entrepreneurs manage only state-owned assets. In theory, managers of this kind of enterprise are usually appointed directly instead of producing by following market principles, although they have autonomy and own profit and loss responsibility for the enterprise. This makes their sense of corporate responsibility

162

3 A Qualitative Analysis of Income Distribution …

less bound by the market to some extent and more follows political and moral responsibility. The formation and maintenance of this responsibility makes it difficult to pursue the performance of business operations like other competitive entities in the market but often to seek the maximization of personal interest at a given level of development. In fact, the analysis of the concentration of monopoly industries and welfare loss can be objectively evaluated from two different perspectives. First, monopoly enterprises, especially administrative monopolies, are the external manifestation of the changed management system from the planned economy period to the present, which has interfered with market microeconomic activities from many aspects, such as access, industry standards and supervision by the use of administrative power, and expanded the size and market share of some companies in the industry through reorganization and mergers. Next, monopoly enterprises are closely related to the entire industry and even many industries and the overall development of the national economy instead of isolated existence. The scale effect and effects of the development and demonstration of monopoly enterprises have an impact that makes it difficult for small and micro enterprises to reach both inside and outside the industry. The welfare loss generated by monopoly enterprises is also a loss relative to the ideal state, which should be combined with the technological innovation activities promoted and created by such enterprises, especially the impacts for the entire industry and other industries from the trickle-down effect and the guiding effect of technology diffusion that can fully examine the positioning and value of such enterprises in market economic activities. (iii)

Land Marketization Intervention

The established marketed economic system thus far needs to be further improved; one aspect is that governments at all levels have huge powers to control important economic resources such as land.126 China’s current land policy is facing the main problems of six aspects,127 such as still maintaining a dualistic situation in China’s rural and urban land system and state monopoly on the first-class urban land markets. China has promulgated many laws and regulations to regulate the government’s land acquisition behavior and methods since 1950.128 The “Land Management Law” promulgated in 1986 enables the government to obtain the legal basis for the paid 126

Zhang and Si (2011). These six aspects are the following: China’s rural and urban land system still maintains duality; the state monopolizes the first-class urban land markets; the enforceable land acquisition and compensation measures exist unfairness; the farmers have weak right to land: the excessive dependence of local governments on land transfer income and land-related financing; it is difficult to lower the loss rate of agricultural land; and the land legal framework is incomplete. For details, see the Research Team of China’s Land Policy Reform: China’s Land Policy Reform: A Holistic Framework for Action, Reform, 2006, No. 2. 128 The main laws and regulations include the “Regulations on Land Reform in Urban and Suburban Areas” promulgated in 1950, the “Constitution of the People’s Republic of China” in 1954, the “Measures of Land Requisition for State Construction” in 1958, the “Expropriation of Regulations for State Construction” in 1982, The Land Management Law in 1986 and the “Regulations on the Collection and Compensation of Houses on State-Owned Land” in 2011. 127

3.2 The Intervention of Public Power on Private …

163

use and administrative allocation of land, in which the paid use part has not been fulfilled well. This law was amended in 1988, 1998129 and 2004. The revision work was restarted in April 2011, and the revision work was restarted.130 In November 2011, the coordination and cooperation mechanism between the central inspection agency and the national land inspectorate officially entered the implementation phase of institutionalized cooperation, which became an important measure to build “the same responsibility for the Communist party and government” supervision mechanism and curb the outstanding problems the land and minerals sector.131 The exceptional provisions have been continuing increases in the process of perfecting the land acquisition and paid use system.132 This can also easily lead to the generalization of powers due to the lack of corresponding regulatory documents on how these exceptional administrative approval powers should be supervised. The government-led land market still has a large negative impact on the realization of residents’ normal private rights in many aspects under the dual influence of system improvement and increasing exceptional regulations. This is mainly reflected in the following three aspects: the cases and money for corruption of government officials have gradually increased; the government has implemented urban–rural differential treatment in the distribution of land interests and violated private property. At the same time, the government has implemented more urban–rural differential treatment in terms of specific land benefit distributions. Although the specific land benefits are not directly obtained by urban and rural residents, the beneficial degrees of the residents in urban and rural areas show an asymmetric situation through the government’s exercise of land power.133 Free transfer of rural land is still difficult to 129

However, the amendment in 1998 still adopted the resettlement method of the planned economy period, which led to the cumulative expansion of land acquisition contradictions from 1998. 130 The change of land ownership in the current amended bill mainly includes the following four types: (1) The requisition and allocation of land should according to law; (2) The assignment and transfer of land use rights should according to law; (3) The sale, inheritance, exchange and division of land use rights should according to law; and (4) The changes in the rights of land use right authorities. 131 The Coordination and Cooperation Mechanism between the Central Inspection and the Land Supervision, Beijing Business Today, November 30, 2011. 132 The General Office of the State Council has promulgated 15 regulations on administrative examination and approval from October 28, 2001 to July 4, 2010, in which two regulations and one amendment on administrative examination and approval reservations were issued: (1) “Decision of the State Council on Establishing Administrative Licensing for Administrative Examination and Approval Items That Really Need to Be Retained” issued on June 29, 2004; (2) “Notice of the General Office of the State Council on Retaining Certain Non-Administrative Examination and Approval Items” issued on August 2, 2004; and (3) “Decision(2009) of the State Council on Amending the ‘Decision of the State Council on Establishing Administrative Licensing for Administrative Examination and Approval Items That Really Need to Be Retained’” issued on January 29, 2009. Among them, the first statute stipulated 500 administrative examining and approving organizations should implement the “Catalog of Administrative Licensing Items for Administrative Examination and Approval Items to be Retained”; and the second statute retained 211 non administrative permit approval items. 133 The government’s basis for exercising land power mainly comes from the Constitution of the People’s Republic of China, the Real Estate Law, and the Land Management Law. In our country,

164

3 A Qualitative Analysis of Income Distribution …

2,800

Y 99 Y 00 Y 01 Y 02 Y 03 Y 04 Y 05 Y 06 Y 07 Y 08 Y 09

2,400 2,000 1,600 1,200

2,800 2,400 2,000 1,600 1,200

800

800

400

400

0

0 1

2

3

4

5

6

7

8

9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Fig. 3.1 Absolute land transfer fees in 31 provinces from 1999 to 2009 (Note Y99, Y00, Y01, Y03, Y04, Y05, Y06, Y07, Y08, and Y09 represent 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, and 2009, respectively. 1–31 represents the following provinces, autonomous regions and municipalities: Beijing (1), Tianjin (2), Hebei (3), Liaoning (4), Shanghai (5), Jiangsu (6), Zhejiang (7), Shandong (8), Guangdong (9), Fujian (10), Shanxi (11), Inner Mongolia (12), Jilin (13), Heilongjiang (14), Anhui (15), Jiangxi (16), Henan (17), Hubei (18), Hunan (19), Shaanxi (20), Guangxi (21), Hainan (22), Chongqing (23), Sichuan (24), Guizhou (25), Yunnan (26), Tibet (27), Gansu (28), Qinghai (29), Ningxia (30), Xinjiang (31). Among them, 1–10, 11–20, and 21–31 are provinces in the eastern region, central region, and western region, respectively. All the above data are calculated based on current prices, and the unit is 100 million yuan. Data source Land and Resources Statistics Yearbook 2000–2010)

realize in most areas due to institutional reasons, and land is only one of the main tools for farmers to make a living. Urban land can realize commercial transactions or the improvement of the urban welfare level after acquisition by the government department, and the land increment revenue can also be converted into cash flow, which has become one of the important reasons for the income differentiation between urban and rural residents. In 2004, only 20–30% of the land increment revenue remained in the countryside, of which farmers’ compensation only accounted for 5–10%, and the value-added income of local governments and developers was 20–30% and 40–50%.134 This kind of disparity can be proven to some extent from the total amount and the use of land transfer fees. From 1999 to 2009, 2009 was the year when the land transfer fee was the highest in most provinces135 (see Fig. 3.1), and the absolute amount of land transfer fees nationwide was RMB 17.9526 billion calculated by there are mainly seven types of statutory land distribution and transfer methods, namely, allocation, transfer, lease, consideration (investment), authorized operation, transfer and lease. 134 The “Green Paper on Rural Economy” no longer analyzed the market for rural production factors and the degree of marketization in separate chapters since 2006, so the distribution pattern in 2006 and beyond is unknown. The data are from the Institute of Rural Development of the Chinese Academy of Social Sciences and the Rural Social and Economic Survey Team of the National Bureau of Statistics: “2004–2005: Analysis and Forecast of the Rural Economic Situation in China”, Social Science Academic Press (China), 2005. 135 From 1999 to 2011, the total amount of land transfer fees nationwide was approximately 12.75 trillion yuan. The net income is more than half, but the direction of expenditure is rarely disclosed to the public. For details, see Liu Zhanchao: “Nearly 13 Trillion Yuan of Land Revenue in the Country for 13 Years Has Rarely Been Publicly Announced”, China Business News, February 24, 2012.

3.2 The Intervention of Public Power on Private …

165

the price in the current year, whose ratio to GDP increased from 0.57% in 1999 to 5.03% in 2009 and was only 4.6% in 2007. It is not difficult to see that the regional disparity of land transfer fees is relatively significant in terms of the total amount from 1999 to 2009, among which the land transfer fees of Jiangsu Province and Zhejiang Province in 2007 were 59.3 times and 68.6 times the respective amounts in 1999. In 2007, the transfer fees of the provinces in the eastern regions accounted for 72.47% of China’s total, while the population proportion there was only 38.35% of China’s population. On the whole, the proportion of transfer fees in the western region of China is 11.62%. In the past 10 years, Sichuan Province has had the highest transfer fee in the western region. The land transfer fees obtained from these completed processes are often used mainly for urban infrastructure improvement rather than an increase in residents’ income. From 2006 to 2009, the national average contribution of land transfer fees to urban public investment was 36%, and the figure in Beijing, Shanghai, Tianjin, and Chongqing Provinces was 55, 55, 56, and 30%, respectively. During this period, land transfer fees nationwide were mainly used for urban public investment, industrial land development and investment, land reserve investment, and affordable housing investment, and the average expenditure amounts were 374.4 billion yuan, 280.8 billion yuan, 187.2 billion yuan, and 93.6 billion yuan, respectively. During this period, the land transfer fees were more used for urban economic development (70% for urban public investment and industrial land development and investment), 10% for improvement of urban residents’ welfare, and approximately 20% for land adjustment. In addition, land transfer fees have stimulated the real estate industry, which makes local governments obtain nearly 10% tax revenue.136 Land transfer fees vary greatly between and within the three regions, which shows that location often determines the value of land to a large extent. As far as land development models are concerned, geographical relevance has indeed improved significantly in recent years. Otherwise, there has been a marked increase in government violations of private property. In the process of land acquisition, the generalization of the concept uses the government’s use of the concept of “public interest”. For the conflict of interest between the government and the people, the government usually adopts a simpler and more straightforward way to deal with it. As a result, the government and the people have serious consequences. In fact, the realization of public interest and personal interest has inherent unity. If the lawful rights and interests of the residents in the relocated area cannot be maintained, the government’s ability and method of defending the public interest will inevitably be questioned. On March 19, 2007, the Property Law of the People’s Republic of China was passed. The law provides a corresponding legal basis for citizens to defend their legitimate property rights and interests, but practical help is still limited. On March 22, 2007, “the most powerful households” appeared in Chongqing. The opposition between official and civilian interests in the process of land requisition has gradually become a concern of society, and it has caused reflection in the whole society with the

136

Bai and Yu (2010).

166

3 A Qualitative Analysis of Income Distribution …

participation of media. However, this reflection has not brought about the improvements that the government should have. On December 19, 2010, and March 28, 2011, Beijing and Shanghai again saw incidents of nail households. If sporadic events have uncontrollable factors, then multiple events have more or less commonality to a certain extent. Although it is impossible to rule out the intentional malicious intentions of nail households, for local governments, the pursuit of political achievements and GDP can be described as their inherent roots to a certain extent. In addition, self-immolations in land interest disputes have repeatedly occurred.137 The frequent occurrence of extreme forms of resistance has caused the issue of the protection of civil rights to become the focus of social attention, and how the government has balanced public and private interests has attracted much attention.138 These incidents also prompted public intellectuals to start thinking about whether the government’s means or methods to achieve the stated goals were reasonable.

Micro Level In real society, government intervention at the micro level undermines the fair distribution rules and directly affects residents’ income. Specifically, this mainly includes the continuation of egalitarianism in state-owned enterprises, improper profit distribution, and the expansion of hidden income. (i)

Continuation of Egalitarianism

In most monopoly enterprises in China, the small difference in total wages between the educational levels of workers directly leads to the relative depreciation of human capital, which hinders the deepening of human capital.139 The wages of workers have not continued to improve significantly with the improvement of academic qualifications and skills, indicating that human capital has not yet received its due return, 137

Mainly including the self-immolation incident occurred during the demolition in Jinhua Village, Tianhui Town, Jinniu District, Chengdu in the morning of November 13, 2009. In December 2009, a self-immolation incident occurred in Beiwu Village, Haidian District, Beijing. On September 13, 2010, self-immolation in Yihuang, Jiangxi also occurred. On April 22, 2011, a self-immolation incident occurred in the forced demolition of Shangyujia Group, Hengshi Village, Xuelin Office, Yunlong Demonstration Zone, Zhuzhou, Hunan. 138 There is a view that if it is difficult for the government to effectively protect private interests, it will also be difficult to maintain public interests. This view is reasonable in terms of the government’s respect for rights and the consistency of public and private interests. However, there is also a situation where the public interest and the private interest are in opposition to a certain extent, and it is often necessary to compensate the other party. However, if private rights are always vulnerable and often violated, it is logically reasonable to have some doubt about the government’s motivation and ability to safeguard public interests. 139 Su Hainan pointed out in 2001 that the wage income distribution gap among many state-owned enterprises and government agencies, institutions, and mass organizations is relatively small. The income distribution gap by administrative positions is too small, and the income distribution gap by technical positions is even smaller. For details, see Su Hainan: To Accelerate the Formation of a New Pattern of Income Distribution for Urban Residents in China, Labor Security Newsletter, No. 7, 2001, pp. 27–30.

3.2 The Intervention of Public Power on Private …

167

objectively leading to the waste of existing human resources and the distortion of the future deepening of labor resources. The loss of internal efficiency of the monopoly industry discussed here is precisely due to the low human capital return and various contradictions in the internal distribution of the industry caused by the deviation from the optimal wage system. Among the actual income of workers, there are many sources of income based on identity. In this type of enterprise, workers have relatively severe income differentiation, and to a large extent, there are large differences in welfare income linked to jobs and grades. It is not difficult to see that the imbalance in the proportion of wages and benefits in laborers’ income actually shows that the specific implementation and implementation of the principle of distribution according to work has always been seriously distorted, and identity-based income has become an important part of their income. (ii)

Improper Profit Distribution

The so-called improper distribution of profits mainly refers to the fact that the profits obtained by state-owned enterprises have not been enjoyed by the residents of the whole society as a result of the reform, which caused the profits paid by stateowned enterprises to be minimal during 1994–2011.140 Although this move aims 140

The main system construction includes: In the pilot reform of state-owned enterprises’ property rights that began in 1979, state-owned enterprises can withdraw 5 and 3% of enterprise funds from completed contracts stipulated by the state and other contracts, and state-owned enterprises with monopoly resources can also withdraw a certain percentage of corporate funds from excess profits. On January 22, 1980 and November 11, 1981, the State Council carried out 40% of the enterprise’s retained profit ratio in the Provisions on Profit Retention of State-owned Industrial Enterprises and Interim Provisions on Several Issues concerning the Implementation of Industrial Production Economic Responsibility System, respectively. Compared with that in the trial in 1979, the retained profit ratio has increased by nearly 30%, from which, in fact, the dominance of enterprises on residual profits has been liberalized, and the income status of employees of stateowned enterprises has basically gradually improved. In 1982, Shougang began to implement a pilot program of increasing profits and contracting, which means while distributing employee welfare funds and personal consumption funds within 40% of total profits, the ratio of total wages to profits of employees was adjusted by a coefficient of 0.8: 1. It can be seen that this wage adjustment coefficient is quite high, in fact, it has further improved the treatment of employees of state-owned enterprises. To control this situation in a timely manner, the more important interest-to-tax reform process began in 1983, but the process ended in failure. On April 4, 1983, the General Office of the State Council forwarded the “Report on Implementing the Central Directive and Doing a Good Pilot of Comprehensive Reform in Chongqing” transmitted by the Sichuan Provincial People’s Government, which mentioned: Chongqing’s tax-for-profit reform has been comprehensively carried out since this year. All large and medium-sized profitable state-owned enterprises in the city will levy income tax at 55% of their realized profits, and the enterprise will implement a floating wage system. On the 24th of the same month, the State Council approved the Ministry of Finance’s “Report on the National Working Conference on Profits and Taxes” and the “Trial Measures on Profits and Taxes of State-owned Enterprises”, stating that profitable state-owned large and medium-sized enterprises are taxed at 55%. Small profitable state-owned enterprises should pay income tax at a level 8 excess progressive tax rate based on the realized profits; the enterprises pay the profit after tax. This measure was put into effect on June 1 of that year. The classification and regulation of large and small stateowned enterprises is highly targeted at retaining profits in state-owned enterprises and the income distribution of their internal employees. On December 15, 1993, the State Council promulgated the

168

3 A Qualitative Analysis of Income Distribution …

to make state-owned enterprises increasingly larger, the growth and distribution of such wealth is rarely open to the public, making the wealth of large state-owned capital to maintain and increase value for a long time enjoyed by workers inside the enterprise, but it is difficult for other members of society. Sharing leads to the lockin of the profit sharing boundary. To some extent, the workers in these enterprises are overdistributed according to the principle of factor distribution. There are many such elements, the most important of which are based on the possession of natural resources, the possession of administrative resources, and the maintenance of identity systems. Therefore, among industries, especially among industries that have different types of ownership, the income situation of employees gradually shows a clear trend of differentiation. After 2000, such contradictions became increasingly prominent and became the focus of social attention. According to the statistical results of the reform questionnaire of the Reform Institute of China in 2010, 62.99% of experts believe that in reforming and improving the income distribution system, regulating the monopoly industry’s income is particularly important for state-owned enterprises to “dividend and collect rent”.141 Using this part of the income will help promote the development from material development to human development and is one of the important ways to effectively realize the transition from wealth to wealth.

3.2.1.2

Redistribution Field

The government’s improper intervention in the second distribution is mainly reflected in the redistribution of hukou and the impact of tax reform.

Redistribution of Household Registration The so-called distribution of household registration characteristics does not refer to the process of re-optimizing income derived from household registration during the redistribution process but refers to the fact that under the dual urban–rural registration system, the redistribution benefits of migrant workers cannot be effectively guaranteed. In our country, a large number of migrant farmers have made great “Decision on Implementing a Tax-sharing Financial Management System”, stating that enterprises pay income tax at a rate of 33% from January 1, 1994. Taking into account the current situation of low profit submission of some enterprises, two levels of care tax rates of 27 and 18% have been added as a transition method. This is a major regulatory process for corporate taxation behavior after the tax reform. However, the decision also proposes that in the near future, the majority of state-owned wholly capital old enterprises registered before 1993 can be implemented in accordance with specific circumstances. To a large extent, the obscurity of this sentence to the time and scope of application has resulted in very little posttax profit payment of state-owned enterprises from 1994 to 2009, which has always been a large contrast with their operating profits. 141 China (Hainan) Institute of Reform and Development: Mutual Reform in China: Theoretical Chapter, China Economic Publishing House, 2011.

3.2 The Intervention of Public Power on Private …

169

contributions to economic development in a low-welfare or even unwelfare working environment, and in some cases, even wages cannot be obtained normally. In the practice of migrant workers, the household registration system reflects the country’s top-down intervention strategy and will to power, while the state rejects Chinese farmers’ legal identity conversion in cities through the household registration system and achieves city-centered social control, resource monopoly and redistribution of benefits.142 As the main object of redistribution, most rural residents actively moved to cities and towns to effectively increase their income. Their lack of opportunities to obtain due labor compensation and social redistribution within the framework of the system is sufficient to show that there is a major omission in the operation of the current system. In fact, the vast majority of China’s social welfare policies are implemented according to household registration rather than population location. It is difficult for migrants to enjoy due social benefits and social security because they have no registered permanent residence. Although the state later stipulated that the minimum pension payment period of 15 years could be carried forward, it still caused huge inconvenience to mobile labor. If migrant laborers pay the pension in their work area for less than 15 years, which is the minimum period, they have to pay it for a new 15year period after they move to the new workplace because the paid pension costs will no longer be carried forward. This move actually encourages the movement of this part of the labor force and restricts their movement in disguise. Especially with the rapid development of the regional economy, although this policy takes into account the financial pressure of local governments, it also deprives workers of the right to freely choose a place of employment. This violation of labor rights actually reduces the opportunity for workers to enjoy the benefits of economic growth through full mobility, leading to a widening income gap between groups.

Impact of Tax Reform The operation and maintenance of the taxation system not only reflects the government’s ability to coordinate planning as the organizer of social resources and the provider of public goods but also carries the value pursuit and moral ideals of ordinary people in the process of economic and social development. It should be pointed out that taxation is more an ex post adjustment of a given income. Its specific connotation involves the process of smoothing the income of the primary distribution field, and the effectiveness of the adjustment mainly depends on three aspects: the basis, method and execution of the adjustment. Among them, the basis of the so-called adjustment, that is, the initial form of the income of the micro-subjects, determines the actual effect of the adjustment to a large extent. While paying attention to the effects of tax regulation, it is necessary to clarify the established environment for tax regulation. Otherwise, it is easy for the phenomenon of discarding capital to end. If the 142

Pan (2011).

170

3 A Qualitative Analysis of Income Distribution …

fairness of market opportunities is neglected, it will be necessary to be vigilant in the view that the adjustment of the income distribution gap should be primarily attributed to the secondary distribution if the fairness of market opportunities is neglected.143 For most microeconomic entities in the market economy, taxation exists as a second form of income distribution. The effect of taxation on “inhibiting high and lowering” the initial distribution can to some extent solve the problem of disparity in returns in the market process. For some public institutions, taxation can also achieve secondary distribution adjustments, but the funds of such units come from the country, through the current tax revenue, through the realization of future income-borrowing income, or the previous period. The first realization of wealth in previous periods, the most important source of funds, is still tax revenue. Therefore, for state-owned institutions, taxation is not only the main channel for obtaining funds but also the income of practitioners in this type of industry. This article will mainly analyze the impact of taxation on the income of urban and rural residents as a secondary distribution. Generally, the government’s improper intervention in tax reform is mainly reflected in the following three aspects: First, the total tax revenue has grown too fast. The rate of China’s tax revenue growth was over 10% most of the time from 1985 to 2010, and the average growth rate was as high as 17.83% from 1990 to 2010. Although excessive tax growth has ensured the government’s fiscal revenue, it has largely squeezed the disposable income of residents and enterprises. Second, the proportion of turnover tax in the total tax revenue was strengthened. The proportion of the three taxes was only 25.27% in 1985 but reached a peak of 73.53% in 1993. Since then, it has slowly declined, while the proportion still reached 54.19% in 2009. Taking into account the rapid growth of the total economic volume and total tax revenue, the actual asymmetric evolution between tax types is also quite conspicuous. In terms of theory and reality, turnover tax is very regressive in residents’ income. From 1995 to 2006, the regressive nature of China’s value-added tax and business tax had a deteriorating effect on income distribution, but this negative impact tended to decrease year by year.144 In this sense, the gradual strengthening of the proportion of turnover tax in tax revenue does ensure government revenue, which, compared with direct taxes, also controls the cost of regulation to a certain extent and has a negative impact on the evolution of residents’ income. Here, the contribution of the main tax types to the inequality of residents’ income from 1994 to 2009 is simply explained. They accounted for approximately 80% of 143

Such views are reasonable, but they obscure the basic issue of fairness. We believe that equity should be more of an opportunity level than a result level. If the initial opportunity is unequal in the market economy environment, it is difficult for the second distribution to play its due role. In this sense, equality of opportunity is more important than equality of results, instead of asserting that secondary distribution should be the main stage of narrowing the gap between the rich and the poor based solely on the insufficient level of tax regulation such as Xu Dianqing, etc. (2011). For details, see Xu Dianqing and Li Xin, Understanding the Gap between the Rich and the Poor in China, Machinery Industry Press, 2011. 144 Liu and Nie (2004).

3.2 The Intervention of Public Power on Private …

171

Table 3.1 Gini coefficient before and after taxation, 1989–2009 v=2

v=3

Town

Countryside

Before tax

After tax

Before tax

After tax

Before tax

After tax

Before tax

After tax

1989

0.4867

0.4865

0.6243

0.6254

0.4223

0.4229

0.5141

0.5150

1991

0.4348

0.4354

0.5810

0.5847

0.3308

0.3313

0.4574

0.4578

1993

0.4782

0.4833

0.6290

0.6363

0.4054

0.4081

0.5048

0.5077

1997

0.4644

0.4669

0.6189

0.6234

0.4018

0.4017

0.4883

0.4866

2000

0.4710

0.4782

0.6278

0.6372

0.3859

0.3869

0.5001

0.4986

2004

0.5046

0.5131

0.6687

0.6782

0.3850

0.3867

0.5459

0.5452

2006

0.5146

0.5211

0.6709

0.6786

0.4241

0.4234

0.5482

0.5482

2009

0.4943

0.5006

0.6369

0.6445

0.4210

0.4213

0.5209

0.5208

Data source CHNS Note v is a parameter in the generalized Gini coefficient. The greater v is the greater proportion given to the poor

the tax revenue and for over 88% of the proportion of fiscal revenue between 1994 and 2009, which can basically represent the overall situation of tax revenue. The ability of taxes to regulate income between urban and rural residents was relatively limited from 1989 to 2009. If the poor are given higher weights, the tendency for reverse regulation will be more obvious (see Table 3.1). Since 2000, compared with the Gini coefficient before taxation, the coefficient after tax has increased in urban areas but remained basically stable in rural areas. In 2009, the overall effect of various taxes was to widen the income gap of urban residents and slightly reduce the Gini coefficient in rural areas. This weak regulatory capability is closely related to all the different regulatory capabilities of various taxes. It should be pointed out that the personal income tax aimed at effective income regulation did not alleviate the income differentiation of urban residents as expected but worsened the status of income distribution to a greater extent. In addition, the 0.21% residual interpretation term actually contains the part that is difficult to explain among the above variables. In fact, this differentiation can be more intuitively shown by the decomposition of the Gini coefficient. It is not difficult to see from Table 3.2 that the overall regulatory effect of taxation on residents during 1989–2009 was negative, with an average of −0.9316%. Over time, the negative regulation gradually deepened. From an urban and rural perspective, there is an asymmetric trend in its internal evolution. In 1993, the internal redistribution rates in both urban and rural areas reached a trough. After that, the internal redistribution rate of rural areas was positively adjusted, while the adjustment in the urban areas had a large annual fluctuation, which was −1.2745% in 2009. If higher weight is given to the poor, the extent of this negative regulation becomes clearer. This shows that the adjustment effect of taxation on urban residents’ income has gradually weakened in the past 20 years, and the direction of influence has also changed significantly.

172

3 A Qualitative Analysis of Income Distribution …

Table 3.2 Redistribution rate from 1989 to 2009145 Year

v=2 Nationwide

v=3 Town

Countryside

1989

0.0411

−0.1421

−0.1751

−0.1762

1991

−0.1380

−0.1511

−0.0875

−0.6368

1993

−1.0665

−0.6660

−0.5745

−1.1606

1997

−0.5383

0.0249

0.3481

−0.7271

2000

−1.5287

−0.2591

0.2999

−1.4973

2004

−1.6845

−0.4416

0.1282

−1.4207

2006

−1.2631

0.1651

0.0000

−1.1477

2009

−1.2745

−0.0713

0.0192

−1.1933

Note The unit here is % Data source CHNS

Third, the direct tax began to regress in a certain range. Personal income tax is one of the taxes that directly affect residents’ income, especially the income of urban residents. Here, the personal income tax is mainly selected to analyze its adjustment to income. The tax deduction quota of personal income tax was 800 yuan from 1994 to 2005, during which the consumer price index rose by 36.87%, which actually lowered the standard for deductions and incorporated more groups into the taxation. It can be said that inaction is a wrong act. The tax adjustment coefficient nationwide from 2001 to 2008 was truly transparent.146 In general, it is obvious that the positive regulation is in the eastern region, while the negative regulation is in the central region, and positive regulation is also in the western region in recent years. It should be noted that only the general trend is outlined here without considering the structural factors. From 2000 to 2008, the positive regulation effect of personal income tax on urban residents’ income in Shandong Province was the most obvious, with an average of 4.84% over 8 years. Relatively speaking, that in Anhui was the lowest, with an average of −1.81% over 8 years. In the eastern region, except for the negative redistribution coefficients of Shanghai in 2006 and 2008 and Guangdong in 2006, those of the other 9 provinces over the 8 years were basically positive. Although the redistribution coefficients of Shanxi, Inner Mongolia, Jilin and Heilongjiang are low, they show a steady upward trend year by year. Among the 11 provinces in 145

According to the method of the Statistics Office of the Prime Minister’s Office of Japan, this indicator is based on the perspectives before and after tax adjustment, the following redistribution rate formula is available: Redistribution rate = (Gini coefficient originally obtained − Gini coefficient after tax)/Gini coefficient originally obtained. In fact, the numerator of this method is the Musgrave-Sinn (MT) index. At the same time, it is also regarded as one of the reference indicators to measure whether and to what extent there is a reverse adjustment of income. 146 The tax adjustment coefficient here is not calculated strictly according to the Musgrave-Shin index, but to a method which imitates Gini coefficient. Even so, it can reflect our concerns to a certain extent.

3.2 The Intervention of Public Power on Private …

173

the central region, Jiangxi is the province with the highest median value and most obvious improvement trend and degree. In the western region, Guangxi has the greatest improvement because its tax adjustment coefficient increases from 1.23% in 2001 to 2.99% in 2007. The adjustment coefficients of the remaining western provinces are slightly higher than zero.147 From the decomposition of income inequality between urban and rural residents from 1994 to 2009, the effect of value-added tax, consumption tax, and corporate income tax on rural residents’ net income improvement over the past 16 years has been confirmed again. Unlike urban residents, the value-added tax here improves rural residents’ net income far more than the contribution of consumption tax and corporate income tax, although the improvement effect of the latter two is also more obvious. Here, the worsening effect of sales taxes on income distribution is highlighted. Personal income tax also resulted in an income differentiation degree of 25.49%, which is approximately 40 percentage points lower than the coefficient of urban residents in absolute terms. In general, value-added tax, consumption tax, and corporate income tax have a positive effect on the improvement of disposable income equality of urban residents, of which the most significant effect is on corporate income tax. The sales tax and personal income tax result in a difference of nearly 137.05%, in which that of sales tax reached 70.76%.

3.2.2 Invisible Inappropriate Intervention In a certain sense, power greatly affects not only people’s opportunity, ability, cost and factor price to obtain income but also the basic order of income distribution and the status of social income distribution.148 The invisible power-for-money deal mentioned here is a form in which the source of the property is illegal and not supervised, easily leading to light gray income. An important source of gray income is malversation generated by power, including corruption, malfeasance, rent-seeking, etc.149 The boundary between the “light gray” and the “gray” lies in the fact that light the contingent basis on the legal level can be found for gray income, and there may be situations that may violate the regulation but not the law. Gray income is basically

147

Calculated based on 2001, 2003–2005, Statistical Yearbook of Surveys on China’s Price and Urban Household Income and Expenditure, and China City (Town) Living and Price Yearbook, 2006–2009. 148 This impact is mainly achieved by changing the social macro-operational norms, including changes in the basic principles of income distribution and decisions on the construction of a market economy system. In addition, the influence of power on the micro level has always existed, especially the specific users of power use the power of approval and other powers to guide and control market entities in economic activities, and achieve benefits of specific inclusion groups at the cost of other entities’ possible benefits. 149 Wang (2010).

174

3 A Qualitative Analysis of Income Distribution …

either frees from the permit of the law or directly goes against the law.150 However, even the light gray income that can obtain certain support in law will actually be distorted due to the lack of the market as well as the motive and behavior of seeking profits of limited rational subject in the market process, resulting in a situational change of the predetermined income pattern in system or rules and generating a plausible internal logic between the levels of due, legal and actual acquisitions. Because of the obscurity of the means, the research object is also ambiguous, to a certain extent. This type of intervention is characterized by the close connection between public power and the formation of income streams, and it is somewhat concealed. This kind of power is also called invisible power.151 The income main includes power-derived corruption and the invisible income associated with it, in addition to optionization on power, which is also one of the new manifestations of such income.152 Starting with the government’s self-interested behavior, this article discusses its origin and evolution from two perspectives and analyzes the specific manifestations of this self-interested behavior.

3.2.2.1

Generalization of Self-Interested Behavior

In a certain sense, it is a simple act of forgetting history to simplify the government to a simple atomic individual and give it sufficient public service motivation. Along with the expansion of government functions, the heterogeneity in the process of scale expansion was seriously ignored. Otherwise, it is difficult to explain the emergence of many monitoring and public opinion agencies in and out of the government. Leaving aside the acquisition and use of public power for the time being, as a special group, the government group composed of atomic individuals actually has sufficient reasons to actively create various opportunities for its own gain, which is the well-known rentseeking or corruption and so on currently. This reason is basically the same as that of other ordinary interest groups, such as the Hanseatic League in Germany in history. The formation of interest groups is actually a dynamic process combining positive checking and negative checking, in which the former is mainly reflected as a kind of “aggregation”, while the latter is mainly “elimination”. These two processes can not only affect the flow of members but also have a significant effect on the existence and 150

This view is basically the same as that of Wang (2010) who defines the two forms of gray income as follows: The first is that laws and regulations do not clearly define their legal or illegal income as well as those that violate the rules and discipline but do not violate the law, which is similar to “light gray income” here. The second is income that is actually illegal, but there is no clear evidence, which is similar to the “dark gray income” here. 151 Wu Gou (2011) pointed out that, besides the unification of executive power and judicial power, the randomness of power can also indulge in the arbitrary behavior of hidden power. For details, see Wu Gou, Hidden Power 2-A Game of Chinese Traditional Society, Fudan University Press, 2011. 152 On June 22, 2011, Wu Yuliang, deputy secretary of the Central Commission for Discipline Inspection, raised the issue of “Optionization of power” at a press conference held by the Central Foreign Affairs Office, and stated that this issue would be prevented by the improvement of system, daily management and supervision of leading cadres, and serious treatment of the incident.

3.2 The Intervention of Public Power on Private …

175

coordination of the point of interest. There is the possibility of stagnation or reversal in this process in the short term, but the opposite tension always exists in the interest group of “birds of a feather flock together”. Here, the process of generating power income from the generation of government self-interest will be analyzed. Hobbes pointed out in his classic work named “Leviathan” that natural law restricts human behavior only on a moral level.153 Therefore, to break through the simple jungle-like lifestyle, it is necessary to release some individual rights in the form of contracts to form an indivisible government with absolute power. A government with absolute authority was initially given religious imperialism, which is called Leviathan, which can transcend secular power. In fact, Hobbes also puts forward in this work more or less the view that absolute rights have the potential to cause power overruns. The “will-to-will relationship” is a process of mutual acceptance between wills, in which mutual acceptance between wills is achieved by means of contract.154 This is also a theoretical basis for what is usually called the expansion of government power. The so-called self-interest behavior of the government mainly refers to members of the government as income-generating individuals to obtain income streams other than legitimate income, including rent-seeking and privileged behavior. Since closely linked to the power of the government, this form of income can also be referred to as power for income, which can also be generally understood as income gained on the basis of power factors. Here, it refers more to the income streams directly or indirectly generated by or related to factors, such as the existence of subjective motives of public power for personal gain, implicit trading methods, and mismatching consequences of public resources. It characterized more situational than institutional constraints. Generally, this is the income stream brought by the power-for-money deal and the identity system. The path of China’s income distribution change during the transition period is the process of power factors determining factor distribution, personal income distribution, and income flow, of which the essence is that under the market economy condition that is not yet perfect, “market-type” distribution according to factors “mutates” into the situation of “power-type” factor distribution and personal

153

Hobbes pointed out that natural law’s restraint on people is mainly achieved through the following five aspects: first, people can take any necessary measures to protect themselves with the aim of peace. Second, the basic prototype of the rights exchange is put forward, that is, the peer exchange. Third, it emphasizes the implementation of signed contracts. Fourth, morally, we should be grateful for the help we receive from others. Fifthly, it emphasis on teamwork. Among the above five basic contents, there is no clear enforcement guarantee mechanism, which makes the provisions are still an academic theory instead of a social will, and no punitive provision for violations. In earlier social environments where the information was relatively closed and asymmetric, the behavior of violation could be forgiven or unknown in another environment, making the cost of this violation relatively low. In other words, it is a community in the sense of morality. In this sense, Hobbes still regards the relationship between people in such a lifestyle as a law of the jungle. The purpose of Leviathan is to expose and oppose the absolute authority of the Pope, hoping to establish a social organization established by contract, a state beyond nature and a Christian nation. 154 Hegel (1982).

176

3 A Qualitative Analysis of Income Distribution …

income distribution under the background of dislocation and interweaving of power and market.155 Generally, the government has the dual status of economic entities and legal entities. The former is metaphysical, while the latter is metaphysical. In fact, the generation of power income is also caused by the alienation of public power. To a certain extent, it can be said that the self-interest of the government has not been effectively restricted by public opinion. The self-interested expansion is promoted by the group of interest distribution and group of encompassing interest in the government. On the whole, this kind of income is mainly generated due to the deviation of the roles of public service subjects in theory and economic subjects in reality. The metaphysical definition of the subject and the claims of interest have distorted the use of metaphysical public power, which can be described as the concrete manifestation of power alienation. In fact, endogenous contradictions between rational individuals and irrational societies in general interest groups in the market also exist in government behavior. It should be pointed out that this method, which transcendentally gives individuals and governments self-interest motivation, is an analytical paradigm with strong value judgments, which inherently excludes the possibility of other value-oriented judgments and firmly makes this the only paradigm for analyzing problems. Marx discussed this in detail when criticizing Bentham’s point of view. In terms of the formation and use of power, the formation of power income is mainly because of the inequality in the distribution of power between the main body of ownership and the executive body of power and the failure to gradually subdivide the power structure during the transformation of government functions, resulting in the inchoate power structure, which is balanced and mutually constrained and further leads to the income stream brought by the right’s transformation into power. What is more important is the power worship of enchantment type brought by centralized power.156 The absolute control of power in the process of centralization leads to the infinite emergence of power, while it is relatively easy for decentralization to specify the boundaries of power, forming a relative limitation of power use. In addition, similar to the logic that division of market and economy can improve market efficiency, the division of political power and administrative power helps solve the problem of supervision motivation and supervision efficiency of power at the practical level. In China, although governance power ultimately belongs to the people, it has to be realized through the specific exercise of power agencies. Only when the final ownership of power interacts with the exercise of power, forming a mutually restricted balance of interests, can the standardized form of power be effectively promoted. That is, the use of power has to be legitimate and balanced. Only under these conditions can the basic system, including income distribution 155

Weighing (2005). The power structure of enchantment type is similar to the power structure under personal worship to a certain extent. Generally, the former also includes worship in the form of mysticism. Since Marx Weber, advocating disenchantment in the political structure has become a direction of political reform, and is also one of the aspirations of many constitutionalists to realize their political ambitions.

156

3.2 The Intervention of Public Power on Private …

177

rules, be effectively implemented and maintained, and the construction of a market economy system is further improved. In fact, the government’s self-interest history can be explained in two aspects. First, to explain from the history of the time dimension. This explanation concentrates on the emergence and evolution of government agencies, focusing on the lineage of an analysis paradigm from scratch. An analysis from such a perspective can answer the question of organizational sociology in the context of the development history of human civilization. Second, to explain from the linguistic dimension, which to some extent is trying to explain within a grand narrative space? This mainly involves the preliminary definition of the etymological connotation of the government and groups related to it, following its evolution process, and trying to give a new research method to the expansion or reduction of its connotation.

Time Dimension According to the history of Western Europe, the influence of government emergence is closely linked to the influence of the Teutonic tradition (Pan-German), the AngloSaxon tradition and the Christian tradition’s dominant position in their respective periods and to the possible shocks brought by the abovementioned traditions in the process of change. Among them, the secularization of religion and the sanctification of private property directly promoted the formation of government. The process is more directly embodied by the struggle between secular regimes and religious rights. In terms of historical evolution, it takes 128 years for Britain to go from its initial struggle for democracy to the basic realization of social democratization157 and 165 years for France. In the initial process of democratic establishment, a government that incorporated the will of the people appeared, which has been trying to transform its own right to power. Three-right transactions158 are the most typical ways currently to make this kind of transformation. With the promotion of such movements, especially religious reforms, various types of individualism have begun to emerge and have been promoted to varying degrees, including political individualism, economic individualism, religious individualism, and ethical individualism. At the time when individualism gained widespread recognition in society, government agencies gradually obtained their own recognition as an independent subject. Compared with the previous constructive cognition in this aspect, this cognitive difference is more obvious because such a bottom-up cognition and cognition-driven process makes political and moral requirements of all residents endogenous, immobile, normal and then legal. Religious

157

The iconic event here is the formation of the British Senate and House of Representatives. The completion of this event can be considered as a direct expression of the construction of a democratic government framework and the normalization of its functions. 158 Rights-for-money transactions, rights-for-pornography transactions, and rights-for-right transaction.

178

3 A Qualitative Analysis of Income Distribution …

reforms have, to a certain extent, made the government agencies that operate countries begin to gain a “sovereignty” view consistent with their own identity. It should be pointed out that the grant of this sovereignty concept was originally linked to the public welfare of society. In fact, it is considered a moral progress and a development of civilization to regard and the government as an abstract individual, which is theoretically and conceptually accepted. In this process, private interests are gradually abstracted into a variety of political ideals and demands. However, in Britain and France, the historical debate over the publicity of government agencies has been strongly questioned for some time, which was not gradually resolved until a bureaucracy that complemented the system emerged. Even today, the sense of identity is also declining despite the dominance of the role of “the public interest” speaker of the government. From the above point of view, the self-interest of government seems to be understandable: as a compromise mix159 of various interest groups in society, the interests of the common interest groups and the profit-sharing groups are basically the same within the government and in the market, while its power boundary continues to widen after the disappearance of the basic limitation of democracy. During this process, the profit-sharing group blurred many clear events in the field of public power160 through the generalization and expansion of the boundary of public power to realize its profit, which further expanded the concept of public power. Under the impetus of the forces, the demand of interests of the profit-sharing group is manifested as a process of gradual alienation and erosion of public power as a whole or positive revenue streams.

Etymology Dimension Actually, there is a profound impact of the language application and language itself in daily life on how people think and the coverage of language. The historical exploration of etymology can help us to understand the connotation given by the user in the context of the use of words at that time, as well as many implicit information such as ideal appeal. The word “government” first derives from the Greek word “kubernn”, referring to the man at the helm of the ship, which is similar to the medieval Latin word “gubernare”. In Europe, the Latin Gibertas represented a political society for a long time before the fifteenth century, around which the word “state” that evolved from

159

The compromise mix here mainly refers to two meanings: on the one hand, the government itself needs to adjust the social self-rational behavior according to the principled norms; on the other hand, the government also needs to adjust the different interest-oriented groups within itself. The government plays a role of social coordinator in the former, while it keeps a role of a combination of the common interest groups and the profit-sharing groups in the latter. 160 To some extent, the great divergence in people’s perception of the government, which is likely to be the concrete reflection of the struggle of different interest groups, shows a strong trend of generalization on government itself.

3.2 The Intervention of Public Power on Private …

179

status gradually gained more recognition from groups, showing their willingness to realize their dreams through power as an independent political individual. The etymology of government agencies actually begins with the identification of “gong” (or “public”) and “si” (or “private”) in our country.161 The word “gong” (or “public”) has been strongly given the meaning of the traditional concept of destiny with the evolution of the concept of “gong” (or “public”) during the development of traditional thought in our country, such as the views of heaven mandate put forward in Lao Zi and Zhuang Zi. Then, the word was gradually associated with the feudal emperor through the evolution of time and space and the change of narrative environment or the object of heaven mandate. Thus, the word is closely connected to feudal imperial power with such a process in the history of our country.

3.2.2.2

Income from Self-Benefit Behaviors of Government

The visible reflection of the self-benefit behaviors of the government in the economic field is the resulting income. Over the past 30 years, the widening of the gap between the rich and the poor, as well as the polarization in China, was formed due to the transformation of public property into private property and the rapid skew of property accumulation toward minorities.162 In this article, we will explain the issue from two aspects: income from hidden rules and income based on information superiority.

The Income from Hidden Rules Deriving from the information that has been passed on and part of the legacy of so-called culture,163 income from hidden rules can be regarded as a value judgment of the common behavior and unique thinking logic of the groups of interests distribution in maximizing their own interests, which can also be considered an informal constraint compared to formal constraints.164 In the static sense, income from hidden 161

In fact, the distinction between the words “gong” (or “public”) and “si” (or “private”) did not occur in documents so early in history because the words “gong” (or “public”) mentioned in the Book of History and Book of Songs only refers to a form of address. The value judgment of “si” (or “private”) has been put forward in Xun Zi, while the opinion that “gong” (or “public”) refers to equalization was proposed by Xu Shen of Eastern Han Dynasty in the book Shuo Wen Jie Zi, according to which the top portion of the Chinese character “gong” (written as “公” in Chinese), “八” refers to deviation and oppositeness while the other half “厶” means private, being given the opposite connotation to private profit from the point of view of Word-formation. The word “si” (written as “私” in Chinese) refers to wicked according to the book, whose connotation is constantly changing in different political and economic environment. 162 Liu (2011). 163 North (1994). 164 Formal constraints refer to a set of basic political, social and legal rules that determine the basis for production, exchange and distribution. For further information, refer to either: David and North, Institutional Change and Economic Growth. London: Cambridge University Press, 1971, p. 18.

180

3 A Qualitative Analysis of Income Distribution …

rules can be defined as undetected or improper rules or acts and behavior tendencies that disobey the express reference or generally accepted concept, leading to the coexistence of social multirules and the detachment of form and essence.165 The inevitability of this detachment is attributed to the inherent way of thinking of the aesthetic order that appears before the logical order in our traditional culture, through which the standard of the legitimacy of order is thus characterized by the fact that the essence takes precedence over the formality while the motive precedes the procedure.166 As a part of subculture, the hidden rules whose actual boundary is wider than metarules are actually the acts that are defaulted by many participants with unwritten code or arrangements relative to the formal rules or “meta-rules”. There are invisible and powerful constraints, boundaries with high pressure and inviolability inside while there is a pattern of behavior following the formal rules outside, which is highly unified due to interests. Compared to rational human beings and rational rules, this kind of rule is characterized by rational man and profit seeking, which possesses special dependency on context.167 When there is an intersection of their interests and public interest, the member of the group of interests distribution will transfer resources that should or may be allocated to the public through rent-seeking that is often connected with monetization, which generates income from hidden rules.

The Income Based on Information Superiority Income based on information superiority is one of the basic methods of market behavior within the normal market boundary, legal system and ethics. This kind of income from the self-benefit behaviors of government includes the current income profit from its own distribution in the current period and the expected benefits from the information of the plan for development. It is common to obtain current benefits through the information priority of the government, which exists in even fair markets between buyers and sellers. Income under the malicious use of informational asymmetries to look for self-interest, resulting in the blurring of the boundary between law and ethics, destruction of the ordered trading system, and loss of the exchange host’s interest due to deception, belongs to non-normal income. Being widely present in all aspects of national life, such as food safety, corporate performance and insider dealing of high concern, such a kind form of income, which should be regulated the government, induce those who have the information disadvantage to make right decisions and to act in their own

165

Wang and Lv (2009a). Wang and Lv (2009b, p. 4). 167 It should be noted that the allowances for civil servants and welfare expenditures of other units belong to nonstandard part of income for being difficult to account for and rarely published to society. 166

3.2 The Intervention of Public Power on Private …

181

self-interest through fake information or concealment of information, taking advantage of the adaptive expectations of microeconomic subject of market. For example, the Bubble Act of 1720 was promulgated due to South Sea Bubble in Britain. At present, the underestimation of the government for actual compensation and the future value-added part of land acquisition and house demolition reflects the increase in income based on information superiority. The value of land increased to a certain extent after land replanning, while value-added income was difficult to objectively and effectively estimate, which can also be regarded as income based on information superiority. It will help to achieve sustained growth people’s wealth if the government repositions its motivations as “public services” by dealing with disputes with the principle of openness and transparency and noncompetition with the people, as well as appropriate distribution of such income. The system of our country’s property reporting and independent third party oversight agency should be established to regulate the excess allowance caused by monetization and demonetization within the framework of power through rules and the improvement of the economic environment, which can curb the excessive expansion of such income. At present, the centralization of power in monopolized sectors and abuse of power are the main sources of income from power and position in China. For example, the corruption of HuanDengke, the former director of the North China Bureau of the Civil Aviation Authority in 2010; the investigation on Kuang Xin, the former director of the Civil Aviation Department of the Transport Department of the National Development and Reform Commission, Yu Renlu, the former deputy director-general of the Civil Aviation, Huang Gang, the former executive vice-general manager of Capital Airport and nine top managers of China Southern Airlines. In addition, existing in urban planning and construction, some illegal operations of local governments provide involved subjects an environment for obtaining income from power and position through the unauthorized changes168 of decided urban planning and the property of land use, as well as the intervention of the judicial procedure of local government. Based on relevant data, the number of government officials involved in corruption cases gradually increased with a higher resulting amount of money in the process of land expropriation and land remising. Land remise revenue is hard to effectively monitor due to its dissociation of management on- and off-budget before 2007. The number of corruption cases and the money involved gradually increased in the process of gradual land marketing led by the government.169 A large number of

168

The change of urban planning is an indirect means of changing the nature of land use in order to achieve specific economic or political purposes. This approach is also a more commonly used means because of its procedural legitimacy. 169 In 2009–2010, 8.7 million yuan was collected per person in 30 cases of corruption in the field of land construction. The money involved in the case of 11 provincial or ministerial officials, who were removed in 2010, exceeds 5 million yuan per person. 8.7 million Yuan Was Collected Per Person in the Land Corruption Cases, Legal Daily, January 31, 2011.

182

3 A Qualitative Analysis of Income Distribution …

investigations have begun since 2009.170 In May 2011, Xu Maiyong, the former deputy mayor of Hangzhou, was found to engage in self-seeking misconduct and abuse power while serving as the mayor and district party secretary of the West Lake District of Hangzhou City and was found to illegally refund more than 71 million yuan in land transfer funds to related companies.171 Taking bribes of 145 million yuan for embezzling 53 million yuan for illegally returning 71 million yuan of land transfer money, in June 2011, Li Yuan, vice minister of land resources, was stripped of Party membership and expelled from public office for his suspected material violations. Promulgated in 2006, the Notice on Issues Related to the Establishment of the State Land Supervision System (Guo Ban Fa No. 50 of 2006) (State Office issued No. 50 of 2006), which was not carried out substantively until 2011, cannot provide complementary supervision for the effective implementation of land policy. In terms of the generation of interest, income from power and position appears when there is deviation to some extent between private interest and public interest or serious divergence in direction, which requires walking an economical tightrope. In other words, officials place their hopes on possible uncertainty to obtain profit in this way and act in secret in light of a short-term interest orientation and a sense of spurious security. In fact, this process challenges the integrity of the organization and state supervision mechanism, the perfection of legal provisions and the fairness of judicial procedures. In addition, the income gap varying with identity is pronounced between rural areas and counties. The income per capita of the family whose members serve as township cadres and village cadres was 9,447 yuan and 9,053 yuan, respectively, according to a questionnaire survey, while the per capita income of ordinary peasant families was 7,087 yuan. It is urgently needed to prevent the managers of grassroots construction projects and large-scale projects from potentially using public power in their possession for personal gain while guaranteeing normal income.

170

Eight officials embezzled more than 60 million group corruption case in Shijiazhuang’s land system in 2010. See Eight Officials Who Work in the Land System Embezzled More Than 60 million In Shijiazhuang Province, Beijing News, December 14, 2010. 171 145 million Yuan in Bribes, 53 million Yuan of Embezzlement, 71 million Yuan of Illegal Refund of Land Transfer, Xu Meiyong, Former Deputy Mayor of Hangzhou Was Sentenced to Death, Beijing Times, May 13, 2011.

3.3 The Recessive Income and Disorder …

183

3.3 The Recessive Income and Disorder of Income Distribution The difference in recessive income between groups is an important part of the three major problems that lead to the disorder of income distribution order.172 Generally,173 recessive income is often difficult to calculate and estimate. Recessive incomes widely existed in the upper- and middle-income brackets in 2008. The higher the income level is, the greater the total amount of recessive income. Due to the existence of a large amount of recessive income, it is difficult for researchers to correctly judge the real situation in the income distribution of residents in a country, through which corresponding improvement measures can be put forward. On February 9, 2013, the State Council approved the Notice on Several Opinions on Deepening the Reform of the Income Distribution System, which pointed out the need to speed up the construction of a modern payment system by vigorously promoting remuneration pay with salary, monetization and electronic currency and to standardize cash management by implementing the real-name system of financial accounts and promoting card consumption. We will provide a preliminary discussion on the intrinsic relationship between recessive income and the disorder of income distribution order in China in this section.

3.3.1 Types of Recessive Income As noted in the previous analysis, the main difference between dominant and recessive income174 lies in whether it is included in the statistical coverage. Dominant normal income includes white income, gold income, other normal incomes and partial gray income, while dominant gray income mainly includes illegal income 172

The Non-observed Economy is also known as the recessive economy. Wang Xiaolu estimated the amount of the recessive income in his report published in 2010. Compared to the report, the statistical incomes of residents from lowest-income group, low-income group and lower-middleincome groups are slightly lower than the estimated one, while there is a small difference. From the middle-income group on, the gap between statistical income and calculated income widens by level. Due to the difficulty of official statistics on the amount of recessive income of residents, the largest gap occurs in the highest-income group, which accounts for 10% of urban households. After correction, annual disposable income per capita of 10% families of highest-income level reached 139,000 yuan in 2008. The recessive income of 10% households in high-income level in towns of China accounts for 63% of the total recessive income of urban residents while “recessive income” of 20% of highest-income households accounts for more than 80% of the total “recessive income” of all urban residents. Wang Xiaolu: Gray Income and National Income Distribution, Comparison, 2010, 48. 173 According to OECD, as long as it is an economy that is not included in official accounting, it can all be referred to collectively as Non-Observed Economy (NOE). The recessive economy we mentioned here can also be put in this group. 174 The tern has been subjectivized to some extent due to the variety and universality of recessive economic and its result of contradictions which have not been effectively resolved for a long time.

184

3 A Qualitative Analysis of Income Distribution …

with controversy, such as a wide range of allowances, high remuneration175 and various functionary expenses. It should be noted that this part of gray income, which should, in principle, be included in the statistical range, is gathered incorrectly or incompletely for various reasons. In other words, the generation of this part of the gray income is attributed more to operational reasons than technical reasons. This type of gray income has the potential to be transferred into normal income if it is included in regulation or can be paid as tax by its subject proactively. Therefore, we define it as quasi-legal recessive income here. Other gray incomes,176 as well as black and blood-red income, are all illegal recessive income. Recessive income177 can be further divided into quasi-legal income and illegal income based on the motivation of income acquisition and source of income.178 Quasi-legal income is an income acquired through honest and lawful business or an income with legitimate sources under good intention, which has a certain degree of rationality due to goodwill and a low negative impact on social order. Private property income, accepted donations and gifts can also be classified to some extent as quasi-legal income. In 2011, China’s gift economy reached nearly 800 billion yuan in market share.179 The private recessive income of beneficiaries

175

The money charged by doctors during treatment of patients does not belongs to labor remuneration but income as a result of her/his position, which means a law violation not a discipline violation. However, In certain circumstances, such income can also be converted into discipline violation. 176 As we point out here, gray income does not equal to recessive income, which is somewhat different from Wang Xiaolu’s (2010) view. Gray income is a concept of income source while recessive income is a concept of income regulation. The two terms are not equivalent although there is some intersection between the two conceptions. Some of the gray income is public, such as excessive bonuses in the wage system, etc. 177 Recessive income is generated in recessive economy. According to SNA (1993), the forms of the recessive economy are divided into four categories: underground economy, illegal economy, the economy of informal sector and the productive behavior of the residents for their own consumption. The recessive income referred to here is the result of these economic forms. Among them, underground economy refers to the economic form with certain productive behavior, abiding by most laws and regulations, but deliberately leaving the supervision of public institutions (SNA6.34). There is no uniform scientific definition of illegal economic activities in academia due to differences in the identification of different countries. For statistical convenience, all illegal economies should be considered legitimate as long as they are in accordance with the principles of transactions (SNA3.54). The informal sector is defined in the 15th International Conference of Labor Statisticians: the informal sector refers to those sectors with small-scale, simple organizational structures and lack of a clear division of labor and capital, which aim to provide employment and income to the people concerned. existing as an independent part of the unobserved economy, the production for the residents’ own consumption does not belong to the informal productive sector, which includes the income from forestation, herding, fishing and comprehensive third industries, as well as the income from the processing of primary products, simple processing of crops and easy processing services such as sewing (SNA6.24). 178 The forms of recessive economy is divided mainly by the degree of legality, for which the division of recessive economy is closely related to the national conditions, which is closely related to the stage in the process of China’s market economy construction. 179 Yao Dongqin: Great Gifts Business, China Economy Weekly, No. 3 (2015).

3.3 The Recessive Income and Disorder …

185

from gifts will reach nearly RMB 500 if they sell gifts at 60% of the list price.180 In addition, there will be more private income if many money gifts are included in 2011. It should be emphasized that the characteristics of beneficiaries are closely related to wealth, power and human resources, while some people of all income levels can obtain this income. In terms of population distribution density, the focus is mainly on wealth and power.181 Under certain constraints, this form of income, whose boundary is easy to break, is not prohibited by law, among which the righting of power, such as corruption and rent-seeking, becomes the most obvious factor. This kind of gray income can be regarded as alienation in an illegal direction here. In addition, black and blood-red income belongs to illegal income,182 which may cause a relatively bad social impact for destroying the basic rules of the market economy, challenging the bottom line of morality in society and flouting the internal authority of the law, which easily generates and accumulates social contradictions. The two types of income can also affect social stability, and unity hinders the construction of a harmonious society through the socialization and politicization of problems in the economic field. We should pay more attention to the supervision, management, control and punishment of the abovementioned types of income in the process of regulating the order of income distribution. Due to the difficulty of effectively counting black and blood red income, it is difficult for scholars to measure their impact on the income distribution of residents, resulting in a rare estimate of two incomes at present.183 Even so, we believe that we should focus on the effective monitoring of the channels, quantities, objects and technologies of these two types of income to regulate the income distribution order and make the relevant information available to society in a timely manner. Only when the owners and implementers of power work together can the benign development of society be accelerated to promote the construction of a harmonious society by gradually regulating the disorder of income distribution in primary distribution. In summary, recessive incomes are as follows: quasi-legal gray income and illegal black and blood-red income. In what follows, we will analyze the characteristics of the two and summarize the concrete presentation combining the classification method of SNA (1993) and the actual situation of our country.

180

This is a conservative estimate of six-discount sales since some beneficiaries prefer to sell gifts at a discount for cash. 181 The normal income of the richest 10–15% of the richest people in our country increased by approximately 10% through various illegal and abnormal income Obtained through different means, as detailed in Confusion of China’s Gini Coefficient, China Economic Times, February 20, 2012. 182 Illegal recessive income consists of corrupt income in gray income, black and blood-red income according to the description above. 183 Chen Zongsheng (2004) has tried in this regard. Chen Zongsheng, Li Defu: The Binary Economic Growth Model of Endogenous Agricultural Technology Progress: A Re-explanation of the “East Asian Miracle” and Economy of Chinese, Economic Research Journal, No. 11 (2004).

186

3 A Qualitative Analysis of Income Distribution …

3.3.2 The Quasi-Legal Recessive Income There is higher treatment level of workers in monopoly industry and of civil servants in China than the average income of employees in other industries since 2000, which is caused by the operation condition and the increase of administrative expenditure on one hand, as well as its relationship with the nontransparency of property of workers in monopoly industries and civil servants on the other hand. It is difficult to make reasonable standardization on the emergence and existence of such benefits unless the external supervisory body is introduced. There are also some legal forms, such as underground economy [There is also a definition of the underground economy in our country: the underground economy refers to economic activities that are not officially controlled, which are not included in the official statistics of gross domestic product and are not reported and taxed to the government. It can generally be divided into two types: illegal economic activities that are not disclosed to the public and economic activities that generate illegal income through legitimate business units. See Ma Hong and Sun Shangqing: Dictionary of Economy and Management (continuation), China Development Press, 1989]. Specifically, they include some of the non-malevolent economy, unlicensed business activities of disadvantaged groups and unregistered legal income. The disadvantaged groups, whose ordinary courses of business, such as setting up stalls, are becoming guerrilla businesses due to public security management of cities, are in an inferior position in terms of income acquisition, rights and willingness to express themselves. According to the SNA (1993), this kind of income can also be classified as an underground economy to some extent, although it is more like a form of self-sufficient economy. Due to the small scale and the unwillingness of people to use red tape and a wide range of taxes and fees, the development of this economy has not been supervised by relevant institutions, which promotes social stability by benefiting the lives of disadvantaged groups to a certain degree. Low-income people support themselves by small-scale unlicensed business activities, which are actually one of the voluntary exercises of economic activity. Their income from honest labor is still included in recessive income due to the absence of a supervision system for the industrial and commercial sectors. The unlicensed businesses we mentioned here mainly refer to the means of those who earn little to make a living instead of those who have illegal motives, which is just a small part of unlicensed business activities. The activity whose motivation is to make a living and to develop sustainably does little harm to society despite the impact of the social and economic order and the consumption of regulatory costs to a certain degree and compensates for the shortage of limited and insufficient social relief of government. It should be noted that in his 2010 report, Wang Xiaolu calculated the recessive income of residents at all levels, with the estimated recessive income of the lowest income group in this part at just 0.4%, compared with the highest of 62.5%. The recessive income of high-income earners in this part should be accounted while that of lowest income not, which is not only to meet the needs of SNA accounting but also to correctly assess the current situation of income distribution in China and to find the solution.

3.3 The Recessive Income and Disorder …

187

3.3.3 The Legal Recessive Income The generation of illegal recessive income is usually associated with illegal production. According to section 6.30 of the SNA (1993), illicit production184 can be divided into two categories: illegal practice of the production, sale and possession of goods and services, such as production and sales of drugs, smuggling activities, prostitution services, etc., and lawful activity of unauthorized or unregistered producers, such as the production activity of an unlicensed production unit, illegal practice of medicine, etc. Specifically, the illegal economy includes the production and sale of illegal goods, the provision of illegal services, legal acts carried out by unauthorized institutions or individuals, the production and sale of infringing goods, smuggling, booty-dealing and money-laundering.185 In our country, illegal recessive income consists of part light gray and dark gray income, black income and blood-red income, among which the first two are usually generated outside the system. It should be noted that the illegal recessive economy of high-income earners takes a more diverse form, including tax evasion, cross-border trade, barter and capital flight. In recent years, the number of people who get rich by dishonestly paying taxes in taxation has gradually increased, which is one of the forms of obtaining recessive income. The income of the middle class has been eroded by the transfer tax due to the ineffectual adjustment of taxes to these people, which results in the gradual deterioration of the income distribution order of society. Capital flight, including domestic and foreign capital flight, is a common form of implicit economy in recent years with the large change in China’s Forbes list annually and the popularity asset transfer for those on the list. Theoretically, the range of illegal recessive income is wider than illegal income to some extent.186 At present, China’s illegal income mainly consists of gray income, which is in violation of discipline but not law, black income, which includes illegal

184

Under the premise of clarifying the illegal economy, some scholars in our country also try to define illegal income: illegal income refers to the income from embezzlement of public property and the benefits obtained through tax evasion, bribery and power-for-money deal. Yang (1997). 185 Blades (1983). 186 Logically, “illegal”, the negation of legal, means illegal behavior; “unlawful” means that the conduct is in conflict with the law. They constitute a complete collection, while “lawful” is only a subcollection of “illegal”. Therefore, there is “lawful” but not “illegal” behavior, which are neither permitted nor prohibited by law. Thanks to Professor Zhang Zhongren of Shimane Prefecture University in Japan for pointing out this!

188

3 A Qualitative Analysis of Income Distribution …

income obtained by some people through their power and income from illegal activities such as smuggling,187 drug trafficking, theft, robbery and kidnapping, and bloodred income, which refers to the benefits obtained through breaking the bottom line of human civilization at the expense of the lives of others, among which the latter two are malicious breakthroughs of existing reasonable social rules and generally accepted moral bottom lines. The source and legitimacy of income should be an important basis for judging whether income is illegal in defining illegal income, which is a relative concept owning historical stage in a specific economic and social environment.

3.3.3.1

Black Income

According to the SNA (1993), black income consists of an underground economy, illegal looting and corruption, which has more disobedience of law, including public, semipublic and undisclosed forms, than a recessive economy. It is difficult to list the forms of the black economy specifically, so we mainly discuss the characteristics of black income here. First, it’s about the intersection of forms outside and inside the legal system. Based on the erosion and deprivation of the core interests of a wide group, black income is a kind of distortion form for individual or interest groups to realize their self-social value. There is a specious behavior space for obtaining black income in the field where the law is not yet expressly provided while there are still various ways to acquire it in the field where provided. Second, it’s also about the extensive crossing of the core band of interest groups and the binding between interest subjects. The intersection of interests is universal because of the wide correlation and hierarchy of interests in this form of income. For example, the official business collusion and abuse of public power for private interests exposed in the Hilton Hotel in Chongqing fully demonstrate the complexity and organization of the main body in this chain of interests. Third, the concealment of acquisition is another element. From a broader and general point of view, especially the concealment of the relation and organization in the interest chain, more black income is obtained in a hidden way, which includes not only the concealment of the way of acquisition but also the concealment under 187

According to the Provisions of the Supreme People’s Court on the Implementation of the Criminal Law of the People’s Republic of China and the Opinions of the Supreme People’s Procuratorate on the Criminal Offences prescribed in the Subrules of the Criminal Law, there are 12 crimes of smuggling, namely: the crime of smuggling of weapons and ammunition; the crime of smuggling of nuclear materials; the crime of smuggling precious animals and precious animal products; the crime of smuggling rare plants and rare plant products; the crime of smuggling obscene articles; the crime of smuggling ordinary goods and articles; the crime of smuggling solid waste; the crime of smuggling drugs; the crime of smuggling drug-making articles. Article 2 of the Amendment to the Criminal Law (IV), adopted by the Standing Committee of the National People’s Congress on December 28, 2002, amends the crime of smuggling solid waste to “the crime of smuggling waste”. Source: General Administration of Customs of China.

3.3 The Recessive Income and Disorder …

189

an umbrella, although there is an external explicit black income. The latter often has a more serious impact on the public and social rules. Fourth, a wide range of social harmfulness includes the damage and trampling of the existing black income to the social and economic form, judicial supervision and legal system, and the erosion and misleading of the mainstream culture and core values at the social moral level. Fifth, the decrease in total social fortune resulted in black income. Stock management and the use of the flow of black income hold a special position due to the illegality of the sources. Such capital often flows out of the country in various forms to regions where extradition regulations have not yet been established or sound to circumvent the law and justice, leading to a decline in total social fortune. Specifically, black income mainly includes income from fraud, drug trafficking, corruption, bribery and surrogate test-taking, among which fraud undermines the basic rules of market integrity and infringes on the basic rights and interests of consumers. Generally, fraud includes product quality and network and telecommunications.188 Disregarding China’s basic market system and legal order, smuggling and trafficking drugs are economic crimes. Due to the illegal means of acquisition and some factors, such as hiding, income usually tends to reduce total social fortune.189 It also has a great negative impact on the health and benign development of the social economy with windfall profits of the economy, harmfulness of society, disobedience of law and the alienation of morality. Corruption and bribery here include both the income flows resulting from the righting of the power and the one that is more universal in social enterprises and institutions, which directly impacts the basic distribution principle of our country and leads to the formation and maintenance of the hidden rules. Illegal fundraising is a significant part of underground finance, while underground lending is also an important part because formal financing channels cannot meet the rigid demand for expenditure. In addition, it also includes many forms in border areas, such as underground exchange.190 For example, there was very much lending from institutions and individuals overtly or covertly in Ordos in 2008, resulting in the difficulty of financial estimation, which is generally believed to be 50 billion yuan, with a finance of approximately 70% of the funds in the chain.191 188

In 2010, there were 24,131 complaints about counterfeit products. In the same year, a total of 45 million netizens in China suffered from online fraud, with a loss of 7.6 billion yuan. The data is from the China Internet Network Information Center. 189 The Office of the National Anti-Drug Commission released the 2010 China Anti-Drug Report, which showed that in 2009, 77,000 drug crimes were solved, 91,000 drug suspects were arrested, 5.8 tons of heroin, 1.3 tons of opium, 6.6 tons of crystal meth, 5.3 tons of ketamine, 1.062 million ecstasy pills, 1.062 million ecstasy pills, 8.7 tons of cannabis were seized. 190 The average interest rate on private lending reached 39.19% in October 2010 and soared to 180% in April 2011 according to monitoring data from the Wenzhou Central Branch Bank of the People’s Bank of China. Underground Lending of Wenzhou with an Maximum Annual Interest Rate of 180%, http://www.edai.net/mjjd/521872.html. 191 Closer to The Underground Private Banks: The Survey of Underground Lending in Ordos, http://news.xinhuanet.com/focus/2008-10/29/content_10270804_1.htm. We can simply estimate

190

3 A Qualitative Analysis of Income Distribution …

Surrogate test-taking is a kind of alienation product that has existed in our examination economy for a long time. The complete industrial chain and mechanism of benefit distribution have been formed in many surrogate tests, including college entrance examinations, which are widely conditioned.192 Flouting relevant laws and regulations and destroying the normal educational order and selection mechanism of talent deprives the basic right of disadvantaged groups to change their own destiny through education, through which the resulting income flow can be regarded as a violation of the normal income order.

3.3.3.2

Blood-Red Income

Blood red income can be divided into production areas and nonproduction areas according to productivity. The former mainly includes acts such as the indifference of basic safety workers’ lives, while the latter covers illegal acts that endanger the safety of citizens and their property in society. In a broader sense, all of the income flows generated by doing harm to the security of citizens’ lives and property can be included in blood-red income. The right of survivorship we mentioned here includes both the basic security of life and property and the living environment, which have been fully reflected in some resource-rich provinces. For example, some workers in the coal industry in Shanxi Province have found it difficult not only to protect their fundamental labor rights over the years but also to destroy the fundamental living environment due to coal mining.193

Production Area In China, there are various resources of blood-red income in production and operation process, including the income from the risk of workers’ health or even life in labor process due to unsafe production of the owner of exploitation well, the income from inferior products that result in the harm of consumers’ life safety and other income from safety accidents, which are typical. Threatening the safety of workers’ lives,

the annual profit generated in this way here, of which will reach approximately 30,052 million yuan and get a faster double of principal and profits if economy is in good shape, assuming a monthly interest rate of 4% and capital turnover rate of 12. 192 For example, the surrogate test-taking case in Cao County, Shandong Province in 2001 and the case in Tianshui City, Gansu Province in 2008 and so on. In this regard, in March 2011, Du Yubo, the Deputy Secretary or Deputy Director-General of Education Party Group, proposed that government should ensure the smooth going of college entrance examination of 2011 by fighting against the disciplinary offence such as cheating, surrogate test-taking and Group Cheating. 193 The Goaf area in Shanxi Province reaches the size of Taiwan Province. In addition, there are 700 villages in the province are “unfit for human habitation.” See Gao Qinrong: Blood Black Hole—Survey of goaf in Shanxi Province, Xinmin Weekly, No. 43 of 2011.

3.3 The Recessive Income and Disorder …

191

the blood-red income caused by resource exploitation has been widely considered by society among the abovementioned types of blood-red income forms.194 In addition, blood-red income includes the income from sweatshops. The education level of the new generation of migrant workers is significantly higher than that of the older generation, most of whom have nine years of compulsory education. With a low proportion of workers of primary school education and illiteracy, there are more with higher secondary education than those with secondary education, in which those with junior high school education account for 33.7% while those with a high school education (technical secondary) account for 44.9%.195 In this circumstance, the excessive rights claims and ways of maintenance, such as the event of the chain jumps by the Foxconn staff, also show that there are certain blood-red incomes in some processing industries. The reasons for the formation of blood red income in enterprises are as follows: First, it’s about China’s relatively rich labor resources and unskilled labor structure. Under the impact, there is overuse of labor due to the low labor costs, with poor working and environmental conditions for labor in some industries. This means that the abundant labor resources objectively lead to the devaluing of labor value and even the value of workers’ life, the extremely wrong way of logic and thinking, arouses the attention and reflection of the public till now when the contradictions have been highlighted, found widely in the three decades of China’s rapid economic development for a long time. The current view that there is a “Lewis Turning Point” in China’s labor force actually appears in the context of industrial upgrading and transfer. With the labor cost of our country increasing year by year, domestic and foreign-invested laborintensified industries are beginning to shift to countries and regions where labor costs are cheaper, while serious stratification of the labor force occurs due to the slowness of domestic industrial upgrading and lack of a highly skilled labor force. There is a more decentralized distribution of the low-grade labor force market and a centralized distribution of the highest with the shift of industries between regions. The dispersion of labor areas has led to a decrease in the number of actual workers in coastal areas, which can be seen as an inevitable result of industrial shifts. As a result, the overall labor surplus and local labor shortage will still remain for some time. Second, the knowledge structure and skill of the labor force are low. Generally, there is a greater positive relationship between work and workers’ knowledge and skills, among which the promotion of the latter two provides workers more extensive 194

From January 1, 2010 to December 31, 2010, there were 161 mining accidents across the country, resulting in 1,461 deaths. The frequency of each mine disaster occurred in 2010 was 2.27 days, among which 37 people were killed in a major mining accident in Wangjialing on March 28. The accident happened in Xingdong II Mine in Weidong District, Pingdingshan City, Henan Province on June 21, 2010 is the biggest mine accident, which killed 46 people. The data here are all from the General Administration of State Security Production Supervision and Administration. 195 Shenzhen General Trade Union, Institute of Labor Law and Social Security Law of Shenzhen University: Survey Report on the Survival of New Generation Migrant Workers in Shenzhen City, http://acftu.people.com.cn/GB/67582/12154737.html, visited on 29 March 2011.

192

3 A Qualitative Analysis of Income Distribution …

choices. Among the older generation of migrant workers, 40.4% had a junior high school education, followed by 38.2% who had a high school education, which shows that over 80% of them had an education background of high school or lower. Thus, in terms of job choice, collective negotiations and the ability to safeguard rights, such a labor structure is worrying in China. Third, the failure of trade union organizations is another element. Trade unions are the defenders and guardians of workers’ rights and interests, as well as important organizations that suppress the transformation of violence possibilities to reality in enterprises. It should be pointed out that belonging to the government, trade unions are not independent and often tend to make pro-enterprise choices. On May 29, 2010, the All-China Federation of Trade Unions issued the Opinions on Furthering the Workforce and Social Stability, which formally took “living with dignity and decent work” as the work policy of the trade unions for the first time. Previous neglect and indifference to this problem has also contributed to these incidents to some extent. Under the background of the prominent labor problems in the first half of the year, the Decision of the All-China Federation of Trade Unions on Further Strengthening the Work of Enterprise Trade Unions and Giving Full Play to the Role of Enterprise Trade Unions, which concluded on July 26, 2010, will further promote the improvement of the collective bargaining system for wages.

Nonproduction Area Blood red income in nonproduction areas mainly refers to the illegal income obtained by threatening the safety of the lives and property of others, which undermines the normal trading order and embarks on the basic morality of society. There will be more blood-red income due to the cause-effect formed by low crime costs. In general, this form of income is divided into the one that is organized and that is unorganized. Organized blood-red income is mainly seen in the group crime with serious impact. It is difficult to assess this kind of blood-red income, which is a breach of the basic rules of trade in society and leads to unusually large-scale financial flows because of the concealment of the activity; thus, the current estimates are based mostly on the existing cases and the speculation of the detected cases. In addition, many circulation funds reduced the total national wealth through withdrawal from the domestic circulation market and circulation outside China’s borders as hoarding funds. Unorganized income mainly consists of the income from crime of small groups by threatening others, which is more common in crime cases because of its randomness. In addition, minors will also obtain blood-red income from their acute or illegal behavior due to narrow-mindedness or extreme views, which causes more attention to social harm compared with the abovementioned blood-red income with the main body of minors. Blood-red incomes in nonproduction areas do great harm to society. The control and adjustment of it is not only the internal requirement of regulating the income distribution order but also the necessary measure to maintain the basic norms of society.

References

193

3.4 Summary At present, there are many reasons for the disorder of income distribution in China, the most important of which should be attributed to the generalization and alienation of the “order” itself. Specifically, it mainly includes labor relations in the economic market, the intervention of public power to private rights, and the increase of recessive income. There is a dialectic relationship of the imbalance of labor relations and the disorder of income distribution. The former can be a concrete embodiment of the latter. The introduction of the original sin of capital into the process of analysis can better reveal the causes of labor relations conflict. There are differences between the development of labor relations in state-owned enterprises and nonstate-owned enterprises, which need to be analyzed. The interference of political power in economic power has been almost uninterrupted since the emergence of a secular political state. In fact, the intervention of the former in the latter is necessary to some extent and is also one of the signs of the maturity of modern countries. Abnormally high incomes, obtained from excessive intervention or power used for personal gains of some people due to proximity to power, are hardly acceptable in society. The analysis here takes self-interest of the government as the starting point, which should be guided and controlled to standardize the use of public power of the government and income distribution order. In addition, recessive income also has a significant impact on the disorder of income distribution. In general, the recessive comes from a recessive economy, whose definition and content are still difficult to clarify according to the international national economic accounting system. In this chapter, combined with the research results of the recessive economy in China, we performed a preliminary analysis of its nature, quantity and influence according to the classification criteria of SNA (1993), while the measurement of the recessive economy will be carried out in Chapter 6.

References Bai Hongwei, Zhang Yu: Behind the Land Shortage, CICC Report, May 26, 2010. Blades, D. W.: Crime: What Should Be Included in the National Accounts and What Difference Would It Make, Paris: Organization for Economic Cooperation and Development, 1983. Chang Kai: Discussion On the Nature and Realization of the Right to Labor and Employment in a Market Economy-Concurrently on the Protection of Labor and Employment Rights in the Transformation of Employment Modes, China Labor, No. 6 of 2004. Cheng Yanyuan: Labor Relations, China Renmin University Press, 2007, pp. 140–141. David Beetham: “Bureaucrat”, Jilin People’s Press, 2005. Engels: On the Housing Problem, Marx and Engels Anthology (volume 3), People’s Publishing House, 2009. Gao yuanzhi: Open Channels to Protect Rights and Safeguard the Dignity of the Law, China Comment, No. 2 of 2013. Hegel: Principles of Legal Philosophy, Commercial Press, 1982.

194

3 A Qualitative Analysis of Income Distribution …

Hu Jianguo: Labor-Capital Relations Governance and Trade Union Performance: Based on the Research of Chinese Private Enterprises, Social Science Literature Press, 2011. Jun Ouyang: Thinking about the Current Situation of Labor Relations and the Response of Trade Unions, Labor Movement Research, No. 2, 2011. Li Shi, Zhao Renwei: “Market-Oriented Reform and Expansion of the Income Gap”, “Making Breakthroughs in Reforming the Income Distribution System”, China Economic Publishing House, 2011. Liu Guoguang: On Enriching the Country or Enriching the People and Becoming Well-Off Early or Common Prosperity, Chinese Social Sciences Weekly, November 25, 2011. Liu Linping, Yong Xin, Shu Fenfen: Regional Differences in Labor Rights and Interests: Based on a Questionnaire Survey of Migrant Workers in the Pearl River Delta and the Yangtze River Delta, China Social Sciences, No. 2, 2011. Liu Yi, Nie Haifeng: Analysis of the Impact of Indirect Tax Burden on Income Distribution, Economic Research, No. 5 of 2004. Liu Yufang: Differentiation and Coordination—Employee Groups in State-Owned Enterprises and Their Interest Relations, Social Sciences Academic Press, 2005, p. 293. Lu Xueyi: A Research Report on the Social Stratum in Contemporary China, Social Sciences Academic Press, 2002, p. 157. Marx: Capital (Vol. 1), People’s Publishing House, 1975, p. 78. North, Douglass: Institutions, Institutional Change and Economic Performance, Shanghai Sanlian Bookstore, 1994. Ouyang Jun: Thoughts on the Current Situation of Labor Relations and the Response of Labor Unions, Research on the Labor Movement, No. 2 (2011): 20–23. Pan Zequan: Practical Logic of Social Policy Adjustment for Chinese Peasant Workers: Rational Order, Structural Inequality and Policy Transformation, Comparison of Economic and Social Systems, No. 5 of 2011. Shan Guangnai: Opening Up the Imminent Institutional Reform—The Analysis on 2009 Mass Incidents, Southern Weekly, February 4, 2010, Version 31. Song Xiaowu: The Reform over the Next Decade—Research on the Reform of the National Income Distribution, China Financial and Economic Publishing House, 2011. Wang Wenli: Changes of the Individual Income Distribution System in Contemporary China—From the Perspective of Power, Northwest University, 2004, PhD Dissertation, p. 121. Wang Xiaolu: Gray Income and National Income Distribution, Comparison, 48th issue, 2010. Wang Xinxin, Lv Xiaokang: Habit of Hidden Rules—Framework for the Analysis of Cultural Psychology under the Prevalence, Journal of Nankai University for Nationalities (Philosophy and Social Science Edition), No. 4, 2009a. Wang Xinxin, Lv Xiaokang: Traditional View on Order of the Detachment of Form and Essence: the Basic Character of Cultural Psychology for the Prevalence of Hidden Rules, Social Science Front, 2009b, 4. Weighing: Government Power, Income Mobility, and Income Distribution: A Framework for Theoretical Analysis and China’s Experience, Social Science, No. 5 of 2005. Wu Jinglian: To Avoid Market Economy Falling into “Crony Capitalism”, Decision-Making and Information, No. 1, 2004. Wu Zhongmin: The Significant Social Contradictory Issues in the Process of China’s Reform, CPC Central Party School Press, 2011. Xing Shaowen: The Evolution Track of the Violence, Southern Window, No. 24, 2011. Yang Canming, Guo Huifang, Zhao Ying: Discussion on the Mode of Economic Development and the Order of Income Distribution, Finance and Trade Economy, No. 5 of 2010. Yang Canming and Sun Qunli: Analysis Report on the Income of Chinese Residents in 2009, Achievement Report of Hubei Province Finance and Development Research Center, 2010. Yang Ruilong, Wang Yufeng, Liu Hewang: Father’s Political Identity, Political Relations, and Children’s Income, Quarterly Journal of Economics, No. 4, 2010.

References

195

Yang Tianci: Explanation of Economic Terms in the 15th National Congress of the Communist Party of China, China Finance and Economic Press, 1997. Yu Bin: “National Income Distribution: Problem and Solution 2011”, China Development Press, 2011. Zhang Jianjing, Si Fangwu: Inflated Rent-Seeking to the Most Reform Needs Top Design, China Reform, 2011, No. 12. Zhang Qi, Jianwei Mi, Jiyuan Huang: Income Mobility and Distribution: Empirical Evidence from Rural China, Economic Research, No. 11, 2007.

Chapter 4

Labor-Capital Relations and Labor Pay

With the marketization of labor and capital factors, labor-capital relations have gradually emerged and developed. The interests between the labor and the owner of capital factors have been characterized by diversity, dynamics and uncertainty in the process of improving the market economy system. The market, laws and other institutional arrangements will affect the development of the interest relationship between employers and employees to a large extent in the evolution of this complicated interest relationship. Observing labor-capital relations at the market level can be done at both the micro and macro levels at which there are some differences in the core propositions of labor-capital relations: From the micro-level, the determination of labor pay and its related benefits in enterprises are the focus of labor-capital relations; From the macro-level, the share of labor income in national income is the key. In addition, the government’s taxation on income from labor and capital will also affect the income distribution between labor and capital. The above analysis actually gives two perspectives including the market and government and three specific aspects in labor relations. In this chapter, we will construct the models of and make simulation experiments on the above three problems, and then use our data to make relevant estimates. At the micro-level, we will analyze the wage determination mechanism in enterprises from the market deepening and workers with different labor productivity, and explore its influencing factors. At the macro-level, we will analyze the impact of the degree of marketization on the labor income share in the process of marketization of labor and capital factors, and try to estimate the optimal proportion of China’s labor income share in the national income. In view of the inconsistency in space and time in China’s economic development, the optimal values of labor income shares in different provinces in different time periods were estimated separately on the premise of distinguishing these two aspects. As for how the government collects optimal labor and capital income taxes, we will explain it in more details in Sect. 4.3.

© Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_4

197

198

4 Labor-Capital Relations and Labor Pay

Since the market environment set in this chapter is the marketization of labor and capital factors, the optimal share of labor and capital and their optimal tax rate in the marketization process of these two factors will be discussed in Sects. 4.2 and 4.3. In Sect. 4.1, we describe this process indirectly through the setting of market tightness which also fits the reality of the construction of the market economy system in China to some extent.

4.1 Determination of Labor Pay Negotiations on wage levels between workers and enterprises should be a choice or conversion between multiple equilibriums.1 In other words, the ideal situation is to achieve a higher level of equilibrium through negotiation. With the only equilibrium, the negotiation strategy to improve the current state will be inefficient due to lack of information. If there is no real equilibrium due to the heterogeneity of subjects, asymmetry of information, and difficulties in collective action, then the choice of wage level will be a suboptimal equilibrium choice. In fact, the multiple equilibriums is not only a prerequisite for wage negotiations, but also a believed threat in the process of negotiation, that is, whether to adjust the wage level according to Pareto efficiency. However, there exists constraints like free entry exist in China’s labor market, resulting in the choice of suboptimal equilibrium becoming a common phenomenon. This kind of restriction is usually imposed on labor, which is specifically reflected in the high entry barriers of some industries or enterprises. The asymmetric barrier to labor mobility has actually reduced the number of collections of decision-making. This kind of practical constraint also reduces the bargaining power of workers before they are hired, leading to inefficient matching, which is somewhat similar to the research background of Hosios. In addition, although the shape of the utility function is constantly improved, multi-period utility optimization has been taken into consideration, and the strategic actions of both workers and enterprises under the condition of heterogeneity have been continuously improved, but it is always difficult to effectively describe the differences in the process of market deepening the direction and extent of wage changes for qualitative workers. In fact, with the deepening of the market, there are more choices for heterogeneous workers, and in this case, they will face more suboptimal choices. In addition, in order to fight for more valuable workers, manufacturers have also begun to join the ranks of competition. In other words, competition among manufacturers also emerged in the process of determining workers’ wages. In this case, labor relations began to show more stage characteristics. Due to the gap between the research background and perspective of the classic literature and China’s reality, for example, the labors with different productivity in 1

The choice emphasizes the transition from a poor state to any of the equilibrium points. The transition focuses on the merger from one current equilibrium to another higher level equilibrium.

4.1 Determination of Labor Pay

199

the maturity of China’s market economy has led to labor income levels with obvious periodic characteristics, which is rarely discussed and analyzed in the relevant literature. Therefore, on the basis of previous studies, this chapter will explore the process and methods of how labor income will be distributed for utility maximization from the perspective of market deepening and workers with different productivity, and make some analysis on its generation mechanism. The former pays more attention to the staged characteristics of market development, which belongs to the time category, while the latter mainly focus on the segmentation process of labor market at a more micro level, which belongs to the main body. This section, combined with the workers with different productivity, analyzes the determination of workers’ wage levels respectively in the process of gradual market development from the perspective of workers’ intertemporal utility and current utility. The specific structural arrangement is as follows: The first part introduces a basic intertemporal model, which includes the bargaining power of labor and capital. In the second part, we will study the share of income distribution between labor and capital in the free market by introducing the upper limit of labor wages. In the process of continuously deepening and improving the market mechanism, the wage level of workers will gradually change with the increase in the number of enterprises and the segmentation of the labor market, thereby affecting the level of wages of workers with skill differences. Relevant analysis will be carried out in the third part. Workers with different productivity have gradually begun to have a multi-dimensional impact on the wages they can obtain in the process of market perfection. Therefore, we will also discuss the conditions under which companies will refuse to pay the social security proportion to workers, and to what extent workers will accept this bid. We will see how, due to the workers with different productivity, changes in individual preferences affect the level of real wages they can obtain.

4.1.1 Intertemporal Model Here we consider an intertemporal model that includes the human capital and bargaining power of capital and labor. The bargaining power of the employer will have a positive impact on the utility of intertemporal substitution of workers in the final income decision-making process. The distribution plan of the income level of labor and capital in the free market will be launched in the next section.

4.1.1.1

Manufacturers

Romer defined labor with human capital in the labor force for the production of final products. However, its use of human capital as the sole input of the manufacturer’s production process is, to a certain extent, contrary to the current economic environment. Therefore, we introduce capital on its basis. The production function of the manufacturer has the following form:

200

4 Labor-Capital Relations and Labor Pay γ

Y (t) = AK α L β HY , α + β + γ = 1

(4.1)

L is the total labor force in the society. K is the total capital that can be used to invest in production in the society, while H Y represents the human capital that is used in the production of finished product. The profit of a company, the return of workers and capital are determined by the following equation in an economic environment where taxes exist: ∞ 

πt =

t=0

4.1.1.2

∞ 

β

γ

[(1 − τ y )AK tα L t HY t − (1 + τk )r K t − (1 − τn )wL t ]

(4.2)

t=0

Government

The government’s influence on the labor market is mainly achieved through taxes. Taxes in society can be classified into four main categories: taxes on income, consumption, labor and capital income. Therefore, government revenue can be expressed by the following equation: ∞ 

Tt =

t=0

∞ 

(τ y Yt + τw wL + τk r K t + τc Ct )

(4.3)

t=0

{τct , τit , τkt , τnt }8t=0 represents the taxes on consumption, investment, capital and labor, respectively. Taxes on capital usually raises the price of capital, while the taxes on labor has the opposite effect, which is consistent with the tax shifting effect. Therefore, we tend to think that capital is a tax excluded in price, while labor tax is a tax included in the calculated prices. Hsieh and Klenow (2007), in the presence of taxes, analyzed the distortion of the total factor productivity (TFP) of the United States, China, and India by using a similar method.

4.1.1.3

Family

The final income will not be distributed according to the optimal principle due to the different bargaining powers of labor and capital in reality. Therefore, we introduce the respective bargain coefficients φ 1 and φ 2 . According to Hall’s thinking, under the constraints of taxation, the constraints of residents are as follows: ∞  t=0

qt [(1 + τct )ct ] ≤

∞  t=0

(1 − τnt )φ1 wt n t −

∞  t=0

qt τht

4.1 Determination of Labor Pay

+

∞ 

201

{rt φ2 (1 − τkt ) + φ3 [qt (1 − τit )(1 − δ) − qt−1 (1 − τi,t−1 )]}kt

t=0

+ [r0 (1 − τk0 ) + qt (1 − τi0 )(1 − δ)]k0

(4.4)

q, r is the pre-tax price of the factor and the interest rate of the risk-free assets respectively. δ is the capital depreciation coefficient and n represents the quantity of labor supply per capita. φ 1 and φ 2 are coefficient of bargaining power between labor and capital in the process of redistribution. The existence of this coefficient results in the final distribution not being determined according to the optimal principle when enterprises earn zero profit. In other words, the coefficients here also describe the structural effects of corporate income distribution to a certain extent. The residents’ investment has also changed accordingly due to the change of distribution of capital during the bargaining period, which is reflected by φ 3 .

4.1.1.4

Equilibrium Conditions

The effective pay rate is usually equal to the marginal output of labor in the classic wage determination model. Such a study is based on the perspective of the social security system exogenous to the production and management process of enterprises. In our country, enterprises need to partially bear many social security responsibilities for formal employees. Therefore, the decision of the optimal wage should be the sum of the labor pay, the social insurance provided by the enterprises for the workers in proportion, and other welfare benefits, which will be further analyzed in Part four: w = (1 − α) r =α

1 − τy Y 1 − τn L

1 − τy Y 1 + τk K

(4.5) (4.6)

Generally speaking, taxes on the labor pay can regulate the wage gap between workers to a certain extent, but the adjustment of income between corporate personnel with high-income and workers is relatively limited. This is mainly because the form of executive income is capital in nature, belonging to the category of capital taxation. However, the effect of taxes on income of labor and capital on high-earners is small for the reason that capital’s ability to pass on taxes and avoid taxes is stronger than that of labor income. In this sense, taxes actually reduce the income of workers, especially the income gap between high-skilled and low-skilled workers in society. According to Eqs. (4.5) and (4.6), we can further find the following equations: 1 1 β α γ H ] 1−(α+β) L = [( )α ( )1−α r w (1 + τk )α (1 − τn )1−α Y

(4.7)

202

4 Labor-Capital Relations and Labor Pay 1 1 α β γ K = [( )1−β ( )β HY ] 1−(α+β) 1−β β r w (1 + τk ) (1 − τn )

(4.8)

Here, it is obvious that the human capital ultimately used for production has a positive impact on the labor employed in the production of the firm. Taxes on capital and labor both reduce the supply of them. Equations (4.7) and (4.8) are difficult to obtain the explicit solutions of capital and labor shares, for which the solution can only be approximated by the wage rate and the total supply of both. However, not all of the total supply can be used, that is, there exists friction between unemployment of the labor market and the capital. Figure 4.1 shows that a rich labor force will cause the overall labor share to remain low. According to Eq. (4.7), we can be clear that this is mainly determined by the labor productivity, return on capital, taxation, and the share of human capital. With the improvement of the market economy, the two processes of reduction of labor force and improvement of skills are carried out simultaneously, which appears as an increase in productivity in the above equation. In fact, the asymmetric increase in labor supplier is an inevitable requirement for market to refine labor. In the process, high-skilled workers gradually get more wages, while low-skilled workers may be at a disadvantage in this wage differentiation. There is no variable of bargaining power between labor and capital in the determining equation of optimal labor and capital. At present, the measurement of the bargaining power of labor and capital is still difficult to become endogenous. For example, Blanchard has adopted an ex-post measurement method, which is based on

Fig. 4.1 Labor force and labor income share (Note γ = 0.15, τ k = 0.2, τ n = 0.1)

4.1 Determination of Labor Pay

203

the ratio of the absolute share to the share of the optimal share of labor and capital in the final income distribution, to inversely show its bargaining power. However, we can derive the effect of bargaining power of labor on its intertemporal utility through Hall’s no-arbitrage principle. Proposition 1 The introduction of bargaining power changes the utility of intertemporal substitution of the capital. The change has a positive impact whose extent is difficult to determine. Hall and Jorgenson (1967) proposed formula (4.6) to derive the cost conditions for the use of funds through the no-arbitrage principle. rt+1 =

1 φ3 [qt (1 − τi,t ) − qt+1 (1 − τi,t+1 )(1 − δ)] φ2 1 − τk,t+1

(4.9)

Here, φ 3 represents the investment propensity of economic entities in the presence of bargaining power. The worker’s intertemporal utility can be further expressed as the following difference equation: u  (ct ) = βu  (ct+1 )

1 + τc,t+1 1 − τi,t+1 φ2 1 − τk,t+1 [(1 − δ) + 2 f  (kt+1 ) ] (4.10) 1 + τc,t 1 − τi,t φ3 1 − τk,t

Compared with Hall’s (1971) results, the φ22 /φ3 has been added as a new item for the interest rate, which means the worker pay more attention to the utility of the current period (next period) if the capital has the bargaining power. In other words, the workers’ subjective discounting rate at this time is higher (lower). Compared to the increase in wages in the future, workers prefer to use bargaining power now (in the future) and increase their income share in the current period, thereby improving their own level of utility. We cannot assert that φ 2 and φ 3 are a martingale process even in a certain period of certainty, because both variables will have their own conditions for changing. We can only be sure that the ratio is positive here, but it is more difficult to simulate the specific degree of change of these two parameters. Proposition 2 will prove that φ 2 is actually greater than the share of capital that should be obtained under optimal conditions. This also shows to a certain extent that workers pay attention to current income, and the possibility of rising income in the long run has a limited impact on them. In our analysis, for laborers, the ratio of utility functions in the two immediate periods is affected not only by the taxes on labor, capital, and consumption, but also the variable φ22 /φ3 which exert a positive impact whose extent is difficult to determine.

204

4 Labor-Capital Relations and Labor Pay

4.1.2 Free Market and Labor Pay A more appropriate free market development model should be the irrational process of rationality and institutional construction of individual actions. “Irrational” here means that the evolution and development of the system is less affected by the construction of rationalism, that is, the social division of labor system has a certain degree of independence. More importantly, this way of thinking emphasizes the endogenous inevitability and naturalness of social evolution, and this process is generally difficult to be influenced or controlled by human will like logic. As a historical manifestation of objective regularity, there is no doubt that the irrational process has promoted the disorderly development in our economic and social process. Moreover, this irrational process seems to have a gradually corrosive influence on the positive behavioral spirit and norms of market subjects due to the lack of necessary internal authority and model maintenance. Proposition 2 Under the condition of asymmetric information, the income of the capital will be higher than the optimal level in its equilibrium model, while the income of the labor will be below its optimal level, if there are no other regulatory forces that allow labor-capital to exist to bargain over the income distribution structure created by the enterprise. Proof Here, we first prove that the share of worker’s income distribution has fallen, and then prove that the share of capital income has increased. Due to other exogenous variables, the decline in labor share is not necessarily accompanied by an increase in the share of capital income. We will prove the proposition from the changes in the parameters in the model in order to more generally illustrate this relative change in income distribution.

4.1.2.1

Workers’ Income Share

First, we introduce a cap on wages for workers in a deterministic economic environment. The way the unemployment rate changes is determined by the following equation: u˙ = δ(1 − u) − λu

(4.11)

Among them, μ is the unemployment rate, δ is the job destruction rate, λ is the offer arrival rate, which can also be understood as the probability of job hopping. The general form of job hopping is λ[1 − F(w)] if the probability of job hopping is defined as a Poisson distribution. F(w) represents the distribution of new wages. In fact, it can take the following more general form: u t+1 = δ(1 − u t ) + (1 − λ)u t

(4.12)

4.1 Determination of Labor Pay

205

This formula is also the unemployment model used by Hairault (2010). We assume free entry in the market. The following equilibrium conditions are easily obtained under the premise that the unemployment rate is 0: δ u = 1−u λ

(4.13)

The maximum wage of the workers can be obtained by characterizing the distribution function of the workers’ wage in the market: w = [1 − (

δ 2 δ 2 ) ]p + ( ) z δ+λ δ+λ

(4.14)

p is the marginal output realized by the labor in the enterprise after employment. z is the retained salary of the employees. It is also the income of the employee without employment, which is usually the income obtained from the unemployment insurance plan. The square term in the second term of the highest wage determination equation is, in fact, the social unemployment rate. In this sense, the highest wage of an employed worker is the weighted value of its marginal output and retained wages, and the weight is the square of the unemployment rate. We have the following equation according to the previous analysis: φ1 ≤

z (1 − u 2 ) p + u 2 z z < (1 − u 2 ) + u 2 = 1 − u 2 (1 − ) =α rk rk

(4.17)

It is easy to observe z for capital, especially in the low-end labor market, which mainly include methods of dismissal, employment and reduction of post wages. In these three ways, the manufacturer can always know the retained wages of the workers based on their own or the acceptable quantity of employment in the market. Therefore, the income share attained from free markets will still deviate from the optimal value even if there is bargaining power of labor. As long as the employer deducts the part that does not exceed the worker’s retained wages for distribution in the final allocation, it is optimal for the employer, and the worker will be better than under self-sufficiency. Therefore, under this condition, the share of capital will increase whose specific extent will be determined by the amount of the workers’ retained wages. Proposition 2 is proved.

4.1.3 Market Deepening and Labor Pay In the free market, the erosion of labor wages by enterprises is determined by the strong position of capital on the one hand, and by the lack of necessary competition from the labor demand side in the early stage of the market. According to the general trend, the market will shift from the general free situation to a deepening process, thereby promoting the gradual expansion of the market size. The deepening of the market is mainly reflected in the following aspects: the increase in the number of enterprises, the further segmentation of the labor market, the improvement of the social security system for employees, and the improvement of relevant laws and regulations. The main purpose of perfecting the system is to provide economic entities with an identifiable property right boundary and predictable cost of default, thus guiding the subjects to make the optimal action choices from both forward and reverse perspectives. Here, we will not discuss the impact of the system on labor-capital relations for the time being, but focus only on the first three issues.

4.1 Determination of Labor Pay

4.1.3.1

207

Increase in the Number of Enterprises

There are two ways to describe market tightness in the classic matching function, but both are linear methods. This description can describe the job opportunities found in the market in a specific environment, especially with the process of market development. However, this description actually lacks a property that describes the characteristics of market tightness over discrete time periods. In other words, this market tightness cannot effectively take into account certain characteristics in its development process, such as the actual change speed of the market tightness will gradually slow down as the economy matures. To this end, starting from the traditional matching model here, we describe the wage changes of workers in this environment by constructing a function featuring inverted U shape curve. Following the traditions of Diamond, Mortensen (2000), and Pissarides (2001), we define the expected utility of an enterprise in the two states of vacancy matching labor and vacancy: J = p − w + β[δV + (1 − δ)J ]

(4.18)

V = −c + β{q(θ )J + [1 − q(θ )]V }

(4.19)

β is the discount factor, defined as β = (1 + r)−1 . The q(θ ) represents the probability of successfully hiring a labor force for a vacant position which is a variable that depends on market tightness. At the same time, the expected utility of workers in the state of employment and unemployment is as follows: E = w + β[δU + (1 − δ)E]

(4.20)

U = z + β{θq(θ )E + [1 − θq(θ )]U }

(4.21)

Here, θ = (v/μ)0.5 describes the market tightness. We further assume that θ is doubly differentiable, that is θ v > 0, θ vv < 0, θ uu < 0 . Economic development is usually accompanied by the generation and persistence of structural unemployment. As new employment opportunities are created, and the number of matching labor forces is relatively limited, emerging a situation of “posts without positions”. In this case, there will be a certain increase of v. However, the unemployment rate can remain near a low stable value unless there is a large internal shock or exogenous shock in developed market economies. In this sense, the larger the θ, the more mature the market economy. Empirical data from the United States show that workers’ job opportunities are an increasing function of market tightness. In other words, workers have more employment and employment opportunities in an economy with a better market.

208

4 Labor-Capital Relations and Labor Pay

In addition, the Burdett-Mortensen model states that the bargaining power of workers and enterprises can be determined in the following form: max (E − U )κ J 1−κ

(4.22)

s.t. S = E − U + J

(4.23)

(E−U ),J

S represents the net social benefits for the matching process. Here, k is the bargaining power of workers. The relative share of income of employers and employees can be expressed as follows: E −U =

κ J 1−κ

(4.24)

From this we can find: w=

r r U + κ( p − U) 1+r 1+r

(4.25)

κθ c r U =z+ 1+r 1−κ

(4.26)

The above two formulas are combined to obtain the determining equation of the laborer’s wage in the matching equation: w − z = κ( p − z + θ c)

(4.27)

Workers gain more in employment than in unemployed state, which is positively related to the production capacity of manufacturer, market tightness and the manufacturer’s cost of making up vacant posts after employment. Market tightness can be understood to a certain extent as the probability that a worker will find a job. The deepening of market development will inevitably accompany the creation of more jobs by micro-industries, or create more low-end labor market employment opportunities, or destroy a large number of low-income jobs while creating more high-end labor market employment opportunities, or the high-end employment opportunities created stably in the market are alternatives between industry sectors. The former situation corresponds to the initial stage of market development, that is, the concentrated and accelerated development of labor-intensive industries. The second scenario corresponds to the transition process in the development stage. The upgrading of the industrial structure will inevitably lead to structural changes in employment. The last scenario is employment changes during the development of a stable market economy. The employment situation in the high-end and low-end labor markets will no longer change significantly. Due to the decline of the sunset industry and the emergence of new industries in the high-end labor market, high-skilled jobs will have an asymmetric evolution trend among industries. These three situations usually develop in the

4.1 Determination of Labor Pay

209

Fig. 4.2 Market development and labor wages (Note The result of the market tightness comes from taking the root of the market development: c = 1000, y = 3000, z = 800, phi = 0.5)

time dimension and are not universal in terms of specific countries. In other words, not all countries will experience such a development process. The market tightness is the increase by degrees convex function in the process of market deepening. Therefore, worker’s wage has the tendency of first speeding up-then rising slowly (see Fig. 4.2). It is also easy to understand that real wages and unemployment benefits of worker are closely related for the reason that workers make a choice between wages and unemployment benefits, which is actually part of the process of optimizing their own behavior. As the social security system is sound and perfect, the laborer is likely to choose unemployment instead of employment if the wage premium for itself is too low, such as less than its utility for its own leisure, or less than its utility for its own laziness. This is especially true of the high welfare states of northern Europe.

4.1.3.2

Refinement of the Labor Market

The increasing of the number of enterprises will also be followed by continuous refinement or stratification of the labor market. The refinement of the labor market is more a concept related to the depth of labor participation in the production process in the process of economic development and division of labor. Specifically, it refers to the formation and emergence of high-skilled labor and low-skilled labor markets due to the differences in the skills and division of labor involved in the market body’s maturity. Generally speaking, high-skilled workers create more marginal products, so they can normally earn a higher income share than the average social worker.

210

4 Labor-Capital Relations and Labor Pay

Proposition 3 In the market that distinguishes high-skilled workers, the cost of low-skilled workers for market maturity is relatively small compared to high-skilled workers, and their income share is not always at a disadvantage in the process of improving the market system. Income disparities within the labor market tend to decrease. Compared with the period when the market is immature, the labor-capital relationship in this period is more mature and stable. Proof If the labor market is further divided into high-skilled laborers whose proportion is a and low-skilled laborers whose proportion is 1-a according to the level of skills, the optimal wage levels of the two types of laborers in the market can be obtained. Shi Shouyong (2003) gives the specific form: wh = p

aθ [φ + e−(1−a)θ ] eaθ − 1

(4.28)

(1 − a)θ e(1−a)θ − 1

(4.29)

wl = p

wh and wt represent the optimal wage levels of high-skilled and low-skilled workers, respectively. φ represents the higher productivity that high-skilled workers make than low-skilled workers make in the per unit of time. θ represents for the market tightness which is defined as the average number of workers employed by each enterprise. For the sake of analysis, we here unitize 1 to represent for all the labor force available for production in the society and assume that the number of labor forces is constant. In this case, changes in market tightness are all resulted by changes of the number of enterprises. Neither did Shi Shouyong (2003) analyze the absolute and relative levels of wages of two kind of skilled workers, nor did he study the cost of reform borne by high- and low-skilled workers in the process of improving the market system. The conclusion of Proposition 2 is based on the further analysis of its salary ceiling and the change of related assumptions. The following formula is used to calculate the first derivative of the absolute and relative wage ceilings of two kind of skilled workers on market tightness: apeθ(a−1) (a − 1) a 2 peaθ (φ + eθ(a−1) ) ap(φ + eθ(a−1) ) ∂wh = − B, this rate of change in capital technology actually increases the capital stock per capita, and vice versa, which is based on that the process of the analysis is basically consistent with the one of the improvement of absolute amount of capital stock per head. The influence of labor and capital technology changes is opposite of the analysis above in terms of the impact of technological progress on the optimal capital income tax.

11 12

Here, we actually imply that the depreciation rate of the capital is 100%. The reverse derivation method is mainly used here.

236

4 Labor-Capital Relations and Labor Pay

4.3.2 Simulation Analysis We will perform a simulation analysis of the relationship between related variables in the model in this section according to estimation method of the optimal labor and capital income tax rates. This simulation will provide an intuitive and effective judgement basis for the estimates in the next section. This simulation is mainly carried out from three aspects, namely the simulation under the change of the replacement rate, capital stock per capita, and the labor income share. We will simultaneously simulate the optimal tax rate of labor and capital in order to conduct a more effective comparative analysis.

4.3.2.1

The Change of the Replacement Rate

Figures 4.12 and 4.13 respectively indicate that the optimal labor income tax rate will rise with the rise of capital stock per capita in the case of constant replacement rates, while the optimal capital income tax rate will decrease. Figure 4.12 shows that there is a single peak of the labor tax rate in the process of the increasing replacement rate, after which the tax rate has continued to decline. The negative number here means that the government should subsidize labor rather than taxation. In addition, the peak of the labor tax rate also shifts to the right during the evolution of the replacement rate with the gradual improvement of capital stock per capita, which indicates that the optimal tax rate on labor income has also gradually increased under the situation of improvement in capital stock per capita. The labor

Fig. 4.13 The optimal capital income tax rate I

4.3 Optimal Income Tax of Labor and Capital

237

income tax rate at this time is still higher than zero even if the replacement rate is 1.5. The labor has a comparative advantage in cost during this period if capital stock per capita is low; and capital income should be subsidized to encourage investment expansion. This situation is basically consistent with the choice of labor-intensive countries in the early stages of development, namely, taxing labor to subsidize capital. In other words, this basic logic is to emphasize capital instead of labor. Such subsidy will gradually decrease with the gradual rise of capital stock; and taxes on capital income will begin to appear (Fig. 4.13). This tax rate change is particularly obvious in the change of the replacement rate less than 1. Distribution interval of the replacement rate is roughly between 0.84 and 1.24 according to the estimation results of the replacement rate in China’s 30 provinces, autonomous regions and municipalities from 1999 to 2010. This interval happens to be the fastest changing interval for capital income tax rates. The increase of capital stock per capita will correspond to a lower optimal capital tax rate with the given other circumstances. When the labor and capital replacement rate changes from 0.6 to 1; and capital stock per capita is 3.5; the capital income tax rate varies from 0 to 40% and exists a rapid upward trend. However, there is a limitation on this increase in tax rates. This limit value will continue to move downwards with the increase of capital stock per capita. It is slower than the rate of improvement in capital stock per capita in terms of the change on raising speed.

4.3.2.2

The Change of Per Capita Capital

The impact of changes in capital stock per capita on labor and capital taxes is obvious in the process of economic development. This effect also shows a strong situation in the process of change in replacement rate. However, there is a certain difference between the mechanism of the effect of changes in the replacement rate on the change in the optimal labor tax rate and the change in capital stock per capita under the change in the given rate in the given situation of the change in capital stock per capita (see Fig. 4.14). The increase of the replacement rate will make the optimal labor tax rate curve of the given capital stock per capita skew toward the right, which reduces the actual tax rate of labor income, and increases the level of government subsidies. That is, the taxation of labor income can be gradually reduced if the rationalization of the replacement rate of factors can be further promoted in the premise of the ever-increasing capital stock per capita. This process is a concrete manifestation of market deepening. Similar to Fig. 4.14, changes in the replacement rate to the optimal capital income tax rate (see Fig. 4.15) under the given capital stock per capita are different from the effect of capital stock per capita on the optimal capital income tax rate under the given replacement rate. The increase of the replacement rate makes the curve of the optimal capital income tax rate more gently in this case. The tax rate is lower when the capital stock per capita is less and vice versa.

238

Fig. 4.14 The optimal labor income tax rate II

Fig. 4.15 The optimal capital income tax rate II

4 Labor-Capital Relations and Labor Pay

4.3 Optimal Income Tax of Labor and Capital

4.3.2.3

239

Labor Income Share

Figure 4.16 shows that the increase in the capital stock per capita will significantly increase the optimal labor income tax rate in the premise of given a worker’s income share. This is easier to understand. Theoretically, formula (4.50) states that the labor income tax rate is an increasing function of the capital stock per capita. In practice, this is also the due situation of tax source withholding (Fig. 4.17). Generally speaking, the process of increasing the capital stock per capita will be accompanied by an increase in the labor income tax rate. However, the effects of such increase and decrease can be offset to a certain extent if the replacement rate of labor and capital can be gradually improved in this process; and the linkage between capital stock per capita and the replacement rate can be realized. In other words, it is possible to gradually control the increase of the labor income tax rate in the process of rising capital stock per capita, so the actual tax rate of their burdens will not be excessive while the income of workers continues to improve. The improvement of capital stock per capita will have a structural impact on changes in the optimal capital tax rate under the condition of the given labor income share. A lower capital stock per capita will cause the optimal tax rate to subsidize capital in the process of rising labor share through taxation of labor. The positive optimal tax rate is more obvious if the capital stock per capita doubles. In addition, the change in this tax rate is relatively stable. The labor income share has increased from 20 to 70%; and the optimal tax rate is between 20 and 30%. The situation described here is basically consistent with reality.

Fig. 4.16 The optimal labor income tax rate III

240

4 Labor-Capital Relations and Labor Pay

Fig. 4.17 The optimal capital income tax rate III

4.3.3 The Estimate of Optimal Tax Rate Based on the intuitive judgment in the previous section, we now use our China’s data to estimate the theoretically optimal labor and capital tax rates. The estimates here are also divided into overall estimates and interval estimates according to the idea of staged and province-level estimates in Sect. 4.2. Former one mainly uses the constant labor and capital replacement rates from 1999 to 2010 to estimate, while the latter uses the labor and capital replacement rates from 1999 to 2003 and 2005 to 2010 to estimate. The interval estimate fully considers the impact of changes in China’s labor and factor prices on their returns since the 2008 financial crisis relative to the overall estimate. These two estimation methods provide a numerical analysis of how the replacement rate affects the optimal tax rate for labor and capital.

4.3.3.1

The Estimation Methods and Data

We first introduce the estimation methods we used and briefly describe the data sources.

The Estimation Methods The estimation is mainly based on the parametric form of the Markov labor and capital optimal tax rate. It is worth pointing out that there are differences in the relative speeds

4.3 Optimal Income Tax of Labor and Capital

241

of labor and capital technology evolution due to the regional differences in China’s economy. Compared with the central and western regions, the eastern region has relatively abundant capital; and its degree of technological change is lower than that of labor. The situation is exactly the opposite in the west. There is uncertainty about the way and level of change because technological change itself may be linear or nonlinear. Here, we do not estimate the technological progress rate of labor and capital, but generally assign values in the three regions to explain the optimal labor and capital tax rate under the specific labor and capital replacement rates, technological changes and labor income share changes according to their characteristics. It is worth pointing out that there are large differences among provinces in the central region. In terms of capital stock per capita, Jiangxi and Inner Mongolia are closer to the east; and Anhui is closer to the west. Therefore, the three provinces mentioned above are based on the principle of feature classification rather than geographical division in the process of assigning value for labor and capital technique. In addition, the capital stock per capita of Tianjin in the eastern region is significantly higher than the national average, so its rate of change in capital technique is relatively low.

Date Sources We can try to estimate the optimal labor and capital taxes across the country and 30 provinces (municipalities, autonomous regions) from 1999 to 2010 under this condition. The data of labor and capital in previous part of China’s 1999–2010 data of labor and capital are used here to estimate parameter. We have obtained the estimated results of labor and capital replacement rates in the overall and interval respectively according to the duration of the estimation. Therefore, the estimate of the optimal labor and capital income tax rates should be made from the overall and the interval according to the corresponding time of division. The capital stock data comes from Zhang Jun. We estimate the capital stock level in 2009 and 2010 according to the average growth rate of 1995–2008 since Zhang Jun only provides the capital stock of 30 provinces, municipalities and autonomous regions in China by 2008.

4.3.3.2

The Optimal Labor Income Tax Rate

Table 4.3 has estimated the nationwide optimal labor income tax rate according to the overall replacement rate level during the period from 1999 to 2010. The estimation results show that the general trend of the optimal tax rate for labor is constantly rising although there has been a decline in some years. The nationwide optimal labor tax rate is 6.41% from 1999 to 2010. The main reason for this change is caused by the increase in the capital stock per capita under the control of other factors. This is consistent with the trend of an increase in the optimal labor income tax rate caused by the increase of capital stock per capita analyzed in Fig. 4.14.

242 Table 4.3 The optimal labor income tax rate from 1999 to 2010

4 Labor-Capital Relations and Labor Pay Year

Tax rate I

Tax rate II

1999~2003

−0.2027

0.0414

2004~2010

0.1300

0.3120

1999~2010

−0.0166

0.0641

Note Tax rate I and tax rate II are calculated based on the change of σ . Tax rate II is more credible than tax rate I because of considering the impact since the financial crisis of 2008. In addition, the parameter value in tax rate I is lower than the parameter value in tax rate II in terms of the rate of technological progress in labor and capital. This is mainly caused by the process of capital deepening. Specifically, the optimal labor income tax rate will rise accordingly with the progressive increase of capital stock per capita in the time dimension, because the tax rate here is an increasing function of the capital stock per capita

The calculated labor tax rate is constantly rising in terms of the national replacement rate from 1999 to 2010.13 The national optimal labor income tax rate is 13.00% from 2004 to 2010 in the case of constant replacement rate; this tax rate is 31.20% when the replacement rate changes. This does not mean that the optimal labor tax rate will increase monotonically over time. This increase is more due to the increase in capital stock per capita. The relative prices of labor and capital will constantly change in the course of economic development; and the labor income share and the technology of labor and capital will also fluctuate from year to year. While the optimal labor tax rate is the result of the combined effects of the above-mentioned factors, and is not determined by any of these variables. The curvature of the optimal labor tax rate will change especially when the replacement rate changes, which can result in a large change in its trajectory. In this sense, the change in the replacement rate has a significant impact on the formation and change of the optimal labor tax rate to a certain extent. The financial crisis since 2008 has had an important impact on the relative prices of labor and capital factors in China; and the rise in labor prices is obvious. Therefore, the actual situation of this change also needs to be considered. In fact, the separate estimates of interval replacement rates can incorporate this effect into our estimation process. Here, we estimate the optimal labor and capital income tax rates in all provinces of China by using the estimated labor and capital replacement rates in the previous section and combining with the determination method for the optimal labor tax rate. There was also a certain difference from the optimal labor income tax rate in the previous period since the replacement rate decreased to a certain extent from 2005 to 2010 compared with 1999 to 2003. Since the financial crisis has led to the significantly 13

The promotion process of the optimal labor tax rate from 0 to 1 can also be obtained if the optimal labor tax rate is estimated from the perspective of labor supply according to this idea; and the value is selected within the range of the existing literature. The detailed analysis process is not given here because there are some differences from the estimation methods in this section.

4.3 Optimal Income Tax of Labor and Capital Table 4.4 The optimal capital income tax rate from 1999 to 2010

243

Year

Tax rate I

Tax rate II

1999~2003

0.3540

0.1492

2004~2010

0.1364

0.0231

1999~2010

0.3481

0.2451

Note Tax rate I and tax rate II are calculated based on the change of σ . Tax rate II is more credible than tax rate I because of considering the impact since the financial crisis of 2008. In addition, the parameter value in tax rate I is lower than the parameter value in tax rate II in terms of the rate of technological progress in labor and capital. This is mainly caused by the process of capital deepening. Specifically, the optimal capital income tax rate will rise accordingly with the progressive increase of capital stock per capita in the time dimension, because the optimal capital tax rate is a decreasing function of the capital stock per capita

change in the relative prices of labor and capital during this period, especially the rise in labor prices has reduced he replacement rate of labor and capital. However, it is possible to show the over taxation on labor if the labor and capital replacement rates are assumed to be constant. The reasons for this increase in the optimal labor tax rate are mainly twofold. First, the simultaneous changes in the actual supply of labor and the price of use show opposite trends in the impact on the replacement rate due to the gradual increase in the cost of labor use in China. The magnitude of the replacement rate depends on the relative magnitude of the two effects to some extent. Second, China’s capital stock per capita is a period of accumulation and rising, especially for laborers. The increase of capital stock per capita often leads to the increase of the optimal labor income tax rate in the formula of the optimal labor income tax rate. Therefore, the optimal labor income tax rate shows the changes by region, time period, and development stage under the combined effects of these two reasons.

4.3.3.3

The Optimal Capital Income Tax Rate

The national optimal capital income tax rate gradually decreases and tends to zero whether the replacement rate changes or not from 1999 to 2010. This is similar to the conclusions of Judd (1985) and Chamley (1986).14 However, the speed of the optimal capital tax rate tending to zero in the environment of changing replacement rate is slower than that in the environment of constant replacement rate (see Table 4.4). The upper limit of the optimal capital tax rate will gradually decrease with the increase of the capital stock per capita when the replacement rate changes. The long-term trend also converges to zero as far as its trajectory is concerned. The optimal capital tax rate has gradually decreased throughout the country in the estimation results of the optimal capital tax rate in the whole nation from 1999 14

They point out that the optimal tax rate for capital tends to zero in the long term.

244

4 Labor-Capital Relations and Labor Pay

to 2010. The optimal capital tax rate will gradually decrease as the capital stock per capita rises, even if the replacement rate does not change. The capital stock per capita in China’s provinces (municipalities and autonomous regions) has indeed experienced a relatively significant rising process between 1999 and 2010.

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages The influencing factors of labor wages growth involve many aspects such as the size of capital stock, changes in the number of labor unions, labor disputes and labor security. The changes of labor wages at the micro level are analyzed in the first section of this chapter from the aspects of laborers’ bargaining power and the heterogeneity of laborers themselves. But is this analysis consistent with the actual situation of changes in labor wages? Are there provincial characteristics of influencing factors? Are there any new characteristics in the transmission mechanism if it is divided according to economic regions? This section will construct relevant indicators and conduct empirical tests on the above issues by using China’s macroeconomic data.

4.4.1 The Empirical Model We mainly use the following models for empirical analysis in this section: yit = αi + β1 U nioit + β2 I nsu it + β3 Con f it + β4 I ncrit + β5 Mar kit + εit

(4.54)

The yit represents the wage growth rate of laborers in i province in the year of t; X i is the explanatory variables, including U nioit , I nsu it , Con f it , I ncrit and Mar kit , which respectively represent the proportion of the number of union members and all laborers, the proportion of laborers participating in insurance, the proportion of labor remuneration disputes in total laborers, growth indicators and marketization indicators in i province in the year of t. The coverage mainly includes five aspects, that is, the occupational insurance, unemployment insurance, maternity insurance, endowment insurance and medical insurance. βi is the degree of influence of the above explanatory variables on the rate of change in wages of laborers, respectively. εit is the error term.

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

245

4.4.2 Variables and Data Sources A total of ten indicators in five categories are used here. These indicators are divided by main categories, including wage indicators, growth indicators, guarantee indicators, dispute indicators and marketization degree indicators.

4.4.2.1

Wage Indicators

The wage indicators used here is the laborers’ wage growth rate of the entire social enterprises. To what extent should the laborer income be increased so that laborers can fully enjoy the achievements of economic growth, and maintaining sustainable economic development while the economy maintains a relatively high rate of growth, which is of great concern than the income stock of labourer. Here the growth rate of the wage index that we use can better analyze how changes in explanatory variables affect wage growth. In fact, the growth rate of wages is the possibility of improvement of labor income, which also means the possibility of upward movement of labor income. In short, it is the income mobility of workers. The faster the rate of wage growth, and the greater the opportunity for workers’ income to flow upwards; the above two aspects have the same meaning in fact. The higher income mobility can enable laborers to improve their economic status and their own power of consumption.

4.4.2.2

Growth Indicators

The increase in labor wages is generated in an environment of continuous economic development. Therefore, it is necessary to construct growth indicators to explain the trend of labor wage changes. The construction of this indicator requires a better analysis for the distribution relation of capital and labor, and a test of whether it has a direct erosion for labor income. The growth indicators we construct here mainly include the growth rate of capital stock. The capital stock levels of the provinces in China in 2009 are estimated according to the average growth rate from 1995 to 2008 by using the Zhang Jun’s data about capital stock; the annual growth rate of the capital stock is calculated based on this capital stock.

4.4.2.3

Guarantee Indicators

The guarantee indicators mainly refer to the indicators that are closely related to the laborers themselves. Here, we select the guarantee indicators at two levels: one is the coverage of employee’s social basic insurance participation rate at the economic level;

246

4 Labor-Capital Relations and Labor Pay

the other is the guild coverage rate at the organizational level. It mainly includes the participation rates of the occupational insurance, unemployment insurance, maternity insurance, endowment insurance and medical insurance by region from 2001 to 2009 in terms of the basic insurance participation rate of employees. In the long run, this indicator has a tendency to stabilize. However, the participation rates of the five insurances fluctuate widely within the time period we have selected; and the annual growth rate has both positive and negative, which indicate that the expansion and contraction of social security coverage between years exist to a certain extent. We indirectly describe changes in in the bargaining power of laborers by constructing the proportion of each union member in the number of laborers as far as union coverage is concerned. Generally speaking, the bargaining power of laborers will also increase to a certain extent with the increase of union coverage.15

4.4.2.4

Dispute Indicators

We have selected the proportion of the number of labor remuneration disputes to the total labor force in terms of measuring labor disputes. This indicator is actually the product of two indicators, that is, the product of the proportion of labor remuneration disputes in the number of cases accepted in the current period and the proportion of the number of cases involved in the current period accounted for the total labor force. The larger the indicator, the greater the resistance of laborers in the realization of income rights; and the labor-capital relationship will increase the tension. In this sense, this indicator mainly reflects the harmonious degree of the labor-capital relationship development.

4.4.2.5

The Degree of Marketization

The development stage of the market has an important influence on the opportunities for workers to participate in trade unions and the realization of their rights. The degree of marketization also has a greater impact on labor income in our analysis of the influencing factors of labor-capital relationship. The annual change rate of marketization is selected here instead of the actual marketization score for two reasons: one is that we take the calculation of the provinces’ growth rates from 2001 to 2009 as explanatory variables because the above explanatory variables use relative numbers; the other is that the degree of marketization itself is a dynamic process, which may be gradually deepened and may be reversed. Therefore, it is more meaningful to pay attention to the degree of change of marketization than to pay attention to its static value in a certain year. Here, we use the marketization index released by

15

The formation of trade unions in non-state-owned enterprises has begun to accelerate since 2000. The ability of laborers in such enterprises to appeal for labor compensation rights also began to rise to a certain extent.

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

247

Table 4.5 Descriptive statistics of main variables Indicators

Variables

Wage growth Capital stock

Mean value

Standard deviation

Least value

Maximum value

Wage growth rate 0.1461

0.0510

−0.0623

0.4626

Capital stock growth

0.2667

1.0008

−0.7725

15.5845

Occupational insurance

Occupational insurance coverage

0.4682

0.5789

0.0000

3.9150

Unemployment insurance

Unemployment insurance coverage

0.5846

0.4230

0.0108

2.3660

Maternity insurance

Maternity insurance coverage

0.3286

0.3345

0.0000

2.5498

Endowment insurance

Endowment insurance coverage

0.8882

0.7298

0.0070

4.3666

Medical insurance

Medical insurance coverage

0.9670

0.9505

0.0097

7.3437

The union coverage

The proportion of 1.1409 union members in employed

0.4970

0.0000

6.8161

Labor dispute

The number of labor remuneration disputes per 10,000 people

6.8319

9.0053

0.4719

54.8571

Marketization

Marketization Index Growth

0.0794

0.3039

−0.8065

4.6207

Fan Gang (2011) to calculate the annual growth rate, which can be regarded as one of the explanatory variables of the model. Specifically, the data in this article comes from the China Labor Statistics Yearbook from 2000 to 2010 and Fan Gang’s China Marketization Index 2011. Table 4.5 describes the data we used.

4.4.3 Empirical Analysis It is necessary to pay attention to the necessity of analyzing both the overall and local aspects of China’s labor-capital relationship in the process of analyzing the influencing factors of China’s labor-capital relationship. The former can better analyze the

248

4 Labor-Capital Relations and Labor Pay

Table 4.6 The regression results of panel data models Capital stock growth

(1)

(2)

(3)

(4)

−0.008***

−0.005*

−0.005*

−0.006**

(0.003)

(0.003)

(0.003)

0.009

0.021

0.036

(0.023)

(0.022)

(0.023)

(0.003) Occupational insurance coverage

−0.142***

Unemployment insurance coverage Maternity insurance coverage

−0.094**

−0.085*

(0.045)

(0.044)

(0.044)

0.061*

0.061*

0.056*

(0.035) Endowment insurance coverage

0.042* (0.022) −0.021**

The medical insurance coverage

(0.009) The proportion of union members in employed

(0.033) −0.013 (0.024) −0.009 (0.009) 0.032*** (0.007)

−0.010 (0.009) 0.036*** (0.007) (0.001)

0.078*** (0.010)

Constant

(0.024)

−0.001**

The number of labor remuneration disputes per 10,000 people Marketization Index Growth

(0.033) −0.016

0.142*** (0.003)

0.084*** (0.009) 0.182*** (0.022)

0.083*** (0.009) 0.150*** (0.022)

0.087*** (0.009) 0.146*** (0.022)

*p < 0.1, **p < 0.05, ***p < 0.01; the same below

overall effect mechanism of various influencing factors on labor-capital relationship nationwide, while the latter can measure the influence mechanism within a specific economic zone, and compare and analyze with the empirical results nationwide. On the one hand, it can make a robustness test to the basic parameters of the model to a certain extent; on the other hand, it can also analyze the specific characteristics of specific explanatory variables16 across the country and in the region. Specifically, the nationwide analysis is mainly the panel data analysis by using aggregate data, and the local analysis analyzes the influencing factors of the labor-capital relationship through the two levels of business nature and region.

4.4.3.1

The Nationwide Empirical Analysis

We take the control of capital stock growth and marketization index growth as the benchmark of the empirical model in the four models in Table 4.6. The regression 16

Here mainly refers to the explanatory variables after adding into the regional dummy variables.

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

249

results of model (4) show that the growth rate of capital stock, the proportion of union members in employment, the endowment insurance coverage, the number of labor remuneration disputes per 10,000 people and the marketization index growth rate all have significant influence on the growth rates for labor wage. The growth rate of capital stock has a certain negative impact on the growth rate of labor income on a national scale, which is about −0.8 to 0.5%. In this sense, there is a certain degree of capital erosion on labor income, but the degree is relatively limited. The crowding out of capital income over labor income is mainly achieved by capital’s control over surplus products. The rapid growth of capital stock can make the capital to obtain more of this ability, which can further strengthen its leadership of the distribution of products and result in a slowdown in laborer income growth. The proportion of union members in total employment and the growth rate of the marketization index have positive significance for the increase in labor wages, with an impact between 3.2 and 3.6%. It shows that the improvement of the union’s coverage and the continuous improvement of marketization can effectively increase the wage growth of laborers. This kind of positive influence of the trade union mainly lies in improving the organization and bargaining power of the laborers, and being able to better negotiate with the employers to fight for their rights. In addition, the trade union’s ability to improve laborers’ skill is also an effective route to promote laborers’ income. A mature market economy environment has provided laborers with more opportunities for unions, reduced the proportion of social vacancies and unemployment, and allowed more laborers to join the production process and enjoy the income growth brought about by growth. In addition, it can also increase the way to assert their own rights to ensure the effective realization of laborers’ income rights. In this sense, the effective way of improving the wage level of laborers is to promote trade union coverage and actively advance the process of marketization. The number of labor remuneration disputes per 10,000 people also has a certain negative impact on the rate of change of labor wages in model (4). This is mainly caused by the direct and indirect effects of labor disputes on workers. The direct impact is that the possibility of laborers’ participation in the union will be reduced; and the indirect impact will be a decline in labor enthusiasm. This negative impact also shows that the conflicts in labor-capital relationship will lead to a decline in wage growth of laborers since this indicator also describe the harmonious degree of laborcapital relationship to a certain extent. The small negative effect is mainly because only the average wage growth rate of the whole society is used as the explanatory variable here; and the differences between enterprises of different ownerships are ignored. However, the coverage of occupational insurance, endowment insurance and medical insurance do not always have a significant impact on the growth rate of laborers’ wages. It is found that the unemployment insurance coverage has a significant negative impact on the increase of labor wage growth by introducing the union

250

4 Labor-Capital Relations and Labor Pay

coverage index based on the model (2). One percentage point change of unemployment insurance coverage will lead to 9.4–14.2% decline in the wage growth of laborers. The percentage of this decline decrease to 8.5% with the addition of the number of labor remuneration disputes per 10,000 people variably, but it still has considerable significance. This shows that the rate of change in wages of laborers can be better explained after controlling the indicators of labor disputes, but it will not change the negative impact of unemployment insurance coverage on the rate of changes in wages of laborers. The maternity insurance coverage has a significant positive impact on the increase in wages of laborers, with an impact level ranging from 5.6 to 6.1%. This insurance is mainly for female employees, so the interpretation of the entire sample is limited. However, this also reflects that the promotion of the maternity insurance coverage has a certain significance to the increase of laborers’ wages to some extent. The emergence of this positive meaning mainly protects the willingness and ability of female employees to continue working.

4.4.3.2

Mechanism of Action by Firm Nature

There are state-owned enterprises, collectively owned enterprises and other types of enterprises in China. Among the three different types of ownership enterprises, do the explanatory variables have different influences on labor wage growth? Table 4.7 shows the specific regression results. The growth rate of capital stock has a certain negative impact on the growth rate of wages of workers in state-owned enterprises and collectively-owned enterprises, and the degree of impact is about −0.5 to 1.4%. Among them, the negative impact in collectively owned enterprises is greater than that in state-owned enterprises. There are two main reasons for this result: First, the capital stock of state-owned enterprises is higher than that of collectively-owned enterprises, and the crowding effect of increasing capital on labor income has a gradual decline. Second, capital in state-owned enterprises is not completely used to expand reproduction, and some capital has entered other fields or other industries, which also has a small impact on the growth rate of labor income. The rate of basic pension insurance participation has a positive impact on the wage growth of workers in state-owned and collective enterprises, the degree of impact is about 4.9 and 7.5%, respectively. This result is relatively easy to understand. The rate of basic pension insurance participation has a greater impact on income, which is mainly reflected in two aspects: first, participating in endowment insurance increased the permanent income in a long time; second, it raised the work enthusiasm of workers. This policy has been comprehensively implemented in stateowned and collective enterprises that most employees can be covered by insurance. However, it is difficult to have a significant and lasting impact on the increase of labor wages in other ownership enterprises due to the limited implementation and coverage. The limited positive impact of endowment insurance participation rates on workers’ income in other ownership enterprises indicates that the promotion of

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

251

Table 4.7 Results of the analysis of the nature of the sub-sector State-owned enterprise

Collective enterprise

Other enterprises

(1)

(2)

(3)

(5)

Capital stock growth rate

−0.005*

−0.007**

−0.013*** −0.014*** −0.007

(0.003)

(0.003)

Labor injury insurance participation rate

0.013

0.046*

(0.027)

(0.026)

(0.005) −0.006 (0.037)

Unemployment −0.212*** −0.145*** −0.175** insurance (0.051) (0.050) (0.072) participation rate

(4) (0.005) 0.017 (0.039)

−0.118

(0.010) −0.020 (0.080)

−0.086

(6) 0.001 (0.010) −0.082 (0.082)

−0.108

(0.073)

(0.153)

(0.156)

Maternity insurance participation rate

0.036

0.028

0.092*

0.088

0.047

0.083

(0.040)

(0.038)

(0.056)

(0.056)

(0.119)

(0.118)

Endowment insurance participation rate

(0.025)

Medical insurance participation rate

0.049*

−0.018* (0.010)

Proportion of labor union membership in employees

Constant

(0.027)

−0.004 (0.010)

0.075** (0.035)

−0.017 (0.014)

0.042***

0.228*** (0.025)

0.188*** (0.025)

−0.005 (0.015)

−0.025 (0.030)

(0.015) 0.174*** (0.035)

−0.012 (0.015) 0.137*** (0.037)

−0.009 (0.031)

0.010 (0.024)

0.007***

(0.001)

0.085*** −0.012 (0.010)

0.067 (0.085)

−0.001

(0.001)

(0.010)

0.107 (0.074)

(0.011)

−0.002***

0.082***

0.017 (0.040)

0.036***

(0.008)

Labor remuneration disputes per 10,000 people Marketization index growth rate

−0.021

(0.002)

0.079** (0.031)

0.061** (0.031)

0.102

0.093

(0.076)

(0.078)

endowment insurance in this type of enterprise still has a long way to go. The rate of medical insurance participation will negatively affect the wage growth of workers in state-owned enterprises, with an impact degree of approximately −1.3%. It should be pointed out that the impact of the five types of insurance in other ownership enterprises on changes in labor income is not significant. This can happen

252

4 Labor-Capital Relations and Labor Pay

for a couple of reasons: the most important of which is that in most non-stateowned enterprises, the insurance participation rate of workers is relatively low, and it is difficult to have both insurance and job opportunities. Participation in the five insurances will increase the employment cost of the enterprise, which will also reduce the employment opportunities of the workers, preventing the increase of their income through working. The emergence of this situation not only illustrates the lack of market system construction in the economic transition, but also shows that workers, especially low-skilled workers, have limited bargaining power that it is difficult for them to protect their legal rights. The degree of impact of labor compensation disputes per 10,000 people on workers’ wages has diverged to some extent. This negative impact in state-owned and collective enterprises is basically consistent with the analysis results in Table 4.6. However, in other ownership enterprises, this factor has a positive effect on the growth rate of labor wages, and the degree of this effect is about 0.4%. The main reason for this situation is that other types of enterprises have major deficiencies in the protection of basic labor rights and interests of workers, and workers need to take the initiative to adopt labor arbitration and other methods to safeguard their legitimate rights and interests. In state-owned enterprises, conflicts in labor-capital relations have not had a significant effect on the growth of labor income, and even have a slight negative impact on it due to the relatively good implementation of relevant state policies and regulations. This situation also explains to a certain extent that the executive force of non-state-owned enterprises in protecting labor in the process of China’s market economy system construction needs to be further improved, and the labor relations in state-owned enterprises also need to be further rationalized. The degree of influence of the marketization index among the three types of ownership enterprises is quite different. It has a positive effect on the increase of workers’ wages in state-owned enterprises and other ownership enterprises. Among them, the promotion effect in state-owned enterprises is greater than that in other ownership enterprises, which shows that state-owned enterprises and other enterprises are actively participating in the market division of labor, and thus have a positive impact on the income of workers. However, the gradual improvement of marketization in collectively-owned enterprises will lead to a slowdown in labor wage growth to a certain extent. In this sense, collectively owned enterprises should actively participate in social division of labor within a reasonable range, so as to effectively increase the income of workers in such enterprises.

4.4.3.3

Impact Mechanism of the Three Regions

The three regions here mainly refer to the traditional three regions divided by geographical distribution: eastern, central and western. This division method runs through the north and the south, to a certain extent, it neglects the inherent connection between neighboring provinces along with the economic development process, and it is only a regional connection. Here, we make a quantitative analysis of the influencing factors of labor income growth under administrative divisions.

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

253

The degree of negative impact of capital on labor income growth in the eastern region is higher than the average level in Table 4.8, reaching about −12.6%, which means for every 1 percentage point increase in the growth rate of capital stock, the growth rate of labor income will decrease by 12.6%. However, the negative impact of capital growth in the central region is not significant. The reason for this situation Table 4.8 Results of the three major geographical analyses East region (1)

Central region (2)

(3)

Capital stock growth rate

−0.137*** −0.132*** −0.013

Labor injury insurance participation rate

−0.018

(0.032) (0.012)

(0.033) −0.007 (0.014)

Unemployment −0.032 insurance (0.025) participation rate

−0.010

Maternity insurance coverage

−0.000

(0.022)

Old-age insurance participation rate

(0.017)

Health insurance coverage

0.006

0.015

0.016 (0.010)

Trade union membership as a proportion of employed persons

constant

(0.023) −0.014 (0.023)

0.023** (0.010)

0.155*** (0.009)

(0.061)

0.135*** (0.016)

(0.003)

(0.003)

0.064

0.232

(0.058)

(0.057)

(0.149)

−0.013 (0.030)

−0.035 (0.043) 0.007 (0.035)

−0.022 (0.014)

0.046 (0.038)

−0.051 (0.042) −0.045 (0.038)

−0.003 (0.015)

−0.018 (0.053)

−0.157 (0.129) 0.062 (0.045)

−0.055* (0.029)

0.060***

(0.093)

0.163*** (0.020)

(0.090)

0.104*** (0.028)

0.040 (0.052)

−0.129 (0.109) −0.065 (0.049)

−0.030 (0.026)

−0.002***

(0.004)

−0.111

(0.127)

(0.008)

−0.001

−0.077

0.303**

0.038***

(0.020)

(0.000)

(0.061)

−0.005*

(0.033)

−0.000

0.130**

(6)

−0.008**

0.092

0.023*

0.125**

(5)

−0.025

(0.033)

(0.013)

Number of labor remuneration disputes per 10,000 people Growth rate of the market-based index

(0.027)

West region

(4)

(0.001)

0.073*** (0.010)

0.132*** (0.010)

0.090*** (0.010)

0.103*** (0.014)

254

4 Labor-Capital Relations and Labor Pay

may be that the capital in the central region is still relatively scarce. Although the increase in the capital stock has a certain negative impact on the changes in wages of workers, the growth effect caused by the increase in the capital stock makes workers still have the possibility of pay increases. The impact of employment injury insurance in the eastern and central regions is exactly the opposite. In the east, an increase in the rate of participation in workrelated injury insurance will cause a slight decline in the growth rate of workers’ income, a decrease of about 2.3%. However, in the central region, this increase in the participation rate has enabled workers’ wage growth to increase between 9.5 and 10.3%. The reason for this situation is mainly because there are a large number of mobile labor in the eastern region who are competitive in the labor market and easy to be replaced. Therefore, for low-skilled workers, they tend to be in an unsafe production environment because of their relatively low bargaining power. The requirements of the production environment may make it difficult for such workers to obtain job opportunities, thereby preventing them from increasing their income. The capital in the central region is relatively small, and its dominance over the remaining income is not as great as in the east, which specifically reflected in the limited degree of substitution of capital for labor. In order to realize the profitability of capital, capital owners need to ensure that a certain proportion of the two factors of production, capital and labor is maintained so that capital can replace labor above this ratio. However, once it is lower than this ratio, the replacement of capital by labor will create a situation of labor production layout, preventing capital from obtaining an optimal share of profits. The ratio of labor to capital in the middle is higher than that in the east. The coverage of unemployment insurance, maternity insurance, and endowment insurance have no significant impact on the growth rate of workers ‘incomes, indicating that the three types of insurance have limited regional effects in the process of improving workers’ income. Medical insurance has a significant effect of about 1.7% on income promotion effect in the eastern region. However, it is not significant in the central region. There may be two reasons for this situation: First, workers in the eastern region are more aware of their rights, and they are more eager to maintain their long-term capacity of labor supply as a labor supplier while achieving income growth. Second, there are many labor-intensive jobs in the eastern region, so these opportunities have a significant impact on the health of workers. Providing medical insurance for workers can increase the enthusiasm of workers on both the psychological and physical levels, thus achieving simultaneous increase in corporate profits and workers’ income. In the east, there is a large difference in the impact of the coverage of medical insurance and work injury insurance on changes in workers’ wages. The increasing rate of the medical insurance participation in the eastern region will help increase the income of workers, while the growing rate of the work injury insurance participation will, to a certain extent, lead to a decline in the rate of labor income growth. The reasons for this situation mainly include the differences among the insured population. The main people covered by medical insurance are regular employees of enterprise and public institution, while the people covered by employment injury

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

255

insurance are mainly mobile labor. Because the latter’s bargaining power is relatively limited, most employers tend to ignore the demands of such workers as a condition of providing job opportunities. In this case, there is an alternative relationship rather than a complementary relationship between participating in employment injury insurance and getting job opportunities. The size of labor union’s coverage, that is, the proportion of union members to laborers, has a significant positive effect on the growth of workers’ income in both the east and the middle. This promotion is mainly due to the improvement of the union’s coverage, which protects the basic rights and interests of the workers by improving the bargaining power of the workers, thus raising the work enthusiasm of the workers. The degree of influence in the central region is higher than in the east, which indicates that the coverage of trade unions in the region is smaller than that in the east, so that the mechanism that positively affects the growth of labor income has not yet been fully exerted. The proportion of labor compensation disputes among all workers has not significantly affected the growth rate of workers’ income in the three regions. Municipalities have also not had a significant impact on workers’ income. However, market maturity has a significant positive impact on the growth of labor income. This illustrates the “market is a friend of the poor” once again. A more mature market economy environment provides workers with more opportunities for labor unions and ways to assert their rights, which can ensure the effective realization of income rights. Among the above factors, the degree of market maturity is not only higher, but also more significant and lasting.

4.4.3.4

Regional Influence in Terms of Different Types of Enterprise

In the above analysis, we can see that various factors in state-owned enterprises, collective enterprises, and other enterprises have different effects on the growth of labor income. According to the impact of market maturity on labor income, stateowned enterprises and enterprises with other ownerships can increase the growth rate of labor income. Then, do the factors affecting labor income in these two types of enterprises have typical regional characteristics? Table 4.9 summarizes this. Capital still has a negative impact on the growth rate of labor income, of which the eastern part has the largest impact, reaching −12.2%. The degree of influence in the west is relatively small, at only −0.6%. This is mainly due to the relative lack of capital in the west, and the higher proportion of labor capital in the production process in the east. If capital erodes labor income excessively, it will easily lead to unsustainable production. However, the growth rate of capital stock has no significant effect on labor income in the central region. Among other enterprises, the negative impact of capital on labor income is the same as that of state-owned enterprises in the eastern region. The significance of the negative impact is easier to understand,

256

4 Labor-Capital Relations and Labor Pay

Table 4.9 Regional regression results for different firm characteristics State-owned enterprises

Capital stock growth rate Labor injury insurance participation rate

Other enterprises

East region Central region

West region East region Central region

West region

−0.122*** −0.028

−0.006**

−0.003

(0.041)

(0.033)

(0.003)

0.001

0.104*

(0.017)

(0.058)

Unemployment −0.021 insurance (0.035) participation rate

0.026

0.059

(0.039)

(0.055)

Maternity insurance coverage Old-age insurance participation rate Health insurance coverage Trade union membership as a proportion of employed persons Number of labor remuneration disputes per 10,000 people Growth rate of the market-based index Constant

0.005 (0.030) −0.000 (0.029)

0.008 (0.013) 0.030* (0.016)

−0.000 (0.001)

−0.017 (0.043) −0.043 (0.039)

−0.015 (0.016) 0.061*** (0.020)

−0.002 (0.004)

0.203*** −0.153* (0.078)

0.137*** (0.021)

(0.092)

0.111*** (0.028)

0.337** (0.134)

−0.121 (0.116)

−0.122*** −0.017 (0.039) −0.023 (0.016)

−0.052 (0.033)

0.005 (0.028)

−0.085*

0.019

(0.052)

(0.028)

−0.036 (0.027) 0.043*** (0.009)

−0.002*** (0.001)

0.089*** (0.010)

0.100*** (0.014)

0.027** (0.013) 0.021 (0.015)

(0.049) −0.032 (0.085)

(0.014) 0.217 (0.651)

0.069

0.035

(0.056)

(0.266)

−0.140** −0.250 (0.062) −0.030 (0.057)

0.035 (0.023) 0.074** (0.030)

0.000

0.004

(0.001)

(0.005)

(0.562) 0.013 (0.251)

−0.014 (0.132) 0.019 (0.042)

0.009*** (0.003)

0.014

0.090

0.033

(0.074)

(0.134)

(0.051)

0.115*** (0.020)

0.032

0.072

(0.041)

(0.070)

4.4 The Empirical Test of Labor-Capital Relationship and Labor Wages

257

that is, the control of surplus products by capital has led to a slowdown in the growth of labor income. The two are numerically equal, and more of a coincidence. The coverage of employment injury insurance has a positive significance for workers’ income in state-owned enterprises in the central and western regions. This is mainly because there are a large number of resource-based enterprises and heavy industries in the central and western regions, and the average coverage of employment injury insurance is higher than in the east. There are a large number of mobile labor in the eastern region who are competitive in the labor market and easy to be replaced. Therefore, for low-skilled workers, they tend to be in an unsafe production environment due to the relatively low bargaining power. The requirements of the production environment may make it difficult for such workers to obtain job opportunities, thereby preventing them from increasing their income. The capital in the central region is relatively small, and its dominance over the remaining income is not as great as in the east, which specifically reflected in the limited degree of substitution of capital for labor. In order to realize the profitability of capital, capital owners need to ensure that a certain proportion of the two factors of production, capital and labor is maintained so that capital can replace labor above this ratio. However, once it is lower than this ratio, the replacement of capital by labor will create a situation of labor production layout, preventing capital from obtaining an optimal share of profits. The ratio of labor to capital in the middle is higher than that in the east. There are workers in other enterprises who are more mobile than who in state-owned enterprises, so business owners are less motivated to participate in such insurance for workers, resulting in this item having little significance for the growth of workers’ income. The coverage of endowment insurance in the state-owned enterprises in the western region has a certain negative impact on the growth of labor income. This is mainly because the skills structure of workers in the western region is relatively low, so the growing number of workers participating in endowment insurance increases the burden on enterprises to a certain extent, which affects the actual income of workers. Endowment insurance, as one of the insurance types with a higher participation rate and a greater degree of impact on labor income, has a negative or no impact on their income growth, which requires certain considerations in the construction of harmonious labor-capital relations. The medical insurance participation rate has a positive impact on the income of workers in other enterprises in the eastern region. This result is relatively easy to understand: the market and legal environment in the eastern region are more mature, and workers pay more attention to their health. Therefore, the coverage of medical insurance for employees in the region is higher than that in the central and western regions. The influence of the coverage of medical insurance on labor income is limited in terms of region and degree. On the one hand, because health has potential benefits with investment characteristics, which cannot be directly converted into income, so the importance of labor is still insufficient. On the other hand, workers’ bargaining power in terms of health is relatively weak, and it is difficult to effectively realize their desire of maintaining their own health. Because the economic environment in East China is relatively mature that both the importance of health and the bargaining

258

4 Labor-Capital Relations and Labor Pay

power of workers have advantages over other regions, so it has a positive impact on income improvement. The further maturity of the market has certain influence on the labor income of state-owned enterprises in the three major regions. It can promote the improvement of labor income in the eastern and western regions, but the labor income in the central region will slow down. This situation is mainly due to the differences in the construction of related systems when the market comes to maturity. The improvement of the market itself requires the construction of relevant systems, organizational guarantees and legal norms. Without the common development of these aspects, it will easily cause insufficient marketization or excessive marketization, thereby deviating from the basic requirements of market economy construction. In the central region, such a mechanism with slow labor income growth due to the lagging construction of the system may exist in state-owned enterprises. However, among other companies, the increasing maturity of the market has not led to a significant rise in labor income. This shows that although such enterprises exist in a market economy, their production and distribution processes have not been carried out in full accordance with the basic rules of the market, which resulting in long-term low labor income. The number of labor compensation disputes per 10,000 people has a significant impact on the income of workers in state-owned and non-state-owned enterprises in the western region. The former reduces the level of labor income to a certain extent, and the latter increases the growth rate of labor income to a certain degree. It should be pointed out that, because the entire average income of workers of all types of ownership is used, it is inevitable that this effect may be underestimated.

4.5 Summary This chapter studies the core issue in labor-capital relations by combining the several stage characteristics of the development of the market economy in China, that is, how the wages of workers are determined. We have analyzed in three aspects from the perspective of the market and the government. At the micro level, in the general free market, we have concluded that the actual income share of both employers and employees tends to deviate from the optimal share to a certain extent. In particular, the employers have sufficient incentives to take such actions first. However, with the deepening of the market and the increasing number of enterprises, and the situation in which the original laborers competed to join the enterprise for production changed to a certain extent: During this period, enterprises also began to compete to recruit laborers that are more suitable. As a result, employment opportunities have begun to increase during this period. Along with this, the labor market also began to have two levels of sub-markets. The differences in wages among workers in the two sub-markets will widen within a certain range and degree, due to the differences in skill levels. To a certain extent, this will lead to the division of the labor market, which will lead to an economic

4.5 Summary

259

environment in which multi-vendors and multi-level workers compete. In an environment where the number of enterprises is increasing and the skills of workers are differentiated, the ability of workers to bargain over the share of income is gradually increasing, and at the same time, its heterogeneity is gradually emerging. Some workers pay more attention to the current income situation, due to the rigid consumption caused by habits, expectations, and exogenous shocks, and the difference in the degree of risk aversion. With the introduction of conditions for bargaining power between employers and employees, the extent to which workers’ intertemporal utility changes began to stand out. In the segmented labor market, there is another important fact: Although the labor market is generally risk-averse, the risk aversion coefficient of the high-end labor market is still relatively higher than that of the low-end labor market. This has resulted in workers in low-end labor markets lacking both relevant effective information and the necessary cost-bearing capacity when looking for job opportunities, resulting in poor jobs and lower income. As companies also recognize this and find that the retained wages of workers in low-end labor market are easy to observe, they tend to create an environment that keeps them at a lower level away from the optimal risk aversion coefficient and pay the remuneration according to their retained wage. Workers can only negotiate with employers about their wage to a very limited extent, which has made it easier for workers in low-end markets to be dissatisfied with the current environment. Due to the limited ways of safeguarding rights and the high cost of safeguarding rights, such dissatisfaction of workers is often difficult to resolve effectively, thus forming the basis for expansion of contradictions. The occurrence of mass incidents in recent years has a certain connection with this. At a macro level, under the analysis framework of the CES function, the change mechanism of the total income and structure is analyzed in terms of changes in the replacement rate of the two, with the distinguish between labor and capital technology changes. Under the condition of asymmetric technological changes in labor and capital, there are some differences in the impact of the replacement rate on the growth of total per capita income. In terms of total per capita income, the marginal effects of labor and capital substitution rates on income increase tend to increase first and then decrease, but the marginal contribution is always greater than zero. Therefore, there are optimal levels of labor and capital substitution rates. The optimal levels of labor and capital replacement rates are not unique, but there is an upper bound, due to the difference in the speed of technological progress. In terms of per capita income structure, in the context of technological changes in labor and capital, the impact of labor and capital substitution rates on income changes is asymmetric. If artificial intervention is made on the share of workers’ income in order to achieve social equity and justice, then intervention in the context of capital and technological progress is often more effective than intervention in the context of technological progress. The adjustment of the distribution order is also one of the important aspects. If the distribution order is normative and reasonable, the difference in income will be more attribute to whether the fair rights in income can be effectively realized, differences

260

4 Labor-Capital Relations and Labor Pay

in personal capabilities, and opportunities. Among them, whether the income right can be effectively realized is often more important than the ability of individuals and other factors to affect the fairness and justice of income. The acquisition of income is actually the externalization of income rights in the market process. The most important issue in income acquisition is not the imbalance in the direction of income distribution, but whether the income right can be effectively realized. In other words, whether the income share of micro-subject is gained from realization of its rights. If not, then there is a disorder in income distribution and the structure of rights. Such a right allocation is obviously not conducive to the realization of residents’ desire to improve their income and living standards, and also runs counter to the concept of social equity and justice. Labor-capital relations are embodied in the impact of workers’ income. This chapter conducts an empirical analysis of the factors affecting labor income growth of state-owned enterprises, collective enterprises, and other enterprises from 2001 to 2009. The regression results confirm the many aspects that affect the labor-capital relationship proposed in the first section. At present, the degree of marketization has certain positive significance for the growth of labor income, but there are certain differences due to different ownership systems. The positive impact of the five insurances on workers in other enterprises is still limited, but the widening coverage of labor unions has a significant positive impact on the income of workers in three types of enterprises. The number of labor disputes has affected the income growth of workers to a certain extent. In the long run, the sustainable growth of labor income requires the simultaneous improvement of market institutions and union coverage. In addition, the supporting construction of related systems is also of great significance.

References English References Arrow, K. J., Chenery, H. B., Minhas, B. S., and Solow, R. M., 1961, Capital-labor substitution and economic efficiency, Review of Economics and Statistics, Vol. 43, No. 3. Larry, E. Jones, Rodolfo E. Manuelli, and Peter E. Rossi, 1997, On the optimal taxation of capital income, Journal of Economic Theory, Vol. 73. Robinson, J., 1933, The economics of imperfect competition, London: MacMillan and Co. Roger, F. E. A., 1997, Money in a real business cycle model, Journal of Money, Credit, and Banking, Vol. 29, Part 2.

Chapter 5

Public Power and Income Distribution

In China’s current income distribution system, residents’ work is regarded as the leading factor, with other diversified distribution methods coexisting. Labor, capital, technology, managerial expertise and other production factors are involved in the distribution of income in accordance with their contributions. Obviously, public power is not an indicator to be considered in income distribution. However, it will unavoidably affect the efficiency of resource allocation when government officials use their public power to interfere with income distribution. Thus, changing the distribution pattern of benefits is significant. Therefore, in this chapter, we will analyze the impact of political capital on the income returns of urban residents by analyzing the wages of public officials in China according to survey data on the personal income of urban residents in 2007 and 2009. Accordingly, the influence of political capital on income inequality is analyzed. Finally, the data of relevant statistical yearbooks are used to study the impact of the corruption on the income inequality of Chinese residents.

5.1 The Wages Standards of Civil Servants and Its Changing Trends Civil servants are the main representatives of China’s power class. From the perspective of civil servants’ job levels, they are also an important part of personal political capital. To analyze the return of political capital, we need to understand the current salary standards of civil servants in China and the changing trend of the average salary of civil servants since the reform and opening up.

© Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_5

261

262

5 Public Power and Income Distribution

Table 5.1 Correspondence positions of civil servants and base rate for post pay (Unit: Yuan/month) Position

Levels

Wage standard Leadership positions

Nonleadership positions

Chiefs at the state level

1

4000

Deputies at the state level

2∼4

3200

Chiefs at the provincial and ministerial level

4∼8

2510

Deputies at the provincial and ministerial level

6∼10

1900

Chiefs at the department and bureau level

8∼13

1410

1290

Deputies at the department and bureau level

10∼15

1080

990

Chiefs at the county and section 12∼18 level

830

760

Deputies at the county and section level

14∼20

640

590

Chiefs at the township and subdivision level

16∼22

510

480

Deputies at the township and subdivision level

17∼24

430

410

Staff member

18∼26

380

Officer

19∼ 27

340

5.1.1 The Wages Standards of Civil Servants Since the reform and opening up, the gap between the wages and income of cadres at various levels of state organs in China has been narrowing. From 1985 to 1989, the salary of the top official was 10.2 times the salary of the lowest-ranking staff, and it decreased to 6.1 times in 1993, 5.6 times in 1997, and 6.6 times in 2003.1 According to the Circular Of The State Council on the Reform of the Wage System of Civil Servants (No. 22 [2006] of the State Council), the basic salary of civil servants in our country is composed of two types: official post pay, official class pay, and basic pay and seniority pay. Among them, officials post pay mainly reflects their responsibilities in which one job corresponds to one salary standard, and officials at the same job level with or without leadership positions have different pay rates (see Table 5.1). Official class pay mainly reflects the performance and seniority of civil servants. The classes of civil servants were adjusted from 15 to 27. Each class corresponds to several levels, and each level has several salary levels (see Table 5.2). From Tables 5.1 and 5.2, we can see that the sum of post pay and class pay of civil servants in China (excluding regional allowances), the maximum wage standard is 1

Ma (2008).

3020

2770

2530

2290

2070

1870

1700

1560

1438

1324

1217

1117

1024

938

859

786

719

658

602

551

two

three

four

five

six

seven

eight

nine

ten

eleven

twelve

thirteen

fourteen

fifteen

sixteen

seventeen

eighteen

nineteen

twenty

1

Level

one

Grade

596

651

711

776

847

924

1007

1098

1196

1302

1416

1538

1669

1818

1996

2202

2426

2670

2915

3180

2

641

700

764

833

908

989

1076

1172

1275

1387

1508

1638

1778

1936

2122

2334

2562

2810

3060

3340

3

686

749

817

890

969

1054

1145

1246

1354

1472

1600

1738

1887

2054

2248

2466

2698

2950

3205

3500

4

731

798

870

947

1030

1119

1214

1320

1433

1557

1692

1838

1996

2172

2374

2598

2834

3090

3350

3660

5

776

847

923

1004

1091

1184

1283

1394

1512

1642

1784

1938

2105

2290

2500

2730

2970

3230

3495

3820

6

Table 5.2 Standard of class pay of civil servants (Unit: Yuan/month)

821

896

976

1061

1152

1249

1352

1468

1591

1727

1876

2038

2214

2408

2626

2862

3106

3370

3640

7

866

945

1029

1118

1213

1314

1421

1542

1670

1812

1968

2138

2323

2526

2752

2994

3242

3510

8

911

994

1082

1175

1274

1379

1490

1616

1749

1897

2060

2238

2432

2644

2878

3126

3378

9

956

1043

1135

1232

1335

1444

1559

1690

1828

1982

2152

2338

2541

2762

3004

3258

10

1001

1092

1188

1289

1396

1509

1628

1764

1907

2067

2244

2438

2650

2880

3130

11

1141

1241

1346

1457

1574

1697

1838

1986

2152

12

1294

1403

1518

1639

1766

1912

2065

13

(continued)

1579

1704

1835

1986

14

5.1 The Wages Standards of Civil Servants and Its Changing Trends 263

504

461

422

386

352

320

290

twenty-two

twenty–three

twenty-four

twenty-five

twenty-six

twenty-seven

1

Level

twenty-one

Grade

Table 5.2 (continued)

2

316

347

380

416

455

498

545

342

374

408

446

488

535

586

3

4

368

401

436

476

521

572

627

394

428

464

506

554

609

668

5

6

420

455

492

536

587

646

709

520

566

620

683

750

7

8

596

653

720

791 757

832

9 873

10

11

12

13

14

264 5 Public Power and Income Distribution

5.1 The Wages Standards of Civil Servants and Its Changing Trends

265

7820 yuan, the minimum wage standard is 630 yuan, and the maximum wage standard is 12.4 times the minimum wage. Compared to the ratio in 2003, it has increased significantly, indicating that the salary gap between civil servants at different levels has widened.

5.1.2 The Changing Trends of the Wages of Civil Servants Table 5.3 reports civil servants’ total salaries, average wages, and ranking of average wages among industries in China from 1978 to 2010. Table 5.3 shows that the total salary and the average salary of civil servants increased significantly from 1978 to 2010. However, the average salary of civil servants is slightly higher than the average salary of employees in various industries, ranking behind most of them. From 1978 to 1996, the ratio of average civil servants’ wages to per capita GDP decreased first and rose later. However, the total amount of civil servants’ wages in the total wages of urban employees in the country is increasing, and the proportion of GDP is also rising. Since the reform and opening-up, the number of civil servants2 in China has been increasing, rising from 4.3 million in 1978 to 14.285 million in 2010, an increase of 9.985 million. The number of civil servants as a proportion of the national workforce rose from 4.53 percent in 1978 to 10.94 percent in 2010, an increase of 6.41 percentage points (see Fig. 5.1). The per capita salary of civil servants rose from 655 yuan in 1978 to 38,242 yuan in 2010. During the period 1978–2010, the average salary of civil servants was approximately 1.05 times that of urban employees in the country, with little change. At the same time, the per capita salary of civil servants was 1.72 times the national per capita GDP in 1978. It has experienced the tendency of declining to 1.08 times the lowest point in 1996-then gradually increasing to 1.49 times in 2002-then slowly decreasing to 1.28 times in 2010 (see Fig. 5.2).

2

For the purpose of this article, we consider those who worked in State organs, party and government organs and public organizations before 2003, and those who worked in public administration and public organizations from 2003 onward, to be civil servants.

27.0

30.5

37.9

40.9

45.8

53.6

62.6

78.7

101.5

116.0

140.4

163.3

192.9

217.5

272.3

357.7

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

3505

2768

2275

2113

1874

1707

1468

1356

1127

989

923

821

815

800

684

655

Total salary Average salary of civil servant of civil servant (yuan) (100 million yuan)

1978

Year

10

11

11

11

12

13

7

7

9

7

5

8

7

7

7

7

Ranking of civil servants’ per capita wages in the industry (yuan)

1.04

1.02

0.97

0.99

0.97

0.98

1.01

1.02

0.98

1.02

1.12

1.03

1.06

1.05

1.02

1.07

Average salary of civil servants/average salary of urban employees nationwide (times)

Table 5.3 Trends in the salary of civil servants from 1978 to 2010

1.17

1.20

1.20

1.29

1.23

1.25

1.32

1.41

1.31

1.42

1.58

1.56

1.66

1.73

1.63

1.72

Average salary of civil servant /GDP per capita (times)

7.28

6.91

6.54

6.54

6.24

6.06

6.17

6.12

5.69

5.52

5.74

5.19

4.99

4.91

4.72

4.75

1.01

1.01

1.00

1.03

0.96

0.93

0.96

0.99

0.87

0.87

0.90

0.86

0.84

0.83

0.75

0.74

Total salary Total salary of civil servant/proportion of civil servant of total urban wages in the /GDP (%) country (%)

6.94

6.73

6.71

6.61

6.44

6.19

6.09

6.01

5.81

5.63

5.13

5.11

4.75

4.69

4.70

4.53

(continued)

Number of civil servants/Number of urban employees in the country (%)

266 5 Public Power and Income Distribution

15,355

17,372

20,234

22,546

27,731

32,296

35,326

38,242

2004 2072.7

2005 2489.6

2006 2839.7

2007 3553.8

2008 4276.0

2009 4896.8

2010 5428.8

11

9

7

9

10

11

10

10

7

7

8

8

9

9

10

11

9

Ranking of civil servants’ per capita wages in the industry (yuan)

1.05

1.10

1.12

1.12

1.08

1.11

1.09

1.10

1.13

1.12

1.07

1.08

1.04

1.08

1.02

1.00

1.09

Average salary of civil servants/average salary of urban employees nationwide (times)

1.28

1.38

1.36

1.37

1.37

1.43

1.41

1.46

1.49

1.41

1.28

1.25

1.14

1.09

1.08

1.10

1.23

Average salary of civil servant /GDP per capita (times)

11.48

12.15

12.12

12.06

11.70

12.07

11.77

11.66

11.20

11.14

10.23

9.83

8.99

7.91

7.40

6.91

7.51

1.35

1.44

1.36

1.34

1.31

1.35

1.30

1.32

1.22

1.20

1.10

1.08

0.99

0.94

0.94

0.92

1.04

Total salary Total salary of civil servant/proportion of civil servant of total urban wages in the /GDP (%) country (%)

Source Calculations based on the China Statistical Yearbook 2003 and China Statistical Yearbook 2011

13,975

8978

2003 1787.6

971.0

1999

7773

2002 1474.0

835.4

1998

6981

6340

12,142

744.0

1997

2001 1317.7

672.1

1996

5526

4962

10,043

559.5

2000 1090.4

500.2

1995

Total salary Average salary of civil servant of civil servant (yuan) (100 million yuan)

1994

Year

Table 5.3 (continued)

10.94

11.09

10.95

10.74

10.80

10.88

10.80

10.67

10.00

10.08

9.69

9.24

8.79

7.36

7.24

6.89

6.85

Number of civil servants/Number of urban employees in the country (%)

5.1 The Wages Standards of Civil Servants and Its Changing Trends 267

268

5 Public Power and Income Distribution

Fig. 5.1 The tendency of the proportion of the total wage of civil servants to that of national urban workers and to GDP

Fig. 5.2 The tendency of the proportion of the average wage of civil servants to that of national urban workers and to GDP per capita

5.1 The Wages Standards of Civil Servants and Its Changing Trends

269

Fig. 5.3 Industry ranking of the average wage of civil servants in 1978–2010

Fig. 5.4 The changing trend of the number of corruption cases

Finally, we analyze the industry ranking of civil servants’ per capita wages.3 As shown in Fig. 5.3, the average salary level of civil servants ranked 7th among 16 3

Prior to 2003, China’s industries were divided into as follows: agriculture, forestry, animal husbandry, fishing, extractive industries, manufacturing, electricity, gas and water production and supply, construction, geological exploration, water conservancy management, transportation, storage and post and telecommunications industry, wholesale and retail trade and catering industry, finance, insurance industry, real estate industry, social service industry, health sports and social welfare industry, education, culture and arts, radio, film and television industry, scientific research and comprehensive technical service industry, state agencies, Party organizations and social organizations, and other 16 industries. After 2002, China’s industries are divided into as follows: manufacturing, power, gas and water production and supply, construction, transportation, storage and post, information transmission, computer services and software, wholesale and retail, and accommodation, catering, finance, real estate, leasing and business services, scientific research, technical services and geological surveys, water conservancy, environment and public facilities management, residential services and other services, education, health, social security and society welfare, culture, sports and entertainment industry, public management and social organization in 19 industries.

270

5 Public Power and Income Distribution

industries in 1978. The top year was 1983, when it was ranked 5th, and the bad year was 1988, when it dropped to 13th. It subsequently ranked higher every year, ranking 7th in 2002. During the period 2003–2010, the ranking of the average salary of civil servants fluctuated from 7 to 11th among the 19 industries. Through the above analysis, we found that although the number of civil servants and the proportion of civil servants to the number of employees, the proportion of total civil servants’ wages to that of employees and to the GDP rose, and the average wage level of civil servants was slightly higher than that of industries across the country during 1978–2010. However, the ranking of the average wage level of civil servants in China generally belongs to the middle position by comparing the average wages of various industries. Due to the low nominal wages of civil servants and the small wage gap between civil servants at different levels, it fails to fully reflect the capabilities, roles and contributions of civil servants at all levels. In addition, the average wages of civil servants do not have obvious advantages among various industries, which may lead to some undesirable consequences. In fact, the recruitment of civil servants across the country is very popular. Even in some places and departments, fraudulent behaviors have appeared. From the perspective of rational people, this shows that nominal wage income is only a part of the total income of civil servants, even a small portion. What is more serious is that some civil servants are using their administrative power to participate in income distribution, such as monopolizing certain factor resources, making rent-setting and rent-seeking behaviors, and obtaining much informal income through various channels, thereby distorting income distribution and widening the income gap. In addition, this is the root cause of corruption. We will analyze political capital’s income return and its contribution to income inequality and the distortion of income distribution by power corruption in the next two sections. We will use the data of urban residents’ income survey and relevant public information for analysis.

5.2 Political Capital and Income Distribution In previous research, we found that research on the question of market transition theory focused on testing the proposition of depreciation of political capital, which led to different views and conclusions but did not analyze the contribution of political capital to income inequality. For the decomposed research on the contribution of different factors to income inequality, although some studies have considered the factor of party membership, most of them have not considered the contribution of cadre status to urban residents’ income inequality. In addition, we also want to examine the tendency of political capital income returns in different periods of the economic cycle, which has not attracted enough attention in previous research. Generally, the government adopts macro-control policies that counter the economic cycle to stabilize the economy. In 2007, China’s economic growth was rapid, and inflationary pressures increased. With the outbreak of the global economic crisis in

5.2 Political Capital and Income Distribution

271

2008, China’s economy showed a downward trend. During this period, the GDP growth rate dropped from 14.2% in 2007 to 9.1% in 2009.4 The government took a series of targeted measures to stabilize the economy. We believe that government power and individual power will also tighten or expand accordingly in the process of regulating the economic cycle. As an important indicator of political capital, the tightening or expansion of personal power must also be reflected in its income return; that is, the return of political capital also changes against the economic cycle. Therefore, in this book, we hope to obtain meaningful findings by using microsurvey data from 2007 and 2009 to analyze the performance of political capital’s income returns at different stages of the economic cycle.

5.2.1 Data Source and Variable Description 5.2.1.1

Data Source

Our data come from the sample surveys of the personal income of urban residents nationwide in 2007 and 2009 in the summer of 2008 and early 2010 by the research group of the Ministry of Education’s Research on Regulating Income Distribution Order. The survey objects include individuals from different regions of the city, different industries, and different work units. We finally obtained 2947 and 3696 valid samples in 2007 and 2009, respectively, by removing samples in which personal information was incomplete, income was not answered, or obviously did not meet the actual low or high income. The income statistics of different groups of people are shown in Table 5.4. The results in Table 5.4 show that China’s urban per capita income increased from 38,039 yuan in 2007 to 46,182 yuan in 2009, an increase of 21%. We also found that the per capita income of party members increased from 44,494 yuan in 2007 to 56,102 yuan in 2009, an increase of 26%. During the same period, the per capita income of nonparty members was 33,673 yuan in 2007 and 39,915 yuan in 2009, an increase of 19%. The per capita income of cadres increased from 45,679 yuan in 2007 to 66,348 yuan in 2009, an increase of 45%. During the same period, the per capita income of non-cadres was 33,267 in 2007 and 38,784 yuan in 2009, an increase of 17%. Through comparison, we also found that the income ratio of party members and nonparty members rose from 1.3 times in 2007 to 1.4 times in 2009, while the income ratio between cadres and non-cadres rose from 1.4 times in 2007 to 1.7 times in 2009. From these comparison results, we know that the income of party members and cadres and the rate of income growth are higher than those of nonparty members and ordinary employees. Political capital factors have led to a greater income gap between party members and nonparty members and between cadres and ordinary employees. 4

The GDP growth rate is calculated using 1978 as the base year. The data comes from the China Statistical Yearbook 2010.

272

5 Public Power and Income Distribution

Table 5.4 Summary sheet of urban residents’ income classification in 2007 and 2009 Type

All information Education: ≤ primary school

2007

2009

samples (%)

Per capita samples (%) income (yuan)

Per capita income (yuan)

2947

38,038.78 3696

46,182.14

64

100

2.17 33,057.88

51

100

1.38 22,063.67

Junior high school

291

9.87 28,150.99

379

10.25 31,923.83

High/vocational/polytechnic school

728

24.70 32,696.23

977

26.43 36,801.21

Junior 1864 college/undergraduate/postgraduate

63.25 41,840.02 2289

61.93 53,084.34

Political status: Party member

1189

40.35 44,493.88 1431

38.72 56,101.91

Nonparty member

1758

59.65 33,672.96 2265

61.28 39,914.95

Duty: Cadrea

1133

38.45 45,678.65

992

26.84 66,348.01

Noncardre

1814

61.55 33,267.02 2704

73.16 38,784.01

Industry: Monopoly indusrtyb Competitive industry Sector: Party and government organs Public institutions

260 2687 536 1092

462

12.50 59,135.08

91.18 35,891.46 3234

8.82 60,230.52

87.50 44,331.72

18.19 40,291.82

506

13.69 51,409.44

37.05 35,219.01 1081

29.25 42,153.97

14.90 48,692.03

16.91 54,624.62

State-owned enterprisec

439

Collectively owned enterprise

102

180

4.87 33,388.56

Private or mixed sectord

778

26.40 36,112.53 1304

35.28 45,212.62

Gender: Male

1613

54.73 42,102.25 1996

54.00 53,002.61

Female

1334

45.27 33,125.45 1700

46.00 38,174.11

770

26.13 44,224.18 1076

29.11 52,793.52

2177

73.87 35,851.02 2620

70.89 43,466.94

Region: Coastal regione Inland

3.46 25,229

625

Note a : All positions held at the subsection level or above and leadership positions held by an enterprise unit are defined as cadres b: Monopoly industries refer to industries such as power, telecommunications, postal services, water and electricity supply departments, railways, civil aviation, petroleum and petrochemicals, natural gas, tobacco, finance, insurance, and salt monopoly. In addition, other industries are competitive industries c : State-owned enterprises include central SOEs and local SOEs d : The private or mixed sector includes private enterprises, self-employed persons, individual enterprises, foreign enterprises, joint ventures and other enterprises e : Coastal areas include Beijing, Shanghai, Tianjin, Liaoning, Hebei, Shandong, Jiangsu, Zhejiang, Fujian, Guangdong, Hainan and Guangxi. Other provinces are inland areas

5.2 Political Capital and Income Distribution

273

We also found that the higher the education level, the higher the income in the two years of 2007 and 2009. Men’s income was higher than women’s. Coastal areas had higher incomes than inland areas. Monopoly industries had higher incomes than competitive industries. There are also large differences in income of different economic sectors, of which state-owned enterprises have the highest income, followed by party and government agencies, public institutions, private or mixed sectors, and collective enterprises have the lowest income. Based on the samples obtained, we calculated the Gini coefficients of urban residents’ income in 2007 and 2009 to be 0.424 and 0.479, respectively, which increased by 5.4 percentage points in the two years. During this period, 10% of the richest urban population accounted for 35.7% of the total urban income share in 2007, while 10% of the poorest population only accounted for 2.6% of the total income share. In 2009, 10% of the richest income accounted for 28.2% of the total income, while 10% of the poorest income accounted for 2.2% of the total income. Comparing the income of the richest and poorest people in the same proportion, the average income of the 10% of the richest during this two-year period was almost 13 times that of the 10% of the poorest.

5.2.1.2

Variables Description

The income of urban residents is composed of 11 sources, including wages, bonuses, operating income, investment income, property income, secondary occupation income, endowment income, transfer income, gift income, inheritance income and other income. Because the pattern of Chinese residents’ income distribution is the result of a combination of factors, we follow the existing research to analyze the influence of political capital on the income of urban residents. In the quantitative analysis, we controlled factors such as education, gender, age, region, industry, and the nature of the work unit. Table 5.5 shows the meaning of each variable and descriptive statistical results. Because the measurement of political capital has not formed a consensus measure and there is a close link between political capital and human capital, it is necessary to further explain the measurement of these two variables in this chapter. In our survey data, survey respondents with positions at the subdivision level and above were identified as holding leadership positions. Therefore, we measure the political capital of individuals by using the two indicators of Communist Party membership and leadership positions. Human capital is a concentrated expression of indicators such as education level, work experience, health status, and occupational mobility, which are involved in the determination of personal income to varying degrees. As the most important human capital, education is playing an increasingly important role in determining personal income. Therefore, we use the years of education to measure individual human capital.

274

5 Public Power and Income Distribution

Table 5.5 Variable meanings and descriptive statistics Variables

2007

2009

Observed value

Mean value

Standard deviation

Observed value

Mean value

Standard deviation

Logarithm of income: LnY

2947

10.24

0.70

3696

10.35

0.79

Gender: male gender = 1

2947

0.55

0.50

3696

0.54

0.50

Age: age

2947

38.21

9.27

3696

39.07

9.39

Age2 /100: age2 2947

15.46

7.18

3696

16.15

7.37

Years of 2947 education: educ

13.94

2.79

3696

13.94

2.79

Political status: 2947 party = 1

0.40

0.49

3696

0.39

0.49

Duty: cadre = 1

2947

0.38

0.49

3696

0.27

0.44

Industry: monopoly = 1

2947

0.09

0.28

3696

0.13

0.33

Region: coast =1

2947

0.26

0.44

3696

0.29

0.45

Unit: Party and government organs sect1 = 1

2947

0.18

0.39

3696

0.14

0.34

Public institutions sect2 = 1

2947

0.37

0.48

3696

0.29

0.45

State-owned 2947 enterprise sect3 =1

0.15

0.36

3696

0.17

0.37

Collectively 2947 owned enterprise sect4 =1

0.03

0.18

3696

0.05

0.22

Private or mixed sectosect5 = 1

0.26

0.44

3696

0.35

0.48

2947

5.2.2 Analysis Methods and Empirical Results 5.2.2.1

Analysis Methods

Based on the Mincer (1974) equation, we build a logarithmic linear equation, as shown in (5.1), to analyze the impact of political capital on income returns:

5.2 Political Capital and Income Distribution

LnYi = β0 + β1 par t yi + β2 cadr ei + β3 X i + εi

275

(5.1)

In Eq. (5.1), LnY is both the logarithm of total income and the independent variable. The main explanatory variables are party membership and cadre variables, which represent political capital. X is a set of control variables, including education level, gender, age, age squared, industry, region, work unit, and other factors. The meaning of each variable is described in Table 5.5. ε is a random error term.

5.2.2.2

Empirical Results

Based on Eq. (5.1), we analyze the impact of political capital on the income of urban residents in various regions of the country and further analyze the impact of political capital on the income of monopoly and nonmonopoly industries and coastal and inland regions.

The Impact of Political Capital on the Income of Urban Residents Across the Country Table 5.6 reports the regression results of the influence of political capital on the income of urban residents nationwide, which show that the regression coefficients of all variables are statistically significant at the 1 or 5% level and are in line with theoretical expectations. With other relevant conditions unchanged, the results of Model I in Table 5.6 show that the income of party members was 12.3 and 4.7% higher than that of nonparty members in 2007 and 2009, respectively, which means that there is a certain income gap between party members and nonparty members, and there is a slight downward trend. The income advantage of cadres increased from 14.5% in 2007 to 38.6% in 2009, which shows that there is a large income gap between cadres and general employees, and this income gap is constantly expanding. An increase in the level of education will make the return on personal income increase from 5.4% in 2007 to 7% in 2009. The monopoly industry had a 31.1% income advantage over the competitive industry in 2007 and a 24.7% advantage in 2009. Although the monopoly industry’s revenue advantage declined in 2009, the income gap between industries is still large. The results of regional factors show that the income of coastal areas was 16% higher than that of inland areas in 2007 and 18.6% higher by 2009, which means that the regional income gap is widening. Men’s income was 15.1% higher than women’s in 2007 and 18.8% higher by 2009, which shows that there is a large gap in income between men and women, and this gap is gradually increasing. Age has a significant positive effect on income, and income shows a decreasing trend toward the margins with the growth of age (the regression coefficient of age square is significantly negative at the 1 or 5% level). We introduce the employment unit on the basis of Model I to obtain a more robust estimation. The regression results are shown in Model II in Table 5.6. We found that

0.16

45.33*** 0.18

3696

8.371

45.09***

Note *, **, *** represent the statistical significance levels of 10, 5, and 1%, respectively

R2

8.233

2947

0.17

2947

7.822

observed value

constant term

0.135

0.255

0.358

6.56***

6.17***

sect5

0.171

0.221

0.144

0.306

5.5***

6.46***

10.99***

0.121

0.055

0.209

0.149

coast

0.326

1.68*

14.51***

sect3

0.270

monopoly

5.3***

0.046

0.068

−0.046

0.049

0.126

sect2

0.135

cadre

4.39***

−2.22**

3.32***

7.13***

0.281

0.116

party

−0.025

0.030

0.172

sect1

0.052

educ

11.63***

−3.42***

−0.040

age2/100

4.76***

0.044

age

5.83***

0.141

gender

Regression coefficient

Regression coefficient

T Statistical value

Regression coefficient

2007

T Statistical value

Model II 2007

2009

Model I

Table 5.6 The impact of political capital on the income of urban residents across the country

40.13***

5.30***

4.27***

3.15***

3.98***

4.97***

5.73***

5.54***

4.42***

12.03***

−3.86***

5.30***

5.23***

T Statistical value

0.19

3696

8.082

0.255

0.228

0.121

0.098

0.161

0.196

0.346

0.073

0.072

−0.027

0.032

0.167

Regression coefficient

2009

41.75***

4.50***

3.70***

2.06**

1.52

6.21***

5.07***

11.46***

2.56**

14.96***

−2.41**

3.58***

6.92***

T Statistical value

276 5 Public Power and Income Distribution

5.2 Political Capital and Income Distribution

277

in 2007 and 2009, the income advantage of party members was 12.86 and 7.57% and that of cadres was 15.49 and 41.34%, respectively. Although there is a certain difference in value from the previous estimations, the trend has not changed, that is, the income return of party members is decreasing, while that of cadres is increasing. The results of Model 4 in Table 5.6 also show that compared with collective enterprises, the revenue advantages of party and government agencies, public institutions, state-owned enterprises, and the private sector were 32.5, 23.2, 35.8, and 43.1% in 2007, and there was no significant income advantage for party and government agencies and collective enterprises by 2009; however, the revenues of public institutions, state-owned enterprises, and the private sector were 12.9, 25.6, and 29.1% higher than that of collective enterprises, which shows that there is a large income gap that is narrowing. Generally, the work unit can determine the status and benefits of individuals to a certain extent.

The Impact of Political Capital on Industry Income The industrial division in different industries, the interests protection of monopoly industries, and resource advantages in the monopoly sector whose monopoly income and profits can easily be converted into the income and benefits of employees in the industry make the wage, benefits and work stability of monopoly industries higher than in competitive industries, leading to widening income gaps (Knight and Li, 2005). To analyze the influence of political capital on the income of different industries, we divide the employment unit into monopoly industry and non-monopoly industry. Table 5.7 reports the influence of political capital and other factors on the income of monopoly and non-monopoly industries. We find in Table 5.7 that in the monopoly industry, the income advantage of party members was not significant in 2007, but the income of party members was 16.8% higher than that of nonparty members in 2009. Compared with ordinary employees, the income advantage of cadres rose from 34.2% in 2007 to 58.6% in 2009; the return on education income fell from 10.3% in 2007 to 7.4% in 2009. In competitive industries, the income of party members was 12% higher than that of nonparty members in 2007; the income advantage of cadres increased from 13% in 2007 to 36% in 2009. An increase in the level of education will make the return on personal income increase from 5% in 2007 to 7% in 2009, an increase of 2 percentage points. In addition, regional factors have no significant impact on income in monopoly industries. However, compared with inland regions, the income advantage of coastal areas has increased from 15.3% in 2007 to 20.4% in 2009 in competitive industries, which means a 5 percentage increase, showing that China’s regional income gap is expanding in non-monopoly industries. The above analysis shows that, whether in monopoly or competitive industries, the income of party members and cadres is higher than that of nonparty members and general employees, and the higher the education level is, the higher the income will be.

0.098

0.145

0.294

0.159

7.304

260

0.23

educ

party

cadre

coast

constant term

observed value

R2

10.01***

1.51

2.82***

1.39

4.95***

−1.51

0.21

462

8.718

0.079

0.461

0.155

0.071

−0.022

15.37***

1.20

6.01***

2.12**

4.61***

−0.61

0.93

Note *, **, *** represent statistical significance levels of 5 and 1%, respectively

−0.074

age2

1.77*

2.76*** 0.025

-0.12

0.066

age

−0.008

0.274

gender

0.14

2687

8.351

0.142

0.122

0.113

0.049

−0.035

0.040

0.130

44.75***

5.07***

4.64***

4.15***

10.77***

−2.92***

4.25***

5.26***

T Statistical value

Regression coefficient

Regression coefficient

Regression coefficient

2007 T Statistical value

2009

2007

T Statistical value

Non-monopoly industry

Monopoly industry

Table 5.7 The impact of political capital on industry income

0.17

3234

8.359

0.186

0.307

0.031

0.068

−0.026

0.030

0.199

Regression coefficient

2009

42.48***

6.58***

9.54***

1.03

13.77***

−2.11**

3.17***

7.67***

T Statistical value

278 5 Public Power and Income Distribution

5.2 Political Capital and Income Distribution

279

The Impact of Political Capital on Regional Income For a long time, China has been seeing uneven economic development in various regions, and factors such as systems and policies have greatly widened the income gap between regions. To analyze the impact of political capital on income in different regions, we divided the national sample based on coastal and inland regions, and the regression results are shown in Table 5.8. The results in Table 5.8 show that in coastal areas, the influence of party membership on income is not significant, and the income advantage of cadres has increased from 10% in 2007 to 51.9% in 2009; each level of education rise will make the return on personal income increase from 5.4% in 2007 to 9.6% in 2009. Compared with competitive industries, the revenue advantage of monopoly industries decreased from 36.3% in 2007 to 21.5% in 2009. There is a large income gap between sectors, and compared with collective enterprises, the revenue advantages of party and government agencies, public institutions, state-owned enterprises, and the private sector were 65, 62.3, 106.3, and 73.3%, respectively, in 2007, while the income gap between these sectors and collective enterprises was not distinguished in 2009. In the inland areas, party members’ income was 18.8 and 11.9% higher than nonparty members in 2007 and 2009, respectively, which represents a decrease of 7 percentage points compared with 2007. Cadre’s income advantage over ordinary employees increased from 18.3% in 2007 to 37.3% in 2009; the return on education income increased from 5.6% in 2007 to 6.6% in 2009, an increase of only 1 percentage point; the revenue advantage of monopoly industries over competitive industries fell from 30.6% in 2007 to 22.9% in 2009; the income of party and government agencies, institutions, state-owned enterprises and the private sector were significantly higher than that of collective enterprises from 2007 to 2009, among which the income advantage of party and government agencies, institutions, state-owned enterprises and the private sector was 27.3, 15, 20.1, and 36.8% higher than that of collective enterprises in 2007. In 2009, party and government agencies had less significant income advantages than collective enterprises, and compared with 2007, the income advantage of institutions and private sectors was 15.1 and 36.9%, respectively, which remained almost unchanged. State-owned enterprises’ income is 38.1% higher than that of collective enterprises, an increase of 18 percentage points from 2007. The empirical results of the influence of political capital factors on income returns show that although the income of party members has declined, the income of cadres has increased dramatically from 2007 to 2009 according to the sample of cities and the subsamples of different industries and different regions. It must be believed that the possible reason behind this is that the government adopted a series of expansionary policies and measures in response to the economic crisis after the outbreak of the world economic crisis in 2008. The strengthening of the government role naturally expanded the power factor accordingly, of which one of the manifestations was the significant increase in income of cadres.

sect3

21.05***

3.64***

4.53***

3.17***

3.16***

3.79***

1.69*

−0.81

5.42***

−1.42

2.17**

2.13**

0.23

1076

8.089

22.13***

0.68

0.28

−0.036 0.081

0.45

0.28

3.10***

7.63***

0.14

10.12***

1.23

1.91*

4.41***

0.055

0.037

0.195

0.418

−0.008

0.092

−0.026

0.031

0.197

Note *, **, *** represent statistical significance levels of 5 and 1%, respectively

0.16

0.724

sect2

R2

0.484

sect1

770

0.501

monopoly

观测值

0.310

cadre

0.550

0.099

party

7.982

−0.048

educ

常数项

0.053

age2/100

sect5

0.040

−0.033

age

0.106

gender

0.18

2177

7.723

0.313

0.183

0.140

0.241

0.267

0.168

0.172

0.054

−0.055

0.056

0.129

Regression coefficient

2007

Regression coefficient

T Statistical value

Regression coefficient

2007

T Statistical value

Inland region 2009

Coastal region

Table 5.8 The impact of political capital on regional income

33.81***

4.19***

2.29**

1.92*

3.08***

4.96***

5.80***

5.58***

10.55***

−4.02***

5.23***

4.72***

T Statistical value

0.17

2620

8.151

0.314

0.323

0.141

0.109

0.206

0.317

0.112

0.064

−0.028

0.032

0.159

Regression coefficient

2009

35.68***

4.88***

4.60***

2.12**

1.47

4.19***

8.75***

3.32***

11.33***

−2.04**

2.99***

5.53***

T Statistical value

280 5 Public Power and Income Distribution

5.2 Political Capital and Income Distribution

281

5.2.3 Impact of Political Capital on Income Inequality We have previously analyzed the impact of political capital on income through regression methods, which do not explain the contribution of political capital to income inequality. Therefore, we use regression-based inequality decomposition to analyze the contribution of political capital to income inequality. Our analysis process is divided into two steps: (i) identifying the influence of political capital and other factors on personal income through regression methods and (ii) determining the proportion of all factors in the income gap. Let income determining equation be (5.2): LnYit = αit Z it

(5.2)

In which, αit = [αt βit β2t ...β J t 1], Z it = [1 xi1t xi2t ...xi J t εit ]。 LnYit represents the logarithm of the i-th person’s income in year t, and Z it indicates the various factors that influence the i-th person’s income in year t, such as party membership, leadership positions, years of education, etc. αit stands for the rate of return corresponding to factors that decide income. Next, we calculate the contribution of each factor to total income inequality or determine income inequality according to income source. We apply the additive and decomposable theory proposed by Shorrocks (1982) to (5.2) so that the contribution of each income to the inequality of total income can be calculated, namely, s j (LnY ) = cov(a j Z j , LnY )/σ 2 (LnY ) = a j σ (Z j )corr (Z j , LnY )/σ (LnY )

(5.3)

Here, s j (ln Y ) is the absolute contribution of the jth factor to the overall income inequality indicator.5 To obtain the contribution of various factors to the change in income inequality within a certain time interval, we follow the practice of Fields and Yoo (2000) to further calculate the role played by the jth factor in the process of income inequality change, that is:  j (I (.)) =

s j,2 ∗ I (.)2 − s j,1 ∗ I (.)1 I (.)2 − I (.)1

(5.4)

And it meets the following formula:  j

5

  j (I (.)) =

j

[s j,2 ∗ I (.)2 − s j,1 ∗ I (.)1 ] I (.)2 − I (.)1

= 100%

Here we use the logarithm of income to measure inequality, such as Gini coefficient, generalized entropy index, Atkinson index, etc.

282

5 Public Power and Income Distribution

Here, the subscripts 1 and 2 represent different periods, respectively, while I (.) indicates the index of income inequality and  j (I (.)) is the jth factor’s contribution to the change of income inequality. In the following analysis, we use the Gini coefficient as a measure of income inequality and analyze the contribution of political capital factors to income inequality from static and dynamic perspectives. Table 5.9 reports the regression decomposition results based on (4.2) for urban residents’ income in 2007 and 2009. Columns (i) and (iv) show the regression coefficients for each factor, which all have the expected signs. Columns (iii) and (vi) report the results of static decomposition, and (vii) are the results of dynamic decomposition. The results of static decomposition show that there is a small contribution of party membership to income inequality, which is 1.88 and 1% in 2007 and 2009, respectively, and its role is declining; the contribution of cadre status to income Table 5.9 Regression analysis results of the contribution of political capital factors to income inequality explanatory 2007 2009  j (I (.)) variable Regression T s j (LnY ) Regression T s j (LnY ) coefficient Statistical coefficient Statistical value value (i)

(ii)

(iii)

(iv)

gender

0.123

5.09***

1.32

0.166

age

0.014

10.17***

3.07

0.011

educ

0.055

12.20***

5.51

0.072

party

0.121

4.39***

1.88

0.074

(V) 6.85***

(VI)

(VII)

1.76

5.15

7.88***

1.63

−9.47

15.01***

6.95

18.05

2.58***

1.00

−5.78

cadre

0.143

5.51***

1.83

0.349

11.56***

5.79

36.32

monopoly

0.253

5.66***

1.48

0.197

5.10***

1.06

−2.18

coast

0.124

4.60***

0.71

0.160

6.14***

1.03

3.50

sect1

0.291

4.12***

1.86

0.096

1.48

0.38

−11.03

sect2

0.213

3.20***

−0.78

0.118

2.01**

0.03

6.27

sect3

0.310

4.32***

1.28

0.226

3.66***

0.85

−2.46

sect5

0.348

5.14***

−1.45

0.251

4.42***

−1.33

−0.40

constant term

8.452

79.36***

8.473

80.16*** 80.86

62.05

residue Observed value

83.30 2947

3696

R2

0.17

0.19

Gini(Y)

0.424

0.479

Note *, **, *** represent statistical significance levels of 5 and 1%, respectively. The meaning of each variable term is the same as that in Table 5.5

5.3 Power Corruption and Income Distribution

283

inequality rose from 1.83% in 2007 to 5.79% in 2009, showing an upward trend. The contribution of years of education to income inequality was 5.51% in 2007 and 5.79% in 2009, indicating that the role of education in income inequality is rising. Other factors, such as gender, age, industry, and region, also contribute little to income inequality, which is within 3%. The private sector’s contribution to income inequality has been negative during these two years, but it has played a role in reducing the income gap even though it is small. The results of dynamic decomposition show that from 2007 to 2009, the contribution of cadre status to changes in income inequality was 36.32%, and the contribution of education level was 18.05. 6.27, 5.15, and 3.50%, which shows that these factors’ contribution to changes in income inequality is expanding, especially the contribution of cadre status to changes in income inequality has reached more than 1/3, while factors like party and government agencies, age, party membership, stateowned enterprises, monopoly sectors, and the private sector all contribute negatively to changes in income inequality, indicating that the contribution of these factors to changes in income inequality is shrinking.

5.3 Power Corruption and Income Distribution 5.3.1 Power and Power Corruption 5.3.1.1

Public Power and Public Resources

Showing as a special social relationship of human society, power refers to the force whose holder influences, dominates and controls the thoughts and behaviors of others through various resources and power at his disposal.6 Public power refers to the various powers that voters give to the government by means of voting by election, including decision-making power, management power, law enforcement power and the specific powers derived from them in actual operation, such as approval power and penalty power.7 The government must hold some power to keep the state operating smoothly by maintaining public order and social stability and managing and regulating socioeconomic life. The government must also disassemble and delegate the powers to different departments and public officials, who then deal with public affairs, perform public functions, and achieve the goal of public management. During this process, the public power possessed by different departments and public officials is then formed. Moreover, the government must also control some economic and social resources to realize the macro-control of the economy by regulating supply and demand and balancing the relations between different interests while fulfilling public functions 6 7

Hao (2011). Cheng (2011).

284

5 Public Power and Income Distribution

and realizing the goal of public management. In other words, the power and control of resources are needed for the governance of the States. In China, public power includes the decision-making power held by the leaders of the Party and government at all levels and the routine executive power held by managers at all levels. Public resources consist of physical resources (such as land, public works, etc.) and social resources (such as administrative approval, etc.), which are both scarce. This will lead to a shortage of resource supply and competition for scarce resources due to scarcity, which will lead to the contradiction between supply and demand. Therefore, scarce public resources are of great value to those in need whether in the double-track price system in the initial stage of the reform and opening up or in the transition from the planned economy to market economy. Moreover, with the development of the economy and constant adjustment of public policy, the relative price of scarce resources rises further with the increase of scarcity to a certain extent. However, the price is still low in terms of the market, although it is rising in the system, for which demanders will undoubtedly benefit greatly if they can obtain scarce resources whose price is lower than that in the market by some means.

5.3.1.2

Power Corruption

Power corruption is the act of public officials who abuse their public power for private interests, which is the most serious corruption in China. The subject of power corruption is public officials, which mainly refer to staff members assuming leadership positions at all levels of the Party, the State and other public institutions, leading cadres of state-owned enterprises, official public individuals and their units, departments and industries in this passage. The chase for self-interest, which includes not only individual profit but also unit profit, local interests, and departmental interests, is the essence and subjective motive of power corruption. Corrupt officials practice corruption through the abuse of public power and public resources, that is, realizing individual or local interests using functionary power and legal rights. Power corruption will inevitably lead to the loss of national public interest and public interest after causing harm to society and the public interest. For a very long time, compared to other industries, the salary of public officials in China was relatively low, while the increase in their wages was obviously slower than that of other social strata, especially the newly rich. Considering that the overall quality of public officials is higher than that of enterprise workers, the responsibilities and workload of public officials have not been fully reflected under such income, and the incentive has been seriously skewed, in which they will seek extrapay income. To obtain illegal extrawage income, some public officials in certain sectors may practice rent-seeking activities by using public power and public resources at their disposal. It provides an opportunity for public officials to seek personal gain through power when they exercise their power of allocation of resources and selectively combine with the employers of capital who need resources. Therefore, corruption occurs when public power ceases to serve the public interest due to the change of its nature and when it is gradually privatized, commoditized and capitalized when there is abuse of

5.3 Power Corruption and Income Distribution

285

legal authority of public officials, artificial expansion of power, use of other people’s power or resources beyond one’s authority, negative impact on the exercise of other people’s power and resource allocation through personal influence and chase for benefits for himself or herself or other stakeholders.

5.3.1.3

Classification and Formation of Power Corruption

Classification of Corruption In the transition from a planned economy to a market economy, many new economic actors and economic phenomena have appeared due to a series of changes in the economic system. Power can bring wealth and excess income when administrative power interferes with market trading activities, for which some people use public power for personal gain. In addition, corruption is growing and spreading due to incomplete reform, market irregularity, imperfect systems, relatively lagging political system reform and degeneration of ideology and morality. Corruption can be divided into the following forms from the perspective of economy8 : (i)

(ii)

(iii)

(iv)

8

Rent-seeking. It refers to the act that public officials trade scarce resources held by them for money and for personal gain. There are four forms of this kind of corruption in our country: the two-track system of price, double standard of power shown as privilege and economic monopoly, the two-track system of trade liberalization that causes high import tariffs and import quotas, and the policy dual-track system such as the government’s “preferential policies” for some regions or groups. Underground economy. It includes all the economic activities in the failure to report and pay taxes to the government, the government’s loss of control and management and the absence of one’s output and income in gross national product, including illegal underground economic activities, such as smuggling, drug production and so on; the legitimate operation of illegal income, such as the concealment of partial or total income, tax evasion and so on; the uncounted underground economy, such as domestic economy, tutoring, private deals and so on. Corruption in tax loss. It refers to the corruption that one bribes or colludes with officials in customs and taxation departments by carving up the illegal gain, which caused the tax loss. Corruption in public investment and public expenditure. It mainly involves corruption in public investment funded or aided by the government, as well as in state-owned economic investment in China, including corruption in government procurement contracts, corruption in other government public expenditures, and corruption in government-funded institutional expenditures, in which many large corruption practices often occur in China.

Hu (2001).

286

5 Public Power and Income Distribution

However, not all underground economies, illegal economies, rent-seeking, tax loss, public expenditure and loss of public investment belong to corruption, but those who abuse public power for the private gain of their individual or minority interest groups or stakeholders can be considered corruption. In addition, according to different standards and perspectives, corruption can be divided into 8 different types as follows9 : (i) (ii)

(iii)

(iv) (v)

(vi)

(vii)

(viii)

Corruption can be divided into individual corruption and group corruption according to the nature and number of corrupt actors; According to the hierarchical distribution of corrupt actors, corruption can be divided into high-level corruption (officials at or above the provincial and ministerial level), middle-level corruption (at the county level or above), and grassroots or low-level corruption; Corruption can be divided into corruption in the political and administrative spheres, corruption in the economic sphere, and corruption in the social sphere according to the field or department in which corruption occurs; According to different motives of corrupt behavior, corruption can be divided into profit-seeking corruption, favoritism corruption and public corruption; According to the differences in the institutional causes of different forms of corruption, corruption can be divided into traditional corruption, transitional corruption and modern corruption; Corruption can be divided into reciprocal corruption (or transaction corruption) and extortion corruption according to the gains and losses of each participant in the corruption transaction; Corruption can be divided into minor corruption, general corruption, and corruption crimes according to the degree of violation of laws and regulations and the degree of direct harm. The latter can be subdivided into general corruption crimes and serious corruption crimes; Corruption can be divided into white corruption, gray corruption, and black corruption according to the ranking of the tolerance levels of the leadership, officials, and the public to various corruption behaviors and referring to the classification of American scholar Heidenheimer.10

Mechanisms for the Formation of Corruption of Power Corruption is possible when public power and capital are combined and public officials have an incentive and opportunity for corruption. 9

He (2003). Heidenheimer et al. (1989) divided corruption into three categories according to the different attitudes of different social groups. Black corruption: behaviors that most upper-class people and the public have unanimously condemned, hoping to punish them on the basis of principles; gray corruption: some people, especially when the upper class wants to punish a certain behavior, others do not want it, the public may be ambiguous; white corruption: the majority of the upper class and the general public may not actively support punishment of corrupt behavior, which is considered to be tolerable. See Heidenheimer et al. (1989).

10

5.3 Power Corruption and Income Distribution

287

Through an analysis of the persons involved in the corruption cases investigated and dealt with in previous years, we have found that the more resources of public power controlled by the persons involved, the greater the space for the operation of public power and the greater the probability of corruption. Corruption cases and the people involved are distributed in all provinces, municipalities and autonomous regions, involving all systems from the central to the local level, from the party and government departments to the judiciary, and monopolistic state-owned enterprises, covering almost all fields of public power. This is reflected in the increasing number of corrupt officials at all levels and the ever-increasing amounts of money involved in such cases. The ways that corruption has been formed in the economic transformation of our country are summarized in Table 5.10. From Table 5.10, it can be seen that the four main mechanisms of corruption formation include economic liberalization, decentralization, nonpublic ownership and economic globalization in the economic transformation of our country. In the process of economic liberalization, drawing support from the dual-pricing system, public officials transferred the resources from the planned economic system to the market for price violence at the beginning of the reform; also, by controlling access to the market, public officials are likely to accept and even solicit bribes in the administrative approval process. Decentralization includes fiscal and administrative decentralization. Through fiscal decentralization, local government departments are likely to cover fiscal gaps and the establishment of private coffers through the collection of funds, arbitrary charges and fines, which can facilitate corruption, such as embezzlement and misappropriation; public officials can also obtain bribes through the approval of administrative appropriations and the use of tax exemptions. Through administrative decentralization, local governments have expanded their powers of appointment and decisionmaking authority, while those in power in local party and government departments have collected bribes for the appointment, promotion and transfer of cadres, government procurement, bidding for public works projects, and even for using their power to interfere with judicial and administrative law enforcement and to shield economic crimes. In the reform of the denationalization of state assets and the property rights system of state-owned enterprises, the bribery for misappropriation of state assets and qualifying for listing of companies appears; with the development of the private economy and the emergence of new economic entities, private business owners have paid bribes to obtain resources and political protection; in the process of the sale of state assets, especially in the process of land leasing and development, businessmen drain state assets by undervaluing them through bribery and thus buying them at low prices. They also make huge profits by paying bribes to acquire land at low prices and operate illegally. In the process of denationalization, opportunities for corruption have increased considerably. With the development of economic globalization, China’s economy has become increasingly closer to the world economy, which has also attracted a large amount of foreign investment. On the one hand, some public officials have taken advantage

11

Administrative decentralization

Fiscal decentralization

Administrative approval, control of appropriation authority

Administrative allocations

Increased powers of appointment for local government

Seeking tax benefits or evading taxes

Obtaining grants through bribery

Bribery in promotions and Bribery in promotions placements and placements

Decentralization of tax Power to take control of collection and tax exemptions administration

Covering fiscal gaps and the establishment of private coffer by collection of funds, arbitrary charges and fines

Overall decline in State revenues

(continued)

Promotion and appointment, connivance of subordinates

Tax relief

Administrative approval (grants)

The establishment of private coffer by collection of funds, arbitrary charges and fines

This table is quoted from Economic Transformation, Institutions and Corruption, Social Science Publishing House, 2007, pp. 168–170.

Decentralization

Administrative approval, control of market access

Market access

Administrative approval (scarce materials, loans, foreign exchange, etc.), conflict of interest

Bribery for market access Administrative approval (right to operate), relatives doing business

Transformation of Getting the targets and resources from the making money by buying planned economic system and selling them to the market

Impact on the demand for fields where corruption corruption (targeting occurs bribe-givers)

Dual-pricing system

Impact on the supply of corruption (for public officials)

Economic Liberalization

Result

Reform

Type

Table 5.10 Mechanisms for the formation of corruption11

288 5 Public Power and Income Distribution

Reform

Reform of the property rights system

Type

Denationalization

Table 5.10 (continued)

Interference in the administration of justice and the administration of justice Increased decision-making power of business leaders and lack of effective regulation

Division of powers between sectors

Decentralization of powers in enterprise

Qualifying for listing through bribery

Company listing

Administrative approval

Searching for business association through bribery

Administrative approval (sale of state assets)

Increasing incentives for businesses to bribe in order to obtain resources to improve efficiency

Interference with the administration of justice and the administration of justice through bribery

Obtaining public procurement contracts through bribery

(continued)

Administrative approval (share reform and company listing)

Searching for business

Embezzlement, misappropriation

Interference with the administration of justice and the administration of justice

Government procurement (contracting of works projects, procurement of goods), administrative approval (malpractice)

Impact on the demand for fields where corruption corruption (targeting occurs bribe-givers)

Reform of state-owned enterprise

Embezzlement of State assets through bribery

Corruption in public procurement, particularly in the tendering of engineering projects

Increased local government decision-making authority

Denationalization of state-owned assets

Impact on the supply of corruption (for public officials)

Result

5.3 Power Corruption and Income Distribution 289

Economic globalization

Type

Restricted liberalization of international contacts

Exit approval

Support for smuggling

Wishing to settle abroad through illegal channels

Profiteering from smuggling

Obtain tax exemptions, import and export quotas through bribery

Administrative approval

Import and export trade

Obtaining land through bribery and profiteering from illegal operations

Being politically vulnerable and wanting to gain resources and protection through bribery

Administrative approval (one-way exit permit to Hong Kong, passport)

Support for smuggling

Administrative approval (foreign trade, import/export quotas)

Administrative approval (foreign investment)

Administrative approval (land)

Conflict of interest (collusion between business and government, support for illegal activities of enterprises)

Impact on the demand for fields where corruption corruption (targeting occurs bribe-givers)

Taking advantage of Obtain concessions administrative approval to through bribery accept the meals from briber, forcibly take goods and ask people for money and goods

Land lease and development

Impact on the supply of corruption (for public officials)

Foreign investment

Smuggling

Emerging main participant

Development of private economic

Sale of state-owned resources

Result

Reform

Table 5.10 (continued)

290 5 Public Power and Income Distribution

5.3 Power Corruption and Income Distribution

291

of administrative approval to accept the meals from briber, forcibly take goods from the public by virtue of administrative authority, make obstacles for the public and ask people for money and goods. On the other hand, foreign investors have bribed government officials to obtain more preferential policies. In other words, domestic enterprises pay bribes to obtain tax exemptions, export tax rebates and import and export quotas, or even to smuggle goods for profiteering purposes in international trade. In addition, economic globalization has made it easier and more covert to transfer stolen funds and corrupt officials to flee the country, which has also made it more difficult to fight corruption.

Analysis on the Situation of Power Corruption The Objective Indicators of Corruption The occurrence of corrupt behavior is very secretive and difficult to observe directly. Therefore, it is very difficult to accurately measure the degree of corruption. However, we can still analyze it according to the data of the cadres of the Party and government in violation of laws and disciplines, the suspected crime bribery and corruption, and the caseload, the number of people involved in the cases and amount of money involved in the case of judging corruption from the data that discipline inspection bodies, procuratorial organs and trial institutions published every year, which can reflect the current situation of corruption in China to some extent. Here, we analyze the change tendency of corruption since China’s reform and opening up only according to the relevant data from the work reports of the Supreme People’s Procuratorate over the years and China Statistical Yearbook. Table 5.11 reports data on the number of cases filed, the number of people involved, and the economic losses recovered from cases of corruption, bribery, and malfeasance filed by procuratorates nationwide from 1980 to 2010. The results in Table 5.11 indicate that the number of cases of corruption and bribery investigated and dealt with in China increased year by year from 7000 in 1980 to 63,953 in 1995 and then began to decrease to 32,909 in 2010. The number of major cases during this period increased from 89 in 1980 to 48,066 in 1997 and decreased to 18,224 by 2010. The statistical results in Table 5.11 also show that approximately 50,000 national staff members at or above the county level were investigated for suspected crimes during 1980–2010, including nearly 3000 bureaulevel officials and nearly 100 provincial officials. The recoverable economic losses were 1.63 billion yuan in 1983–1987, 22.92 billion yuan in 1993–1997, 22 billion yuan in 1998–2002, and 24.48 billion yuan in 2003–2007; the recoverable economic losses were 7.12 billion yuan in 2009 and 7.4 billion yuan in 2010. Figure 5.4 shows the cyclical trend of the number of corruption cases filed by procuratorial organs from 1980 to 2010, and it can be seen that the changing trend of the number of corruption cases has gone through five cycles. The number of corruption cases had great change before 1990; the peak period of corruption in

292

5 Public Power and Income Distribution

Table 5.11 Statement of investigating corruption cases by the national procuratorial organs from 1980 to 2010 Year

Number of cases investigated (jian)

Number of major cases (jian)

Total number of people investigated (people)

Number of people above county level (people)

Recover damage (billion yuan)

1980

7000

89 (corruption)

1981

31,000

1982

32,605

2512

24,636

1984

22,000

2100

15,000

0.9

1985

28,000

6200

19,000

2.68

1986

49,577

13,888

7219 (voluntary surrender)

1983–1987

155,000

30,651

1988

21,100

2900

1989

58,926

1990 1991

1983

700

8

1500

16.3

19,083

194/4 (prefecture-level cities)/0(provincial and ministerial-level)(the same below)

4.23

13,507

19,406

875/70/2

4.82

51,373

11,295

23,344

1188/–/–

8.1

46,219

11,894

24,176

924/34/1

5

1992

36,700

9526

9809

1452/65/2

3.65

1988–1992

214,318

1993

56,491

27,914

19,357

1037/64/1

22

1994

60,312

28,626

39,802

1915/88/-

34

1995

63,953

29,419

12,835

2262/137/2

49

1996

61,099

34,879

13,530

2699/143/5

67.8

1987

4629

1997

53,533

48,066

1993–1997

387,352

168,904

54,805

2903/265/7

1998

35,084

1733 (over 500,000 yuan)

40,162

1999

38,382

2000

45,113

2001 1998–2002

56.3 229.2

1714/103/3

43.8

13,969

2200/136/3

40.9

18,086

2871/184/7

47

36,447

1319 (over 40,195 million yuan)

2670/–/6

41

207,103

5541 (over million yuan)

12,830/–/–

220 (continued)

5.3 Power Corruption and Income Distribution

293

Table 5.11 (continued) Year

Number of cases investigated (jian)

Number of major cases (jian)

Total number of people investigated (people)

Number of people above county level (people)

Recover damage (billion yuan)

2003

39,562

18,515

43,490

2728/167/4

43

2004

37,786

1275 (over 43,757 million yuan)

2960/198/11

45.6

2005

35,028

41,447

2799/196/8

74

2006

33,668

18,241

40,041

2736/202/6

2003–2007

179,696

35,255

209,487

13,929/930/35

2008

33,546

17,594

41,179

2687/181/4

2009

32,439

18,191

41,531

2670/204/8

71.2

2010

32,909

18,224

44,085

2723/188/6

74

244.8

Source The 1980–2008 data come from the Supreme People’s Procuratorate Work Report 1980– 2009 of Supreme People’s Procuratorate’s website http://www.spp.gov.cn; the 2009–2010 data come from Supreme People’s Procuratorate Work Report (Summary) 2010–2011 of Xinhuanet http://www.xinhuanet.com. The blank forms in the table indicate the lack of relevant data in the original report. In the mid-1990s, the criteria for placing on file of bribery and corruption was raised from 2000 to 5000 yuan in the mid-1990s; the standard for major corruption cases was increased from 10,000 yuan to 50,000 yuan; and the standard for embezzlement of public funds was raised to more than 100,000 yuan

China was during 1990–1998; the number of corruption cases has declined and had a relatively stable changing trend since 1999. The specific situation of the number of corruption cases in each cycle is as follows: the number of registered cases was 7000 in 1980, rose rapidly to 32,605 in 1982, and then dropped to 22,000 in 1984 during the first cycle from 1980 to 1984. There were only 89 major cases in 1980, rising to 2512 in 1982 and falling to 2100 in 1984 during this period. The number of registered corruption cases rose sharply from 28,000 in 1985 to 49,577 in 1986 and then dropped to 21,100 in 1988 during the second cycle from 1985 to 1988. The number of major cases during this period also increased significantly, of which the number of major cases was 6200 in 1985. The number of corruption cases dropped from 58,926 in 1989 to 36,700 in 1992 during the third cycle from 1989 to 1992, and the number of major cases during the same period dropped from 13,507 in 1989 to 9526 in 1992. The number of corruption cases increased from 51,373 in 1990 to 63,953 in 1995 and then decreased to 35,084 in 1998 during the fourth cycle from 1990 to 1998; the number of major cases showed a typical rising trend, which increased from 11,295 in 1990 to 48,066 in 1997. The number of corruption cases increased from 38,382 in 1999 to 52,077 in 200212 and then decreased year by year to 32,909 in 2010 during the fifth cycle from 1999 to 2010; the number of major cases rose from 13,969 in 1999 to 18,224 in 2010. 12

Here the number of corruption cases in 2002 is obtained by subtracting the number of corruption cases in 1998–2001 from the total in 1998–2002.

294

5 Public Power and Income Distribution

Fig. 5.5 The changing trend of the number of persons at or above the county level involved in corruption cases

Figure 5.5 reports the changing trend of the number of persons at or above the county level involved in corruption cases from 1988 to 2010. The number of persons at or above the county level increased from 194 in 1988 to 2903 in 1997, declined to 1714 in 1998, and then began to rise year by year, reaching a maximum of 3375 in 2002.13 The number of the above county-level persons involved in corruption cases decreased and stabilized after 2002, but the number of people involved in the case was still approximately 2700 each year. Furthermore, we provide the number of cases, major cases and the number of people involved in corruption bribe cases and cases of malfeasance among the corruption cases from 1998 to 2010 (see Table 5.12). As seen from Table 5.12, the number of cases of corruption and bribery increased from 30,670 in 1998 to 37,183 in 2000 and then decreased year by year to 25,560 in 2010; the number of large cases increased year by year from 9715 in 1998 to 18,224 in 2010. The number of people involved in cases rose from 34,405 in 1998 to 41,337 in 2000 and then showed a downward trend; that number was 33,858 by 2010. Among them, the number of people involved in major cases increased from 1674 in 1998 to 2670 in 2001 and then declined year by year to 2387 in 2010 (see Fig. 5.6). Figure 5.7 shows the changing trend of the number of cases of malfeasance and the number of people involved in the period from 1998 to 2010. The number of cases of malfeasance increased from 4414 in 1998 to 8819 in 2001, then gradually decreased to 6549 in 2006, and then rose to 7349 in 2010; among them, the number of major cases rose from 2163 in 2000 to 3508 in 2010. The number of people involved in these cases gradually increased from 5757 in 1998 to 10,097 in 2001, then declined to 8081 in 2005, and rose to 10,227 in 2010; among them, the number of people involved in major cases rose from 146 in 1998 to 379 in 2002 and then gradually declined to 336 in 2010. 13

Here the number of people at or above the county level in 2002 is obtained by subtracting the number of people at the county level in 1998–2001 from the total in 1998–2002.

5.3 Power Corruption and Income Distribution

295

Table 5.12 The number of corrupt, bribery and malfeasance cases and the number of people involved in 1998–2010 Year The corruption bribes cases Number Number Number of of major of registered cases registered claims people (jian) (person)

Cases of malfeasance Number of people involved in major cases

Number Number Number of of major of registered cases registered cases people (jian) (person)

Number of people involved in major cases

1998 30,670

9715

34,405

1674

4414

5757

146

1999 32,911

13,059

36,703

2019

5471

6830

181

2000 37,183

16,121

41,377

2556

7930

2163

9407

316

2001 36,447

16,627

40,195

2670

8819

2367

10,097

343

2002 34,716

16,826

38,022

2546

8542

1914

9677

379

2003 31,953

34,922

2389

7609

8568

339

2004 30,548

35,031

2626

7238

8726

334

2005 28,322

33,366

2503

6706

8081

296

2006 27,119

31,949

2435

6549

8092

301

2007 26,780

32,210

2380

6871

8543

326

2008 26,306

17,594

32,240

2380

7240

3211

8939

307

2009 25,408

18,191

32,176

2364

7031

3175

9355

306

2010 25,560

18,224

33,858

2387

7349

3508

10,227

336

Note The data in this table come from the China Statistical Yearbook 1999–2011. Among them, the corruption bribe cases include corruption, bribery, embezzlement, collective private distribution, huge unidentified property and other cases; cases of malfeasance include abuse of authority, dereliction of duty, play favoritism and commit irregularities and other cases

Fig. 5.6 The case number of corruption and bribery and the number of people involved in them

296

5 Public Power and Income Distribution

Fig. 5.7 The case number of malfeasance and the number of people involved it

The Subjective Indicators of Corruption We analyze the degree of corruption in China in the above part by using objective indicators, and below, we use subjective indicators for analysis. The most influential and representative objective indicator for measuring the degree of corruption in a country is the Corruption Perception Index (CPI), which has been released annually by Transparency International (TI) since 1995 and is also called the Corruption Perceptions Index. In addition, Transparency International has released the Bribe Payers Index (BPI). There are also other international organizations that have published some objective indicators to measure the degree of corruption, such as Corruption Control Index from World Bank, Bribery and Corruption Index and Transparency Index from World Economic Forum, Global Competitiveness Report Index, and index of illegal payment, judicial corruption, bribery and kickback from Swiss Institute of International Management Development, index of international business organizations and risk index of international countries. We will use the Corruption Perception Index of Transparency International for analysis in this chapter. Transparency International takes entrepreneurs, risk analysts, and the general public as its main respondents, conducts quantitative analysis according to respondents’ perception and experience for corruption, and scores them on a 0–10 scale; the higher score means the higher degree of honest and upright; the lower score represents the higher degree of corruption. A CPI score of 5 points is usually used as a critical value; specifically, a CPI score between 8–10 is considered the least corrupt country; a CPI score between 5–8 is considered a relatively incorruptible country; a CPI score between 2.5–5 is considered a country with severe corruption; and a CPI score less than 2.5 is considered a country with extreme corruption. Table 5.13 shows China’s CPI index and international ranking from 1978 to 2010.14 The results in the table show that China’s CPI was between 5 and 6 during the period of 1978–1985, which indicated that China was a relatively incorruptible 14

The CPI index of Transparency International was released since 1995; Transparency International has provided the staged CPI index from 1980 to 1996, which were 5.13 points in 1980–1985, 4.73 points in 1988–1992 and 2.43 points in 1993–1996. Corruption Index = 10- CPI.

5.78

5.77

5.73

5.66

5.57

5.45

5.3

5.14

4.96

4.77

4.57

4.35

4.3

3.94

3.58

3.03

2.46

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Corruption Index

7.54

6.97

6.42

6.06

5.7

5.65

5.43

5.23

5.04

4.86

4.7

4.55

4.43

4.34

4.27

4.23

4.22

Ranking

Number of countries

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

Year

3.5

3.6

3.6

3.5

3.3

3.2

3.4

3.4

3.5

3.5

3.1

3.4

3.5

2.88

2.43

2.16

CPI

6.5

6.4

6.4

6.5

6.7

6.8

6.6

6.6

6.5

6.5

6.9

6.6

6.5

7.12

7.57

7.84

Corruption Index

78

79

72

72

70

78

71

66

59

58

63

59

52

41

50

40

Ranking

178

180

180

179

163

158

146

133

102

91

90

99

85

52

64

41

Number of countries

Note The CPI data of this table from 1978 to 1994 is quoted from Guo Yong: Economic Transition, Institution and Corruption, Social Science Academic Press, 2007, p. 223. The CPI data in 1995–2010 comes from the website of Transparency International

CPI

Year

Table 5.13 China’s CPI index and international ranking from 1978 to 2010

5.3 Power Corruption and Income Distribution 297

298

5 Public Power and Income Distribution

Fig. 5.8 Changing trends of CPI

country during this period. The CPI index has gradually decreased from 4.96 year by year since 1986, reached the lowest level of 2.16 in 1995, and ranked 40th among the 41 participating countries in that year, which showed that the degree of corruption in China has shown an increasing trend. Subsequently, the CPI index increased year-on-year from 2.43 in 1996 to 3.5 in 1998 and remained at approximately 3.4 during the period of 1999–2010, indicating that the degree of corruption in China decreased during this period. China still belonged to the relatively corrupt countries because it ranked 78th in the degree of corruption ranking list among 178 countries in 2010. Figure 5.8 shows the changing trend of CPI from 1978 to 2010. Due to the secrecy of corruption, not all corruption cases can be discovered and investigated. Along with asymmetric information, it is almost impossible to find all the corruption activities. Therefore, official statistics of corruption cases and people involved are only a small part of it that cannot accurately reflect the actual degree of corruption, which means that there are “Concealed Numbers of corruption”.15 In addition, the release of the CPI has deepened people’s understanding of corruption, and it has provided data for the study of corruption, which has made it possible to give cross-country and annual comparisons of corruption degrees. However, the CPI measures people’s subjective perception of corruption, which is not based on objective data such as the number of corruption cases and the impact of corruption. In addition, due to the different understandings, perceptions and evaluations of corruption from different investigators, subjective perception of corruption does not mean corruption in reality.

15

The “Concealed Numbers of corruption” measures the proportion of civil servants engaged in or involved in corruption who have not been investigated. It refers to the proportion of corrupt civil servants in the total number of corrupt civil servants that have indeed occurred but were not found due to various reasons or have not been punished after investigation. The percentage of “corruption black numbers” is usually expressed as a percentage, that is, what percentage of corrupt civil servants are not counted. For details, see Hu Angang and Guo Yong: “Economic Analysis of Civil Servant Corruption Costs-Benefits”, “Comparison of Economic and Social Systems”, No. 4 of 2002.

5.3 Power Corruption and Income Distribution

299

Impact of Authority Corruption on Income Inequality Since the reform and opening up, residents’ income in China has greatly improved, as have people’s living standards. However, the gap between residents’ income is widening between urban and rural areas, among regions, industries and all levels of society. At the same time, authority corruption often occurs in certain departments of governments at all levels and involves various industries and fields, which is manifested by the increasing number of people involved, the rising amount of money involved, and its growing harmfulness. When public officials use their power to intervene in the market and participate in market transactions with power and public resources, the power will definitely receive excess income, which is at the expense of public interests. This actually shows that corruption is related to the distribution of benefits. However, unlike the distribution of benefits in the general sense, the bureaucratic privilege stratum that uses public power to participate in the allocation of economic resources in illegal or nonstandard ways, which is extremely unfair and seriously violates social justice, achieves this distribution. Therefore, authority corruption affects resource allocation and income distribution. When these two factors work together, it will widen the gap in the distribution of benefits and disrupt the distribution order. Corruption leads to inequality of opportunities, reduces economic growth, cuts social welfare expenditures, causes fewer opportunities for the poor to be educated, worsens poverty, and results in fewer opportunities and potential for the poor to obtain income. Therefore, a part of the income gap is caused by corruption, which has widened the income gap. Moreover, in previous studies, most scholars ignored the impact of economic growth on income inequality, but some of them believed that highly efficient economic growth widened the income gap. Therefore, in practice, how the impact of corruption and economic growth on income inequality will be answered by the following empirical analysis. (i)

Model, Variable and Data Description

To analyze the impact of corruption on income inequality, we set up a measurement model as shown in (5.5): I nequalit yt = β0 + β1 Corr uption t + β2 G D P Rate + β3 X t + εt

(5.5)

In (5.5), it represents time, and inequality is an inequality index, which is an explanatory variable. We use the Gini coefficient and actual urban–rural income ratio to express it. Corruption is the main explanatory variable. We use the CPI from Transparency International to express it, and GDPRate indicates the actual economic growth rate. X is a set of control variables. We use the trade dependence ratio (open), government expenditure as a percentage of GDP (govsize), degree of denationalization (Reform)16 and other indicators to represent. ε is the stochastic error term. Table 5.14 shows the descriptive statistics of the variables. 16

We express the degree of denationalization in terms of the number of employees in the nonstate economy as a proportion of the total number of employees.

300

5 Public Power and Income Distribution

Table 5.14 Descriptive statistical results of the data Variables

Observations

Mean value

Standard deviation

Min value

Max value

Variable description

Gini17

31

0.37

0.07

0.24

0.46

Gini coefficient

Inequality

33

2.62

0.48

1.82

3.33

Income ratio of urban and rural residents

corruption18

33

5.99

1.07

4.22

7.84

Corruption: 10-CPI

Gdp rate

32

0.10

0.03

0.04

0.15

Real GDP growth rate

Gov size

33

0.19

0.05

0.11

0.32

Size of government: total fiscal expenditure/GDP

open

33

0.34

0.16

0.10

0.65

Trade dependence: total exports and imports/GDP

reform

33

0.85

0.04

0.81

0.92

Degree of denationalization

The data such as GDP, population, number of employees in the nonstate-owned economy, total number of employees, total volume of foreign trade, per capita disposable income of urban residents, per capita net income of rural households, and budgetary expenditures used in the statistical analysis are from the China Statistical Yearbook. The estimation results of the measurement model of formula (5.5) are shown in Table 5.15. The estimated results in the table show that whether we use the Gini coefficient or the urban–rural income ratio as a measure of inequality, when we control indicators such as government size, degree of openness, and privatization, the impact of corruption on income inequality is positive at the statistical level of 1%, which means that corruption leads to increased income inequality. The relationship between economic growth and income inequality is negatively correlated. This result fully illustrates that the development of the economy and growing income are conducive to narrowing the income gap. In addition, we can see from the estimation results that the relationship between government expenditure, opening to the outside world, denationalization and other indicators and income inequality are positively related, which means that these factors have widened the income distribution gap to a certain extent.

17

The national Gini coefficient is cited from Wang Shaoguo, The Impact of China’s Income Distribution Gap on Economic Efficiency, in Liu Shucheng, Zhang Liancheng, and Zhang Ping, China’s Economic Growth and Economic Cycle (2009), Beijing. 18 The corruption index is derived from Table 5.13 in this section.

5.4 Summary

301

Table 5.15 Estimates of the impact of corruption on income inequality variables

corruption Gdp rate Gov size

The explanatory variable is the national Gini coefficient

The explained variable is the real urban–rural income ratio

(1)

(2)

(3)

(4)

0.092

0.042

0.039

0.546

0.337

0.321

(8.22)***

(3.74)***

(3.48)***

(10.24)***

(4.89)***

(4.38)***

−0.305

−0.413

−0.314

−1.379

−1.926

−1.629

(1.43)

(2.89)***

(2.11)**

(1.18)

(2.01)*

(1.55)

1.070

0.460

0.347

11.742

9.325

8.886

(4.39)***

(2.38)**

(1.77)*

(10.32)***

(8.37)***

(6.94)***

0.252

0.149

1.125

0.847

(5.82)***

(2.08)**

(3.90)***

(1.75)*

open reform

(5)

0.443

1.244

(1.75)* constant term

−0.351

−0.017

(3.32)***

(0.19)

observed value

30

30

R2

0.79

0.91

F statistical value

32.42***

63.48***

−0.327

(6)

(0.72) −3.290

−1.924

−2.739

(1.65)

(6.56)***

(3.58)***

(2.18)**

30

32

32

32

0.92

0.81

0.88

0.88

55.55***

38.97***

47.89***

37.73***

Note ***, **, and * denote the 1, 5, and 10% significance levels, respectively, and the numbers in parentheses are the absolute values of the t-statistics. Our empirical test results show that the widening of the income gap in China is not caused by the principle of giving priority to efficiency. In contrast, rapid economic growth has played a role in reducing the income gap. Corruption leads to opportunity inequality, which affects social equity and justice. Thus, corruption is an important reason for the widening income gap

5.4 Summary In this chapter, we analyze the salary of public officials in China and its changing trends from 1978 to 2010. Using data from questionnaire surveys of national urban residents’ income in 2008 and 2010, we study the political capital of urban residents, including party membership and cadre status, on urban residents’ income. The contribution of political capital to the income gap of urban residents is also measured. Finally, the formation mechanism and current situation of authority corruption and the impact of corruption on income inequality are analyzed. The study finds that the wage level of public officials in China has been at the middle-low level in various industries since the reform and opening up. However, according to the survey data of sampled cities in China, the income return of cadres holding certain leadership positions increased from 15.49% in 2007 to 41.34% in 2009 compared with ordinary employees. The inspection results in different industries and regions indicate that from 2007 to 2009, whether in monopoly or competitive industries, coastal areas or inland areas, all conform to the above conclusions,

302

5 Public Power and Income Distribution

although the income returns of cadres are different. We also find that when the economy grows too fast or overheats and tightening policies are adopted to regulate the economy, power is tightened, and the return on political capital income is relatively small. Conversely, when the economy is down and active policies are adopted to stimulate the economy, power expands accordingly, and the return on political capital income is relatively large. This means that the return of political capital is also countercyclical. Furthermore, the contribution of cadre status to the income gap is expanding. The results of the static decomposition show that the contribution of managerial positions to the income gap rose from 1.83% in 2007 to 5.79% in 2009. The results of the dynamic decomposition show that the contribution of managerial posts to the change in the income gap between these two years was 36.3%. While the income returns to party membership have declined, the income returns to cadre status have increased substantially, and their contribution to the income gap is widening. We believe that the current income distribution problem in China mainly arises in the primary distribution and the proportion of workers’ compensation in GDP is declining year by year, while the influence of political power on the primary distribution is actually the intervention of political power on the market mechanism, the motive for its intervention is either to pursue political performance or to obtain personal benefits. Then, there is the fact that political capital, as a nonmarket factor, has not weakened, but rather strengthened, the power of cadres in the process of economic transformation since the reform and opening-up. Particularly since the outbreak of the world economic crisis in 2008, the government has adopted a series of proactive policies to stimulate economic development, and the role of cadres’ power has also expanded. This is reflected in the distribution of personal income; when political capital acts on the return of personal income, it may distort the principle of distribution based on factor contributions, thus reducing the efficiency of resource allocation. When cadres use the power they possess and make use of national policies to serve their own economic interests, they may form unreasonable incomes as a result of power rent-seeking and corruption, leading to widening income disparities. The results in this chapter show that corruption significantly increases income inequality, while economic growth is conducive to reducing income disparities. We believe that when power participates in income distribution or intervenes in the market mechanism, monopolizes certain factor resources through power and uses national policies to serve its own economic interests, unreasonable income is formed as a result of power rent seeking and corruption, which will certainly distort the principle of distribution according to the contribution of the factors of production, thus reducing the efficiency of resource allocation. Therefore, the government shall prevent and punish corruption, as well as reduce the monopoly of executive power over economic and social resources and the intensity of executive power’s intervention in the market to promote reform of the political system and strengthen democratic oversight of executive power; at the same time, the government should continue to deepen market-oriented reforms, accelerate economic development, and increase the proportion of people’s income in national income, which is the key to regulating the order of income distribution and narrowing the income distribution gap.

References

303

References Cheng, Wenhao: Prevention of Corruption, Beijing: Tsinghua University Press, 2011, p. 10. Fields, G.S. and Yoo, G., 2000, Falling labor income inequality in korea’s economic growth: patterns and underlying causes, Review of Income and Wealth, Vol. 46, No. 2. Hao, Wenqing, Research on the Derivative Power Corruption in Contemporary China, Hefei: Anhui University Press, 2011, p. 24. He, Zengke, Research on Corruption and Anti-Corruption in China’s Transition (Part I), Comparative Economic&Social Systems, No. 1, 2003. Heidenheimer,A.J., Johnston M. and Levine,V.,Political Corruption: A handbook, New Brunswick, NJ: Transaction,1989. Hu, Angang, Corruption is the most serious social pollution in China, China Reform, No. 4, 2001. Ma, H., A Comparative Study of China’s Corruption in the Transition Period, Beijing: Intellectual Property Publishing House, 2008, p. 85. Shorrocks, Anthony F, 1982, Inequality decomposition by factor components, Econometrica, Vol. 50.

Chapter 6

Recessive Economy and Income Distribution

Recessive economic activity is ubiquitous and has existed for a long time. There are a number of reasons that bring about the recessive economy, including both institutional and economic factors. At the institutional level, it is closely related to national laws, government regulations, tax systems, and income distribution systems. At the economic level, it is closely related to the level of economic development. For a long time, the impact of the recessive economy on the official economy has been a controversial issue. On the one hand, the recessive economy distorts competition between countries or regions, leading to inefficient product and labor markets. It also distorts official macroeconomic statistics (such as taxes, personal income, labor, unemployment rate, consumption, etc.). Policies and measures based on unreliable data are likely to be impractical. Obviously, the recessive economy has a negative impact on the economic system. However, the recessive economy can bring additional added value to the official economy. Studies have shown that two-thirds of the income of the recessive economy will be immediately spent in the official economy. Therefore, the recessive economy also have a positive impact on the official economy to some extent, thereby increasing overall economic growth. The research purpose of this chapter is mainly twofold: one is to use the improved method of money demand to measure China’s total recessive economic scale in 1978–2010, on the basis of which the impact of the recessive economy on income inequality is analyzed. Two is to use the structural equation model to measure the recessive economic scale of 30 provinces and municipalities in China (excluding Tibet), on the basis of which the impact of the recessive economy on economic growth is analyzed.

© Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_6

305

306

6 Recessive Economy and Income Distribution

6.1 Measurements of the Recessive Economy 6.1.1 Definition and Classification of Recessive Economy 6.1.1.1

Definition of Recessive Economy

The recessive economy is also called the underground economy, black economy, shadow economy, unobserved economy and so on. To measure the proportion of the recessive economy to GDP, the first problem to be faced is to define and define the scope of the recessive economy. Regarding the definition of a recessive economy, different scholars have put forward their understanding of the recessive economy from the perspective and purpose of their research. However, to date, there is no unified definition that is completely acceptable to people. Regarding the definition of a recessive economy, different scholars have put forward their understanding of the recessive economy from the perspective and purpose of their research. However, to date, there is no unified definition that is completely acceptable to people. The commonly used definition is as follows: all economic activities that currently contribute to officially calculated gross national product but are not registered.1 Smith’s definition is as follows: it refers to all legal and illegal production of goods and services based on the market, which evades official GDP estimates.2 A narrow definition proposed by Schneider is as follows: the legal production of all market-based goods and services, which intentionally evades the supervision of public authorities for the following reasons: (i) to evade income taxes, valueadded taxes or other taxes. (ii) to avoid social security contributions. (iii) to avoid following certain legal standards, such as the minimum wage system, the maximum working time standard, and the safety guarantee standard. (iv) to avoid compliance with certain administrative procedures, such as filling out statistical survey forms or other administrative management statements.3 A broader definition is as follows: all economic activity that evades government regulations, taxes, or monitoring in other ways and the income that is generated.4 Our understanding of the recessive economy is as follows: all market-based or nonmarket-based, legal or illegal economic activities that evade or avoid government regulations, taxes, or regulations, and the income that is generated. Additionally, in addition to legally hidden economic activities, it is very likely that illegal production and household production will be included in the model to measure the recessive economy, which will have an impact on the estimation results of the recessive economy. The content shown in Table 6.1 helps us better understand the recessive economy. 1

Feige (1994) and Frey and Pommerehne (1984). Smith (1994). 3 Schneider (2005). 4 Thomas (1999) and Fleming et al. (2000). 2

6.1 Measurements of the Recessive Economy

307

Table 6.1 Classification of underground economic activities Activity type

Currency trading

Noncurrency trading

Illegal

Theft of goods; drug production and sales; pornography, gambling, smuggling, fraud, etc

Barter transactions such as drugs, smuggling, and theft; drug production and theft for your own use

Legal

Tax evasion

Tax evasion

Tax avoidance

Barter transactions for legal services and goods

All do-it-yourself and neighborhood help

Tax avoidance

Undeclared income Employee from discounts and self-employment; fringe benefits wages, salaries and property from undeclared legal services and goods Source Lippert and Walker (1997)

6.1.1.2

Classification of Recessive Economy

According to the 1993 version of the SNA, the recessive economy is divided into four categories: the underground economy, the illegal economy, the informal sector economy, and the productive behavior of residents for their own consumption.

Underground Economy An underground economy refers to an economic form that has certain productive behaviors and abides by most laws and regulations but intentionally departs from the supervision of public institutions.5 It is difficult to observe the actual income generated by these economic situations, which are attributed to the underground economy for the following reasons: i. ii. iii. iv.

To avoid paying income tax, value added tax and other taxes. To avoid payment of social security contributions. To avoid following certain legal standards, such as the minimum wage system, the maximum working time standard, and the safety guarantee standard. To avoid compliance with certain administrative procedures, such as filling out statistical survey forms or other administrative management statements.

Illegal Economy There is currently no clear definition of the illegal economy because there are still differences in the identification of the illegal economy in different countries. However, according to the 1993 SNA classification principles, the illegal economy can be divided into the following two categories: 5

Commission of the European Communities et al. (1993).

308

i. ii.

6 Recessive Economy and Income Distribution

The production of goods and services prohibited by law from being sold, distributed, or held. Legal activities carried out by unauthorized or registered producers.

The Informal Sector Economy The 1993 version of the SNA did not give a clear definition of the informal sector but pointed out in general that countries need to differentiate according to the actual situation. However, the 15th International Conference of Labor Statisticians specifically defined the informal sector: the informal sector refers to those that are small, simple-organized, and unclear division of labor and capital, with the purpose of providing employment and income for relevant personnel. The informal sector has the following properties: i. ii. iii. iv. v.

The ownership of the production unit belongs to some households in the household sector. The production unit does not have a complete set of accounting accounts. At least a part of the products produced are used for market exchange. The production scale is small, and the number of employees is generally less than the minimum number of registered enterprises. Production units are generally not registered.

Then, the informal sector economy includes all production of goods (regardless of whether they are sold on the market or for own use) and production of some services while excluding all noneconomic production.

Production Behavior for Personal Consumption Residents’ own production exists as an independent part of the unobserved economy instead of belonging to the informal production sector. This type of production includes agricultural, forestry, animal husbandry, sideline fishing, etc., which are consumed by themselves, the processing of primary products, simple processing of crops, and simple services.

6.1.2 Measurements of Recessive Economy We need to measure the total recessive economic scale of China and the recessive economic scale of provinces and municipalities in the research of this chapter. Therefore, we will use the money demand method and the structural equation model method for estimation. Based on the existing correlation model, we will make improvements according to China’s reality.

6.1 Measurements of the Recessive Economy

6.1.2.1

309

Method of Money Demand

To measure the total recessive economic scale of the country in 1978–2010, it is not very suitable to use the structural equation model to estimate because the number of samples is only 33. Specifically, the parameter estimation results are not reliable if the number of samples is less than 100 when using structural equation model analysis (Kline 2004). Therefore, we chose to use the money demand method to estimate China’s recessive economic scale in 1978–2010. Through the analysis of existing studies, we have found that, using the Tanzi (1983) model to measure the recessive economic scale, most of the studies are conducted based on the aforementioned assumptions, especially for China. In addition, there is little research on the impact of the recessive economy on income inequality, although there are many studies on income inequality in China. Therefore, we improve the money demand equation of Tanzi (1983) by trying to relax two assumptions, including the same velocity of money in the official economy and recessive economy and no recessive economy in the base year. We hope that China’s recessive economic measures will be more realistic after the proposal of an improved money demand model, on the basis of which the measured recessive economic scale is used to analyze its impact on income inequality. First, we start with the basic money demand equation. In addition to conventional indicators such as income, price levels, and interest rates, the model also introduces tax burdens and government controls. According to the practice of Mauleon and Sarda (2000) and Giles (1999b), an improved money demand equation, as shown in (6.1), is given as follows6 : Ln(Mt ) = β0 + β1 Ln(Y Rt ) + β2 Ln(Pt ) + β3 Ln(Rt ) +β4 T ax Si zet + β5 GovSi zet + εt

(6.1)

Here, M represents the money demand, and Y R is an observable economy that is expressed in GDP. P is the price level, which is expressed in the link index of the retail price index of commodities; R is the interest rate for a one-year fixed deposit. TaxSize is tax scale ➀, which is expressed by the proportion of the total tax to GDP. GovSize is the government scale that is expressed by the proportion of government consumption to GDP, which is used to measure the degree of government intervention in the market and the impact on money demand. β0 ~ β5 is the parameter to be estimated, and ε is the error term. We obtain the following equation by finding the inverse function of Eq. (6.1): 

β

β

β

Mt = β0 · Y R 1t · Pt 2 · Rt 3 · exp(β4 T ax Si zet + β5 GovSi zet + εt )

(6.2)

Since the change in tax rate is the cause of fluctuations of the recessive economy in response to money demand, it can be concluded that the demand for money can 6

The study of Mauleon and Sarda (2000) adopted the total tax revenue instead of the proportion of tax revenue to GDP without considering government intervention in the market.

310

6 Recessive Economy and Income Distribution

be attributed to total income, including observable economic income Y R and recessive economic income Y H . With the assumption of the absence of taxes, the money demand equation is as follows: β



β

Mt = β0 · (Y R t + Y H t )β1 · Pt 2 · Rt 3 · exp(β5 GovSi zet + εt )

(6.3)

We obtain the following equation by dividing (6.2) by (6.1): β

Y R 1t · exp(β4 T ax Si zet ) = (Y Rt + Y H t )β1

(6.4)

Based on Eq. (6.4), we obtain the proportion of the recessive economy to the official economy, that is, the scale of the recessive economy is as follows: β4 T ax Si zet YH t = exp( )−1 YR t β1

(6.5)

Equation (6.5) shows that the recessive economy is a function of the proportion of the total tax revenue to GDP. We can calculate the recessive economic scale of the country on the basis of Eq. (6.5) by estimating Eq. (6.1). We obtain an improved money demand equation by deriving the money demand equation. Equation (6.5) shows that it is not necessary to require the same velocity of money in the recessive economic sector and the formal economic sector and an assumption of zero recessive economic scale of the base year when calculating the recessive economic scale. In addition, it is not necessary to assume that these control variables have the same effect on the recessive and official economies if they are introduced into the money demand model. We believe that the measured recessive economic scale should be more real by relaxing these assumptions, which is also the starting point for us to propose improvements to the method of money demand to more truly measure the national recessive economic scale.

6.1.2.2

Measurement Method of Structural Equation Model

In this chapter, we not only need to measure the recessive economic scale of the country but also have to understand the recessive economic scale of provinces and municipalities in China, which is also a problem we need to solve. Currency data for various provinces and municipalities have not been published in China, and taxation is considered to be the only cause of recessive economic activity according to the currency demand method, so the monetary demand method cannot be used to measure the recessive economic scale of provinces and municipalities. Therefore, to analyze the influence of various factors on the recessive economic scale, we adopt a special form of the structural equation model, namely, the Multiple Indicators and Multiple Causes Model (MIMIC), to measure the recessive economic scale of various provinces and municipalities in China. This model links the unobservable recessive economic scale with the observable factors and indicators, in which the former is

6.1 Measurements of the Recessive Economy

311

the reason that encourages or hinders recessive economic activities, while the latter is considered the influence of recessive economic activities on recessive economic activities. Frey and Weck-Hannemann (1984) and Giles (1999a), according to the formation of structural equations, call equations that represent the recessive economy and variables that cause the recessive economy structural models and equations that represent the relationship between index variables and recessive economic variables measurement models. Therefore, the multiple indicators and multiple causes model (MIMIC) is composed of a structural model and a measurement model. Measurement model: y1 = λ1 η + ε1 ,

y2 = λ2 η + ε2 , ..., yq = λq η + εq

(6.6)

where y1 , y2 , ..., yq represents a set of observable index variables related to the recessive economy, η represents the recessive economy, λ1 , λ2 , ..., λq represents a structural parameter of a measurement model, and ε represents a measurement error vector. Structural model: η = γ1 x1 + γ2 x2 + γ3 x3 + ... + γ p x p + ξ

(6.7)

where η is the recessive economy, x1 , x2 , ..., x p represents a set of observable cause variables, γ1 , γ2 , ..., γ p represents the parameters of a structural model, and ξ represents a random disturbance term. (6.6) and (6.7) can be rewritten as: y = λη + ε

(6.8)

η = γ x + ξ

(6.9)

Here, we assume that the mean of the measurement error ε and the random disturbance term ξ are both 0, independent of each other, and uncorrelated with each other, while ε is uncorrelated with η. That is, E(ξ ε ) = 0 , and E(ξ ξ ) = σ 2 , E(εε ) = 2 , in which is the covariance diagonal matrix of the measurement error. To solve the model, the structural model (6.9) is substituted into the measurement model (6.8), so the MIMIC model can be expressed as the following multiple regression equation: y = λ(γ  x + ξ ) + ε = x + ν

(6.10)

where = λγ  is the coefficient matrix and ν = λξ + ε is the perturbation vector. Therefore, we obtain the following error covariance matrix:  ˆ

= E(νν  ) = E[(λξ + ε)(λξ + ε) ] = σ 2 λλ + 2

312

6 Recessive Economy and Income Distribution

The rank of the coefficient matrix of the q-order multiple regression equation of (6.10) is 1, and the error covariance matrix cov(ν) is also limited. Therefore, the value of a certain element of the vector λ needs to be preset with and standardized before (6.10) is estimated. That is, a scale index has to be built for the estimation of the MIMIC model; if λi = 1, there will be yi = ηi + εi . Output indicators are often used as scale indicators in most studies. If the model is correct and can be identified, the parameter vectors λ and γ  can be obtained through the coefficient matrix

estimated by the maximum likelihood ratio method. Next, if the average value of the random perturbation term ξ is 0, the ordinal value of the hidden variable can be calculated by (6.9). However, the obtained ordinal value of η must be converted into a base value, so it is important to use the base value of a sample point as a reference value. The common practice is to obtain the base value or benchmark value of η by other estimation methods (such as the money demand method).

6.2 China’s Recessive Economical Scale and Income Inequality 6.2.1 China’s Recessive Economical Scale To measure the scale of the country’s recessive economy, we also introduced a dummy variable Dum94 that reflects the tax reform on the basis of (6.1). Finally, the regression equation we established is shown in (6.11): Ln(Mt ) = β0 + β1 Ln(G D Pt ) + β2 Ln(R P It ) + β3 Ln(Ratet ) +β4 T ax Si zet + β5 GovSi zet + β6 Dum94t + εt

(6.11)

In formula (6.11), M is the demand for money, which is represented by M0, M1, and M2. GDP stands for the nominal gross domestic product, RPI for the chain-linked retail price index, Rate for the average annual interest rate of one-year deposits of residents, Tax Size for the proportion of total tax to GDP, Gov Size for the proportion of government consumption to GDP, and Dum94 is used to show the impact of tax sharing reform on money demand. The data required for the above variables are from the relevant years of the China Statistical Yearbook, among which M0 in 1978–1989 is from relevant years of the China Financial Yearbook. The natural logarithms of M0, M1, and M2 are regarded as the dependent variable, and the regression results according to formula (6.11) are shown in Table 6.2. As seen from Table 6.2, in Models 1–3, when the factors of government regulation and tax reform are controlled, economic development significantly increases the demand for money. The GDP elasticity coefficients of M0, M1 and M2 are 1.23, 1.17, and 1.39; the tax scale has a significant positive impact on M1 at the 5% level in Model 2, but the tax scale has no significant impact on M0 and M2 in Model 1

6.2 China’s Recessive Economical Scale and Income Inequality

313

Table 6.2 The regression results of demand for money equation Explanatory variable

The dependent variables are natural logarithms of M0, M1, and M2 LnM0

LnM1

LnM2

LnM1

Model 1

Model 2

Model 3

Model 4

1.228

1.174

1.392

1.133

(28.85)***

(54.01)***

(56.67)***

(88.61)***

0.547

0.163

−0.496

−0.092

(0.85)

(0.50)

(1.34)

(0.23)

LnRate

0.229

−0.068

0.097

−0.055

(2.90)***

(1.68)

(2.14)**

(1.16)

TaxSize

0.674

1.220

0.875

1.017

(0.56)

(1.99)*

(1.26)

(1.78)*

15.260

6.409

9.389

(4.44)***

(3.65)***

(4.74)***

Dum94

−0.201

−0.108

−0.097

(1.46)

(1.54)

(1.22)

Constant term

−8.586

-4.667

−3.049

−2.104

(2.66)**

(2.82)***

(1.63)

(1.10)

Observed value

33

33

33

33

Adj. R2

0.993

0.998

0.998

0.997

F Statistics

734.19***

3048.86***

3241.08***

2930.43***

LnGDP LnRPI

GovSize

Note ***, **, * indicate significance levels of 1, 5, and 10%, respectively, and the number in parentheses is the absolute value of the t statistics

and Model 3; the government scale has a positive impact on M0, M1 and M2 at the 1% level; price changes and interest rate changes have different effects on different currencies, while Dum94 is significantly negative. Furthermore, we do not consider the impact of government regulation and taxsharing reform on money demand in the regression, and the regression results are shown in Model 4 in Table 6.3. In Model 4, the GDP elasticity coefficient of M1 is 1.13, and the tax scale is significantly positive for M1 at the 10% level. Based on the regression results, we choose Model 2 and Model 4 as the money demand equations, and the national recessive scale results calculated by using formula (6.5) are shown in Table 6.3. The calculation results of Model 2 in Table 6.3 show that the scale of China’s recessive economy is between 10.61 and 26.52%, among which it was 15.96% in 1978 and declined slightly in the following years, 14.63% in 1984, 26.52% in 1985 after rising sharply. From 1986, the scale of the recessive economy decreased starting from 23.55% to the lowest point 10.61% in 1996, a decline of nearly 13 percentage points in 10 years; then the scale of the recessive economy has steadily increased from 11.44% in 1997 to 20.88% in 2010, 9 percentage points increase in 13 years. The recessive

314

6 Recessive Economy and Income Distribution

Table 6.3 The recessive economic scale in 1978–2010 in the whole country (%) Year

Model 2 Measure result

Model 4 Measure result

Year

Model 2 Measure result

Model 4 Measure result

1978

15.96

14.93

1995

10.87

10.19

1979

14.75

13.81

1996

10.61

9.95

1980

13.96

13.08

1997

11.44

10.72

1981

14.32

13.41

1998

12.08

11.32

1982

14.64

13.71

1999

13.18

12.34

1983

14.47

13.55

2000

14.09

13.19

1984

14.63

13.70

2001

15.60

14.61

1985

26.52

24.75

2002

16.45

15.40

1986

23.55

21.99

2003

16.55

15.49

1987

20.26

18.94

2004

17.01

15.91

1988

17.96

16.80

2005

17.55

16.42

1989

18.15

16.98

2006

18.20

17.02

1990

17.01

15.92

2007

19.53

18.26

1991

15.33

14.35

2008

19.65

18.38

1992

13.57

12.71

2009

19.89

18.60

1993

13.33

12.49

2010

20.88

19.52

1994

11.69

10.95

economic scale measured in Model 4 has a consistent trend with that measured in Model 2. Through comparison, it is found that when government regulation and tax-sharing reform are not considered, the scale of the recessive economy declines, which stands for an approximately 1 percentage point decrease. In Fig. 6.1, we compare the size of the recessive economy measured by the three representative methods. Among them, the unobserved economic size measured by the MIMIC model approach by Xu Aiting and Li Jinchang (2007) ranged from 13.45 to 17.53% during 1985–2005, and the unobserved economic size measured by the national accounts-based equilibrium model by Li Jianjun (2008) ranged from 8.31 to 24.27% during 1985–2006 for China’s small-caliber unobserved economy. The size of the recessive economy measured in this chapter using an improved money demand methodology ranges between 10.61 and 26.52% over the 1978–2010 period. There is some, but not great, variation in the results of the three different methods of measurement. It is important to note that while there are many ways to measure the recessive economy, there is no such thing as the best way to measure it, and neither method is likely to accurately measure its true size.

6.2 China’s Recessive Economical Scale and Income Inequality

315

Fig. 6.1 The size of the recessive economy as measured by different methods

6.2.2 The Recessive Economy and Income Inequality Since the reform and opening up of China, the country has experienced rapid economic growth and a substantial increase in personal income, which has been accompanied by a widening income gap and rising income inequality. Using survey data, we calculated that China’s Gini coefficient in 2008 was 0.456, a result that has reached a relatively high level by international comparison. The widening income distribution gap has attracted widespread attention from all sectors of society and poses a challenge to sustained economic growth, social justice and stability. We believe that there are many reasons affecting the inequality of income distribution, not only closely related to economic development, ownership structure, market structure, regional environment and other factors but also closely related to the size of the invisible economy. There is a large body of literature on income distribution and inequality in China, and the reform of China’s economic system, while providing an effective institutional guarantee for high economic growth, also implies changes in the incentive mechanism and distribution system, resulting in the evolution of China’s income distribution pattern and the widening of the income gap. The regression Eq. (6.12) was established to analyze the effect of the size of the recessive economy on income inequality. I nequalit yt = I nequalit yt−1 + H eSi zet−1 + I ncomeG D Pt +U nemp Ratet + Arg E x pt + O pen t + Ur ban t + Re f or m t + εt (6.12)

316

6 Recessive Economy and Income Distribution

In the equation, inequality, the explained variable, denotes income inequality. The explained variable includes the lagged-period income inequality indicator, the lagged-period recessive economic size (HeSize), the share of income in GDP (Income GDP), the registered urban unemployment rate (UnempRate), the share of fiscal spending on agriculture (ArgExp), the degree of openness to the outside world (Open), the level of urbanization (Urban) and the degree of denationalization (Reform), in which ε is a random error term. Since we do not have complete Gini coefficients for the country as a whole for the years 1978–2010, this chapter uses the ratio of real urban disposable income per capita to real rural net income per capita (with 1978 as the base year) as a measure of income inequality in China. Since the development of the recessive economy will, to some extent, lead to a reduction in tax revenues, which in turn will reduce the ability to provide public goods and services, thereby affecting income redistribution, we infer here that the recessive economy will widen the income gap. As the economy grows, total income [total income of residents = per capita disposable income of urban residents × urban population + per capita net income of rural residents × rural population]. An increase in the share of GDP (IncomeGDP) will narrow the income gap, while an increase in the unemployment rate (UnempRate) will widen the income gap, and the government will narrow the urban–rural gap by increasing support for agriculture (ArgExp) and increasing farmers’ income. To further analyze the influences of the income gap, three variables reflecting the structural change in the Chinese economy are also considered in our regression equation: the level of urbanization expressed as the share of urban population in the total population (Urban), the degree of openness expressed as the share of total import and export trade in GDP (Open), and denationalization expressed as the share of the number of employees in the nonstate economy in the total number of employees in the economy degree (Reform). Regarding the impact of these three variables on income disparity, we believe that increasing the level of urbanization is conducive to improving the structure of the rural labor force and increasing farmers’ income, thereby reducing income disparity. Since most of the processing, production, transportation, marketing and other aspects of import and export trade take place in cities, urban residents benefit more from them, so the degree of openness to the outside world will widen income disparity. For denationalization, we believe that it is important to improve the structure of the rural labor force and increase farmers’ income. degree on income disparity, we argue that the restructuring and reorganization of urban state-owned enterprises has improved their efficiency and increased workers’ income. This process of property rights change has also led to the unemployment and layoff of some workers, causing difficulties in their lives. At the same time, the rapid development of township enterprises has absorbed part of the rural labor force and increased farmers’ income. Lu Ming and Chen Zhao (2004) argue that denationalization leads to the reconfiguration of urban–rural labor market allocation; thus, the impact of denationalization on the income gap is uncertain. Here, we will use empirical evidence to make our estimates.

6.2 China’s Recessive Economical Scale and Income Inequality

317

The data for HeSize in the regression Eq. (6.12) are from Table 6.3 in this chapter, the data required for each of the other variables are from the relevant years of the China Statistical Yearbook, and the estimated results of the (6.12) equation are shown in Table 6.4. From Table 6.4, we can derive the following estimates: first, the effect of the size of the recessive economy on the income gap is significantly positively correlated, with a 10% increase in the size of the recessive economy increasing inequality by 7–10%, i.e., the recessive economy widens the income gap. Second, with the development of the economy, an increase in the share of income in GDP, an increase in the level of urbanization, and an increase in the share of fiscal expenditure on agriculture will significantly reduce the income gap. Last, unemployment, openness to the outside world and the increase in the degree of denationalization widen the income gap. Table 6.4 Estimated results of the impact of the recessive economy on income disparities (1978– 2010) The explanatory variable is the ratio of per capita income of urban and rural residents Inequality-1 HeSize-1 Income GDP

(1)

(2)

(3)

(4)

(5)

0.815

0.640

0.833

0.694

0.627

(17.12)***

(6.56)***

(18.91)***

(7.38)***

(7.15)** *

0.678

0.911

0.920

1.070

0.875

(1.63)

(2.22)**

(2.35)**

(2.75)**

(2.82)***

−1.649

−1.647

−1.711

−1.701

−0.982

(5.22)***

(5.49)***

(5.91)***

(6.06)***

(2.47)**

0.059

0.055

(1.66)

(1.53)

Unemp Rate

0.075 (2.02)*

ArgExp

−3.495

−3.037

(2.56)**

(2.25)**

Urban

−1.344

Open

0.155

Reform

4.083

(1.97)* (0.89) (2.90)*** 1.097

1.171

1.272

1.306

−2.190

(4.71)***

(5.23)***

(5.69)***

(6.01)***

(2.32)**

observed value

32

32

32

32

32

Adj. R2

0.953

0.958

0.961

0.963

0.978

F statistical value

210.95***

176.62***

191.25***

163.52***

201.47***

constant term

Note ***, **, and * denote significant differences at the 1, 5, and 10% levels, respectively, and the number in parentheses is the absolute value of the t-statistic

318

6 Recessive Economy and Income Distribution

Fig. 6.2 Multiple indicators and multiple causes model path diagram

6.3 Size, Causes and Consequences of the Recessive Economy by Region in China 6.3.1 Causal Variables of the Recessive Economy The results of theoretical and empirical studies show that one of the crucial aspects of estimating the size of the recessive economy using structural equation modeling is the correct selection of the causal variables and the corresponding indicator variables that affect the recessive economy. In most of the studies, the causal variables used are tax burden, government regulation, unemployment rate, and self-employment rate. For the tax burden, to reflect the impact of different taxes on the recessive economy, the total tax revenue is usually divided into direct and indirect taxes. Indicator variables are usually chosen from the level of economic development, labor force participation rate, monetary data7 and other indicators. We give a path diagram of the MIMIC model in this chapter, as shown in Fig. 6.2.

7

Since we do not publish monetary data (M0, M1, M2) for all provinces and municipalities, monetary indicators are not considered in this chapter.

6.3 Size, Causes and Consequences …

6.3.1.1

319

Tax Burden

In almost all studies of the recessive economy, tax burdens and social security contributions are cited as the most important determinants of the recessive economy. Taxes are generally thought to affect labor and leisure choices, as well as costs and benefits. If there is a large difference between the total cost of labor and the after-tax income in the formal economy, this provides a strong incentive for workers to enter the informal sector, with the aim of making this difference compensated for through tax evasion. Thus, higher tax rates or tax burdens increase the supply of labor in the recessive economy, which leads to hidden economic growth. In the econometric analysis, the tax burden is expressed as a share of GDP in terms of total taxes, and to measure the impact of different taxes on the recessive economy, total taxes are usually decomposed into direct and indirect taxes and measured as their respective shares of GDP. We expect the tax burden to have a positive impact on the recessive economy. Hypothesis 1 The heavier the tax burden is, the larger the size of the recessive economy.

6.3.1.2

Income of Residents

After the founding of New China, we adopted a planned economic system and chose a strategy that gave priority to the development of heavy industry. In line with this, the government adopted a low income distribution model, including a low proportion of labor income in the primary distribution and a low proportion of residents’ income in the national income distribution. Even after the reform and opening up, although our economic growth has achieved world-renowned success and people’s income levels have risen significantly, the problem of the “two proportions” remaining low still exists. In the process of transitioning from a planned economy to a market economy, China’s society and economy have developed rapidly, and the market has become increasingly abundant while encouraging some people to become rich first. As a result, there is a gap between the desire to increase income and the low level of income (including primary and redistributed income) in reality. To narrow or close the gap between the desired income and reality, some organizations, enterprises and individuals resort to different methods, such as rent-seeking, trading of power and money, tax evasion, engaging in second jobs, etc. to obtain additional income, i.e., hidden income. There are both “legal” and illegal components, and they all have in common the evasion of government laws and regulations and the evasion of taxes, and these incomes are not included in the official statistics. In this chapter, we express the income share of residents as the product of per capita urban disposable income and the number of urban or nonagricultural residents plus the product of per capita rural disposable income and the number of rural or

320

6 Recessive Economy and Income Distribution

agricultural residents as a share of GDP and use this to analyze the impact of residents’ income on the recessive economy. Hypothesis 2 The lower the share of household income is, the higher the size of the recessive economy.

6.3.1.3

Unemployment Rate

In the process of transitioning from a planned economy to a market economy in China, a large number of laid-off and unemployed people have emerged who have been encouraged by the state policy to take different ways to earn their own living and become self-employed. Therefore, we believe that there are still some practitioners of the recessive economy from the unemployed, both hidden employment. In this chapter, we use the urban registered unemployment rate as a measure of unemployment and assume that. Hypothesis 3 The higher the unemployment rate is, the larger the size of the recessive economy.

6.3.1.4

Self-Employment Rate

The ratio of the number of self-employed individuals to the labor force is considered to be an important factor influencing the size of the recessive economy. From the results of existing studies, we find that as the number of laborers involved in the recessive economy increases, the size of the recessive economy increases correspondingly. Since the reform and opening up, China’s private and individual economy has developed greatly, which on the one hand enlivens the economy and provides employment opportunities but also provides a larger space for engaging in hidden economic activities? In this chapter, we measure the self-employment rate by the ratio of the sum of private and self-employment in urban and rural areas to the total number of employed people. It is also assumed that. Hypothesis 4 The higher the rate of self-employment is, the larger the size of the recessive economy.

6.3.1.5

Government Regulation and Public Services

From a theoretical point of view, government regulation is one of the reasons for the existence of the recessive economy, but the relationship between government regulation and the size of the recessive economy is uncertain. On the one hand, excessive regulation (e.g., licensing, trade barriers, etc.) raises the cost of entry,

6.3 Size, Causes and Consequences …

321

coupled with inefficient levels of public services, cumbersome approval procedures, etc., which raises the transaction costs of public registration of investors, thus causing some firms and individuals to switch from the formal economy, where they had hoped to engage, to the underground economy, and thus pushing up the size of the recessive economy; on the other hand, if the government is not able to provide a certain level of public services in certain specific areas, it may not be able to provide a certain level of public services. Better regulation and improved laws and regulations in this area will avoid corrupt practices and deter tax evasion motives and behaviors; in addition, it will reduce the level of recessive economy to some extent by improving the efficiency of services and practices and lowering transaction costs. Government control in China has evolved from overregulation during the planned economy period to a gradual relaxation at the present stage, providing some space for the development of the recessive economy. However, the government is also constantly improving its efficiency and management and strengthening regulations in certain areas to ease and inhibit the development of the recessive economy. Attempts have been made to use some kind of indicator to measure the extent of government regulation, such as the ratio of the number of civil servants to total employment or the share of government consumption in GDP. In this chapter, we use the ratio of government consumption to GDP to measure the degree of government regulation. Hypothesis 5 The more government regulation there is, the smaller the size of the recessive economy.

6.3.2 The Target Variable of the Recessive Economy 6.3.2.1

Economic Growth

The relationship between the hidden economy and the official economy is uncertain. On the one hand, the increase in the size of the hidden economy may cause the factors of production to shift to the hidden economy from the official economy, thereby lowering the official GDP growth rate. Therefore, the relationship between the hidden economy scale and the official economy is negatively correlated. On the other hand, some researchers believe that the relative scale of the hidden economy also increases with the promotion of the growth rate of the official economy during the expansion stage of the economic cycle because it meets some goods and service needs that the official economy cannot involve. However, the size of the hidden economy is reduced because of the decline in the official economic growth rate during the period of economic recession. China’s economy has grown rapidly in the course of the transformation from planned to market economies; at the same time, China’s hidden economic scale has also shown an increasing trend. Therefore, by using the actual GDP growth rate to

322

6 Recessive Economy and Income Distribution

measure the economic growth rate in this chapter and combining it with China’s actual situation, we assume the following: Assumption 6 The hidden economic scale and economic growth have a positive correlation.

6.3.2.2

Labor Force Participation Rate

The increase in the relative scale of the hidden economy usually reflects a decline in the official labor force participation rate8 ; the number of people working in the official economy and working time in the formal economy will decrease with the increase in the number of people working in the hidden economic departments. We use the ratio of the total employment economically active population (15–64 years of age) to measure the labor force participation rate in this chapter and assume the following: Assumption 7 The larger the hidden economic scale is, the lower the official labor force participation rate.

6.3.3 Data and Empirical Results 6.3.3.1

Data and Variable Declaration

We take the hidden economic scale (the ratio of the hidden economy to GDP) as the hidden variable and fully consider the causal variables that affect the hidden economy, such as tax burden (direct and indirect taxes), resident income, government regulation, unemployment rate, and self-employment rate, and the actual GDP growth rate and labor force participation rate as the target variables to establish the MIMIC model and measure the scale of the hidden economy through measurement methods. The data required for causal variables and target variables in the model come from the China Statistical Yearbook and China Population Statistics Yearbook 1998– 2010.9 The expression and meaning of each variable are shown in Table 6.5. 8

The China Statistical Yearbook did not publish the number of economically active population of various provinces and regions in each year, but the number of laborers (persons) in the 15–64 years old sample survey data was released. Therefore, the labor force participation rate in this chapter = employment (10,000 persons)/[15–64 years old labor force population (persons) in the sample data of the sample survey/population (persons) × total number of persons (10,000 persons)]. 9 Whether they are the China Statistical Yearbook 2011, the statistical yearbooks of provinces and regions in 2011 and the sixth national census data, we have not been able to obtain complete demographic data in urban and rural areas in various provinces and regions by the end of 2011, which makes it difficult to calculate the proportion of urban and rural residents’ income to GDP in

6.3 Size, Causes and Consequences …

323

Table 6.5 Descriptive statistics of causal variables and target variables Variable name

Observed value

Mean value

Standard deviation

Least value

Maximum value

Variable declaration

ttaxgdp

360

0.0611

0.0248

0.0186

0.1683

Total tax revenue/GDP

itaxgdp

360

0.0379

0.0140

0.0112

0.0918

Indirect tax/GDP

dtaxgdp

360

0.0232

0.0120

0.0074

0.0811

Direct tax/GDP

incomegdp

360

0.4267

0.0905

0.2416

0.7540

Resident income/GDP

unemprate

360

0.0359

0.0078

0.0060

0.0650

Registered urban unemployment rate

gcongdp

360

0.1516

0.0397

0.0821

0.3027

Government consumption/GDP

selfrate

360

0.1128

0.0646

0.0326

0.3913

Self-employment rate

gdprate

360

0.1067

0.0223

0.0497

0.2135

Real GDP growth rate

labrate

360

0.7089

0.1058

0.4971

0.9836

Labor force participation rate

To distinguish the different effects of different types of taxes on the hidden economy, we divide the total tax revenue into direct tax and indirect tax during the inspection; the data extent we select is from 1998 to 2009 since the value-added tax and business tax of various provinces and regions have only been announced since 1998. In addition, the indirect taxes of each province and region are the sum of value-added tax, business tax, resource tax, and urban construction and maintenance tax (Research Group of the Taxation Research Institute of the State Administration of Taxation, 2005); the direct tax is obtained by subtracting the indirect tax from total tax revenue; government regulation is expressed by the proportion of government consumption in GDP; the self-employment rate is expressed by the ratio of the sum of the number of urban and rural private and individual employed people to the labor force. Target variables include two variables that reflect the annual real GDP growth rate of the production market and the labor force participation of the labor market.

6.3.3.2

Estimated Results of MIMIC Model

The basis for the identification and selection of the model is that we start with the most general form of the model, gradually remove the structural variables with unapparent statistics, and comprehensively consider and determine the model according to the each province. Therefore, what is measured in this chapter is the hidden economic scale of provinces and regions during 1998–2009.

324

6 Recessive Economy and Income Distribution

testing values such as probability of chi-square test, RMSEA, AGFI and SRMR. In addition, we can also adjust the model by adding and deleting causal variables and compare the fit of the model; we will choose the simple model instead of more parameters if the fit of the simple model is similar to the complex model. Table 6.6 shows the estimated result of the MIMIC model by using Amos 7.0 software. The results show that the estimated coefficients of each variable in the table are statistically significant and in line with theoretical expectations regardless of what estimation form is used. Assumptions 1–4 we proposed earlier are confirmed, but assumption 5 is invalid because tax burden, unemployment rate and the hidden economy are significantly positively correlated, and residents’ income, government regulation, and self-employment rate have a significant negative correlation with the hidden economy. From the estimation results, we can also see that the hidden economy has a significant negative correlation with the labor force participation rate, which indicates that the labor force participation rate decreases significantly with the growth of the hidden economy, confirming assumption 7. We select the M3-1-2B model in this chapter according to the aforementioned model identification and selection basis and compare the fit index in the test results; the chi-square value χ 2 of this model is 6.565 (p = 0.161), RMSEA is 0.042, SRMR is 0.0333 and AGFI is 0.972, which shows that the imitative effect of the sample covariance matrix S and the implicit covariance matrix in the hypothetical model is very good. This model includes three causal variables, such as the proportion of total tax to GDP (ttaxgdp), the proportion of government consumption to GDP (gcongdp) and unemployment rate (unemprate), and two target variables, such as the actual GDP growth rate and labor force participation rate. According to the estimated coefficients of causal variables, we obtain the structural equation shown in (6.13): ηˆ i,t = 0.123 ∗ ttaxgdpi,t − 0.078 ∗ gcongdpi,t + 0.910 ∗ unempratei,t

(6.13)

We can calculate the hidden economic index of each province and region from 1998 to 2007 from Eq. (6.13).

6.3.3.3

Calculation of Recessive Economy Scale

We need to calibrate it by using some methods and convert it into the ratio of the hidden economy to GDP since the MIMIC model only calculates the hidden economic index. A common approach is to use a certain year as the base year and obtain the hidden economic scale of the base year by using other estimation methods (such as the currency demand method). However, the currency demand method cannot be used to obtain them because currency data (such as M0, M1, and M2) of various provinces and regions in China are not available. Is it feasible to use the ratio of the GDP difference of the provinces and regions before and after the 2004 economic census in China to the GDP before census as the hidden economic scale? We find that the gap between the GDP after the census and the GDP before the census is

−0.143*** (−11.549)

−0.142*** (−11.621)

0.623*** (6.456)

−0.035** (−1.941)

−0.070*** (−4.407)

incomegdp

unemprate

gcongdp

selfrate

36.421 p = 0.000

10

Chi-square1 (χ 2 )

df(DOF)

6

26.184 p = 0.000

−3.774*** (−6.735)

−3.674*** (−6.723)

GFI

1.000

1.000

labrate

−0.065*** (−4.211)

gdprate

Target variables

−0.300*** (−2.826)

−0.340*** (−3.131)

dtaxgdp

0.601*** (6.262)

0.218** (2.506)

M 5-1-2A

0.279*** (2.999)

M 6-1-2

itaxgdp

ttaxgdp

Causal variables

7

9.304 p = 0.232

−3.084*** (−6.195)

1.000

−0.027 (0.163)

0.602*** (5.988)

−0.128*** (−11.795)

−0.532*** (−4.729)

0.277*** (2.758)

M 5-1-2B

3

24.383 p = 0.000

−4.063*** (−6.322)

1.000

−0.051*** (−3.241)

−0.136*** (−10.338)

−0.461*** (−4.243)

0.248*** (2.756)

M 4-1-2A

Table 6.6 Estimated results of structural equation model MIMIC (Samples = 360)

5

14.154 p = 0.015

−3.173*** (−6.189)

1.000

0.588*** (5.945)

−0.130*** (−12.015)

−0.493*** (−4.533)

0.230** (2.453)

M 4-1-2B

2

0.042 p = 0.979

−3.469*** (−5.988)

1.000

−0.128*** (−11.081)

−0.617*** (−5.547)

0.261*** (2.704)

M 3-1-2A

4 (continued)

6.565 p = 0.161

−1.251* (−1.669)

1.000

−0.078*** (−2.861)

0.910*** (6.231)

0.123*** (2.743)

M 3-1-2B

6.3 Size, Causes and Consequences … 325

0.086

0.0484

RMSEA3

SRMR4

0.0411

0.097

0.908

M 5-1-2A

0.0282

0.030

0.972

M 5-1-2B

0.0434

0.141

0.850

M 4-1-2A

0.0535

0.071

0.947

M 4-1-2B

0.0027

0.000

1.000

M 3-1-2A

0.0333

0.042

0.972

M 3-1-2B

Note The data in parentheses are the z-statistics, *, **, and *** indicate that the z-statistics meet the significance levels of 10, 5, and 1%, respectively 1 The smaller the chi-square value and the larger the p value, the higher the degree of fit of the model. It is generally believed that the difference between the sample covariance matrix S and the implicit covariance matrix of the hypothetical model is small if the structural equation model is correct, which indicates that the hypothetical model has a good degree of fit with the actual data 2 AGFI is the adjusted goodness-of-fit indexfit index, whose value is between 0 and 1, and usually requires AGFI > 0.9 3 RMSEA is the approximate root mean square error, whose value is between 0 and 1; it is generally believed that the model has a good fit if RMSEA is between 0.05 and 0.08 4 SRMR is the standardized root mean square residual, whose value is between 0 and 1; it is generally acknowledged that the imitative effect of the model can be accepted if SRMR < 0.05

0.914

M 6-1-2

AGFI2

Table 6.6 (continued)

326 6 Recessive Economy and Income Distribution

6.3 Size, Causes and Consequences …

327

negative in some provinces10 by comparing the data before and after the census. Obviously, the hidden economy cannot be negative; therefore, we cannot obtain the hidden economy scale of the base year through the GDP data before and after the census. To obtain the hidden economic scale of provinces and cities in the base year, this chapter calculates the hidden economic scales of provinces and regions (excluding Tibet) with 2000 as the base year by drawing on the method of estimating the marginal propensity for household consumption-elastic coefficient from Li Jinchang and Xu Yanting (2005) (see column 4 in Table 6.7). We calculate the hidden economic scales of various provinces and regions from 1998 to 2009 by using the methods from Giles and Tedds (2002) after obtaining the hidden economic scales of the base year in various provinces and regions. ηˆ i,t ηi,t ∗ = hesi zei,2000 ∗( ) G D Pi,t ηˆ i,2000

(6.14)

Here, ηi,t /G D Pi,t is the proportion of the hidden economy to GDP in province i ∗ is the hidden economic scale of various provinces and regions in year t; hesi zei,2000 in 2000 and calculated by using the method of estimating the marginal propensity for the household consumption-elastic coefficient; and ηˆ i,t is the index of the hidden economic scale in province i in year t and calculated by formula (6.13). We calculate the hidden economic scales of 30 provinces and regions from 1998 to 2009 by combining formulas (6.13) and (6.14), as shown in Table 6.7. Table 6.7 shows that the average hidden economic scale of the country from 1998 to 2009 is between 10.65 and 15.14%11 and shows a slowly rising trend year by year. In addition, to compare the differences in the hidden economic scale of different regions, Table 6.7 also provide the average hidden economic scale of the eastern, central, and western regions. We found that the hidden economic scale of the eastern region is between 10.45 and 16.22%; that in the central region and western region are between 9.48 and 14.59% and 11.65 and 15.36%, respectively; and the hidden economic scales of the eastern, central and western regions show the same changing trend, as shown in Fig. 6.3.

6.3.3.4

Impact of Invisible Economy on Economic Growth

To test whether hypothesis 6 holds, we construct a regression model as shown in (6.15): 10

These provinces include Hebei, Heilongjiang, Jiangsu, Anhui, Fujian, Shandong, Henan, Hubei and Sichuan. See “China Economic Census Yearbook” 2004. 11 The hidden economic scale of each region we measured may be lower than the actual level since the tariffs and consumption taxes levied by the central government in each region are not reflected in the tax revenue of each region. We believe that all regions substantially exist tariff and consumption evasion although tariff and consumption tax belong to the central tax; and the hidden income generated by them must be reflected in the actual hidden economic scale of each region.

6.94

3.85

11.36

10.26

10.92

13.68

10.13

9.48

Heilongjiang

Anhui

Jiangxi

Henan

Hubei

Hunan

Central region

10.38

Shandong

8.72

8.91

Fujian

Jilin

13.56

Zhejiang

Shanxi

8.93

Jiangsu

10.45

9.21

Shanghai

Eastern region

10.07

Liaoning

9.04

7.36

Hebei

17.13

5.44

Tianjin

Hainan

14.92

Beijing

Guangdong

1998

Province

9.6

10.14

14.03

11.00

11.17

11.36

4.31

7.50

7.30

11.78

17.53

10.25

10.81

9.97

14.76

9.86

11.24

10.72

8.22

11.18

15.03

1999

10.31

9.23

14.81

10.75

14.30

11.54

6.15

7.89

7.77

12.48

17.11

9.96

11.28

12.47

14.76

11.53

11.48

11.17

8.99

12.50

15.99

2000

11.67

10.13

17.04

11.15

16.90

12.97

9.07

5.87

10.22

14.42

18.22

11.83

11.65

19.86

15.68

13.06

13.65

9.41

10.40

14.61

20.27

2001

12.7

9.83

17.92

11.18

17.37

13.72

9.35

7.13

15.09

16.2

16.00

12.16

12.21

21.28

18.10

15.04

15.40

21.02

11.56

15.13

20.25

2002

12.81

9.16

17.55

12.41

19.52

14.03

7.72

8.98

13.10

16.09

17.92

10.81

11.81

20.48

18.38

14.72

15.94

21.22

12.37

14.36

18.97

2003

Table 6.7 Recessive economic scales of different regions from 1998 to 2009 (%)

13.7

11.35

17.26

14.28

20.15

14.70

8.21

8.88

14.81

15.86

17.68

10.52

10.84

20.14

18.52

13.42

15.22

21.85

12.82

14.81

18.68

2004

2005

13.86

11.81

17.94

14.45

19.12

15.51

8.50

9.10

14.48

16.22

18.41

11.37

11.08

21.33

16.99

13.09

14.73

18.89

12.53

14.81

25.16

13.96

12.00

16.70

14.75

19.84

15.17

8.11

9.22

15.92

15.82

18.68

11.75

11.09

21.79

16.20

12.40

14.37

17.44

12.10

14.50

23.77

2006

2007

13.84

11.94

17.28

15.27

18.20

15.04

7.74

8.42

16.79

15.53

18.42

11.92

10.69

22.52

15.44

11.74

14.56

15.53

12.23

14.87

22.91

2008

14.07

11.89

16.96

15.64

19.98

14.70

7.47

8.56

17.33

15.88

20.53

12.08

12.52

22.41

16.83

11.91

14.22

14.32

13.01

15.09

21.74

2009

(continued)

14.59

12.34

17.13

16.07

20.77

15.05

7.15

8.59

19.60

15.47

20.49

12.68

12.65

22.83

16.24

11.66

14.25

14.28

13.34

14.97

16.84

328 6 Recessive Economy and Income Distribution

8.83

15.56

6.21

14.46

17.27

17.17

18.07

10.90

12.01

10.65

Sichuan

Guizhou

Yunan

Shaanxi

Gansu

Qinghai

Ningxia

Xinjiang

Western region

China

6.28

4.68

Chongqing

Neimenggu

Guangxi

1998

12.71

Province

Table 6.7 (continued)

1999

11.15

12.08

10.19

17.03

17.68

15.09

13.64

7.68

17.33

9.11

4.70

7.09

13.29

2000

11.48

11.65

9.05

16.01

15.43

14.38

15.26

6.28

16.20

8.79

6.33

6.31

14.08

2001

12.93

12.69

9.45

13.01

23.51

12.57

19.41

7.89

16.23

10.18

5.36

7.03

14.92

2002

14.26

13.89

9.44

12.86

23.47

17.65

20.36

10.73

16.65

10.60

5.35

7.70

17.99

2003

14.45

14.44

8.40

13.76

24.91

19.02

21.91

11.43

16.31

10.39

5.30

7.38

20.04

2004

14.82

14.89

8.50

15.21

22.82

17.73

24.44

12.25

16.69

10.38

5.54

9.15

21.03

2005

15.09

15.19

10.78

15.81

23.47

15.86

26.32

11.90

17.31

11.11

5.85

10.21

18.43

2006

14.89

14.88

9.39

15.20

21.20

17.77

25.99

12.07

17.16

11.04

5.74

10.07

18.09

2007

14.64

14.54

8.94

15.73

20.10

15.88

26.26

12.60

17.07

10.57

5.94

9.33

17.47

2008

15.01

15.07

8.69

17.32

23.70

13.54

25.37

13.81

17.99

11.50

5.84

9.83

18.19

2009

15.14

15.36

10.13

19.24

27.82

13.70

22.49

13.64

17.45

11.36

6.16

10.07

16.96

6.3 Size, Causes and Consequences … 329

330

6 Recessive Economy and Income Distribution

Fig. 6.3 The hidden economic scales of the eastern, central and western regions

pergdpratei,t = β0 + β1 hesi zei,t + β2 invratei,t +β3labratei,t + β4 dum04i,t + εi,t

(6.15)

Here, i represents the i-th province, and t stands for the year. Pergdprate is the actual growth rate of GDP per capita, which is the explanatory variable. Hesize means the scale of excessive economy, which is the main explanatory variable. Invrate is the investment rate, which is represented by the ratio of gross fixed capital formation to GDP. Labrate is the labor force participation rate, and we use the proportion of employed people to account for the age of 15–64. The dummy variable dum04 is used to indicate the economic census first conducted in 2004, and ε is a stochastic error term. Table 6.8 reports the regression results of the impact of the recessive economy on economic growth. The results of Hausma’s test showed that the national sample and samples from the eastern and central regions did not conform to the random effects, and the samples from the western region were in line with the random effects. The regression coefficients of investment rate and labor force participation rate are positive at a significance level of 1% in the national sample and in the eastern, central, and western regions, which are in line with the theoretical results we have expected. This indicates that investment and labor are still the main drivers of economic growth in the country and in various regions. The symbol of the regression coefficient of the dummy variable dum04 is significantly positive at the level of 1%, which indicates that through economic census, a part of the GDP that was not in the official statistics has been reflected, thereby increasing the actual per capita GDP growth rate. The regression results of the national sample in Table 6.8 show that the regression coefficient of the recessive economic scale hesize is positive at a significance level of 1%, which indicates that the recessive economy has a certain effect on improving the official economy. We further divided the national sample into three regions, the eastern, central, and western regions, and tested the impact of the recessive economy on the economic growth of each region. The results show that in the eastern, central, and western regions, Hesize’s regression coefficient is significantly positive at the

6.4 Summary

331

Table 6.8 Results of the test of the impact of the hidden economy on economic growth (1998–2009) National samples

Eastern region

Central region

Western region

(1)

(2)

(3)

(4)

0.292

0.217

0.471

0.233

(5.63)***

(3.09)***

(3.75)***

(2.90)***

invrate

0.134

0.103

0.086

0.170

(9.50)***

(3.81)***

(3.27)***

(7.53)***

labrate

0.137

0.051

0.243

0.167

(4.38)***

(1.24)

(2.71)***

(3.84)***

0.016

0.018

0.018

0.012

(3.74)***

(2.82)***

(2.08)**

(1.75)*

constant term

−0.095

−0.011

−0.156

−0.138

(4.22)***

(0.34)

(2.50)**

(4.10)***

observed value

360

132

96

132

cross-sectional number

30

11

8

11

hesize

dum04

R2

0.44

0.27

0.47

0.58

Hausman test Value

550.64***

9.38*

11.96**

−3.48

Test Method

FE

FE

FE

RE

Note *, **, and *** indicate significance levels of 10, 5, and 1%, respectively. The numbers in parentheses represent the absolute value of the t statistic value. FE (fixed effect) is a fixed effect model, and RE (random effect) is a random effect model

level of 1%. From the perspective of the overall impact of the recessive economy on economic growth, we believe that the growth of the recessive economy kept in line with the official economy to a certain extent, thereby confirming hypothesis 6.

6.4 Summary In this chapter, we measured the scale of the recessive economy in 1978–2010 and the size of the recessive economy of 30 provinces and municipalities of the country through two modified measurement methods. Also, we adopted an improved method of money demand, relaxed the assumptions of the original model, no longer required the currency to have the same velocity of circulation in the official economy and the recessive economy, and did not need to assume the scale of the recessive economy in the base year is zero. In the revised model, factors such as tax reform and government intervention in the market are considered. The scale of the recessive economy in the country from 1978 to 2010 is measured through empirical analysis, and the impact of the recessive economy on income inequality is analyzed.

332

6 Recessive Economy and Income Distribution

According to the research, it was found that from 1978 to 2008, the scale of China’s recessive economy was between 10.61 and 26.52%. When a moderately loose policy was implemented and the two factors of government regulation and tax-sharing reform were not considered, the size of the recessive economy declined, with a decrease of approximately 1%. The tax burden is the main factor affecting the recessive economy. The higher the level of tax burden is, the larger the size of the recessive economy is, and vice versa. This also shows that the increasing tax burden intensifies the willingness of enterprises and individuals to evade taxes, which sharply raises the scale of the recessive economy. The tax burden has a significant positive impact on narrow currency M1, but it has a slight impact on M0 and M2; from this, we can infer that the current transactions in the recessive economy are not totally completed by cash payments. With the improvement of bank services and the Internet, part of the transaction payment in the recessive economy is realized through bank transfers. We also find that the impact of recessive economic scale on the income gap is significantly positive; that is, the larger the size of the recessive economy is, the larger the income gap is. The unemployment rate, opening to the outside world, and the degree of denationalization have a significant positive impact on the income gap. The proportion of residents’ income in GDP, the level of urbanization, and the proportion of fiscal expenditure on agriculture to government expenditure are significantly negatively related to the income gap. We measured the scale of the recessive economy of 30 provinces and municipalities in China from 1998 to 2007 through the MIMIC model method and analyzed the reasons for the recessive economy with a focus on the impact of the recessive economy on economic growth. The measurement results of the recessive economy show that the average scale of the recessive economy of the country from 1998 to 2009 was between 10.65 and 15.14%, and it showed a trend of slowly rising year by year. Compared with different regions, we also found that the scale of the recessive economy is between 10.45 and 16.22% in the eastern region, between 9.48 and 14.59% in the central region, and from 11.65 to 15.36% in the western regions, and the scale in the eastern, central and western regions has the same trend. Our research results show that the tax burden, residents’ income, unemployment rate, self-employment rate, and government regulation are the main factors affecting the recessive economy, and with the rise in tax burden and unemployment rate, the size of the recessive economy has increased significantly. However, improving the income of residents and strengthening government regulation have significantly restrained the size of the recessive economy. We believe that the combined effect of these factors has caused the scale of the recessive economy to rise slowly year by year. We also find that although there are many factors affecting economic growth, investment and labor are still the main drivers of economic growth, and the recessive economy also has a certain positive effect on the national sample and the economic growth of the eastern region. Although the impact of economic growth in the central and western regions is positive, it is not significant. In addition, the recessive economy

References

333

has a negative impact on the official labor force participation rate; that is, the development of the recessive economy has reduced the number of employees in the official economy.

References English References Commission of the European Communities, International Monetary Fund, Organization for Economic Cooperation and Development, United Nations, World Bank, 1993, “System of National Accounts”, New York. Feige, E.L., 1994, “The Underground Economy and the Currency Enigma”, Supplement to Public Finance/Finances Publiques, Vol. 49, pp. 119–136. Fleming, M.H., Roman, J., and Farrel, G., 2000., “The Shadow Economy”, Journal of International Affairs, Vol. 53, pp. 64-89. Frey, B.S. and Weck-Hannemann, H., 1984, The Hidden Economy as an ‘Unobservable’ Variable, European Economic Review, Vol. 26. Frey, B.S. and Pommerehne, W.W., 1984, “The Hidden Economy: State and Prospect for Measurement”, Review of Income and Wealth, Vol. 30, pp. 1–23. Giles, D.E.A., 1999a, Measuring the Hidden Economy: Implications for Econometric Modeling, The Economic Journal, Vol. 109. Giles, D.E.A., 1999b, Modelling the Hidden Economy and the Tax-Gap in New Zealand, Empirical Economics, Vol. 24. Giles, D.E.A. and Tedds, L.M., 2002, Taxes and the Canadian Underground Economy, Canadian Tax Paper No. 106, Canadian Tax Foundation, Toronto/Ontario. Kline, R.B., 2004, Principles and Practice of Structural Equation Modeling, Second Edition, New York: Guilford Press. Lippert, O. and Walker, M., 1997, The Underground Economy: Global Evidences of Its Size and Impact, Vancouver, BC: The Frazer Institute. Mauleon, I. and Sarda, J., 2000, Income Measurement and Comparisons, International Advances in Economic Research, Vol. 6. Schneider, F., 2005, “Shadow Economies Around the World: What Do We Truly Know?” European Journal of Political Economy, Vol. 21, pp. 598–642. Smith, P., 1994, “Assessing the Size of the Underground Economy, the Canadian Statistical Perspectives”, Canadian Economic Observer, Vol. 11, pp. 16–33. Tanzi, V., 1983, The Underground Economy in the United States: Annual Estimates, 1930–1980, IMF Staff Papers, Vol. 30, No. 22. Thomas, J.J., 1999, “Quantifying the Black Economy: ‘Measurement Without Theory’ Yet Again?”, Economic Journal, Vol. 109, pp. 381–389.

Chapter 7

An Analysis of the Causes of Disorders in China’s Income Distribution: From the Perspective of Economic Transformation

The achievements of China’s economic reform are universally acknowledged. However, with such favorable conditions at present, why do the government and the rich class not provide adequate welfare to the poor? Why does the rapidly expanding manufacturing sector not provide basic development opportunities for the poorest 10% of the population? In the process of China’s transition from a planned economy to a market economy, there are many reasons for disorders in the income distribution. From the perspective of China’s economic transformation, we analyze some major factors affecting income distribution order, namely, labor-capital relations, administrative power and corruption; the recessive economy from the perspective of the transformation of government functions, the adjustment of ownership structure, the relationship between central and local governments; and the reform of the distribution principle, the element mobility, incentive and restraint mechanisms for people.

7.1 The Perspective of the Transformation of Government Functions Since the reform and opening up, the functions of the government have changed considerably. However, on the whole, the lagged transformation of government functions and the government’s excessive and improper intervention in the market have restricted the continued deepening of economic reforms, which affects the process of democratic political construction and leads to chaos in the distribution of residents’ income and corruption.

Most of the main ideas in this chapter are taken from Yang Canming and Guo Huifang, Discussions On Economic Transformation and Income Distribution, Fiscal Studies, No. 9, 2009. © Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_7

335

336

7 An Analysis of the Causes of Disorders …

7.1.1 Transformation of Government Functions and Income Distribution Order The imbalance of income distribution in China is closely related to the unclear responsibilities of government, overuse of authority and default in obligation. China’s transition from a planned economy to a market economy will inevitably require a change in government functions. Part of the government’s power must give way to the market. At the same time, the development of the market requires the government to assume some new responsibilities, which is an inevitable trend in the transformation pro. On the one hand, part of the government’s power must give way to the market, but which powers are transferred first and which are later transferred? Should or should not transfer? “Openly transfer” or “secretly transfer”? It is flexible. On the other hand, what new problems does market development bring? What issues require government responsibility? What issues have nothing to do with the government? When the government needs to assume management responsibilities, and when will it begin? How to take on this management responsibility? It is also flexible. In the process of the government giving up power to the market, due to the unclear positioning of the government and the market, vagueness will be produced, causing the government to give up power in public and manage it in the dark “and problems including “rent setting” and “rent seeking”. The flexibility of the above two aspects may lead to the irregularity of the income distribution order and the formation of unreasonable income. Some income is generated through these two aspects of flexibility. With the needs of market development, some problems will arise when the government assumes some new management responsibilities. For example, if the government expands its responsibilities and even consciously or unconsciously links its responsibilities with economic benefits, then some unreasonable income is generated. In the process of transformation, from the perspective of the relationship between the government and the market, the transformation of government functions will lead to a nonstandard income distribution order in China and may delay the process of marketization.

7.1.2 Changes in Government Functions and Labor-Capital Relations The labor-capital relationship is the most basic social relationship. Engels considered the relationship between labor and capital as a modern social system upon which the entire rotation axis. In the process of China’s economic transformation, the role and function of the government in labor-capital relations play an important role in the settlement of labor disputes, the adjustment of labor conflicts and the balance of interests. The government’s policy orientation and its effective implementation are one of the key factors for achieving harmonious, stable, and equal labor relations

7.1 The Perspective of the Transformation of Government Functions

337

among society as a whole. Therefore, the labor-capital conflict has attracted nationwide attention, especially the protection of the rights and interests of workers in a vulnerable position, which is the focus of social problems and livelihood issues.

7.1.2.1

Government’s Role in Labor-Capital Relations

Experts and scholars at home and abroad have summarized the government’s role in labor-capital relations into five categories, referred to as the “5P” role, namely, the protector of the basic rights of workers (Protector), the promoters of collective bargaining and employee participation (Promoter), Peace-maker of labor dispute (Peace-maker), Planner of employment security and human resources (Planner) and public sector employers (Public sector employer).1 Throughout the history of the development of labor-capital relations, the role of the government varied in different periods of economic development. However, the government favored employers in labor-capital relations for a long time in the past, which led to sharper conflicts between labor and capital and frequently happened labor movements. During the period of free capitalism, under the influence of the “night alarm” theory, the government played as a “night watchman” so that the “invisible hand” of the market was advocated to regulate and guide labor-capital relations and the government’s interference in labor-capital relations was opposed to. After entering the period of monopoly capitalism, capitalist contradictions have become increasingly acute, thus forming the theory of government functions of interventionism, which emphasizes the government’s comprehensive intervention in laborcapital relations to ensure the order of labor market and the legal rights of workers by adopting a series of welfare measures. The government functions of contemporary Western countries show the following characteristics in labor-capital relations: by recruiting workers to participate in management, the government aims to ease labor-management conflicts and improve labor-capital relations. This means that the government’s regulatory function to maintain social stability tends to be strengthened, and the socialization of administrative functions will be performed. From the perspective of China’s labor-capital relations, before the reform and opening up, China implemented a planned economic system. There was no real modern enterprise because the relationship between laborers and enterprises was affiliated with the relationship between laborers and the state, while the enterprise only played an intermediary role as an agent. Therefore, labor-capital relations in our country in the strict sense are the products of reform and opening up. With the gradual establishment of the market economic system, a new type of market-oriented labor-capital relationship has replaced the administrative labor-capital relationship. Workers who were in the “master” position in the past began to enter the labor market as owners of the labor force. However, due to the transitional economic system in China, there is a serious “government failure” in the field of labor-capital relations. On the one hand, because of the incomplete laws and regulations for protecting 1

Chen Yufeng and Chen Guoying (2009).

338

7 An Analysis of the Causes of Disorders …

workers and inadequate social security systems, workers are worried about losing their jobs and living security, so it is difficult to defend their rights and interests in the negotiation process with employers. On the other hand, the supervision of government departments is not in place, and the work procedures in labor administrative departments, labor arbitration agencies, and judicial organs are complicated when handling labor disputes; they do not provide workers with timely, fair, and highquality services from the perspective of protecting workers, which makes it very difficult for workers to safeguard their rights in accordance with the law. At present, China is undergoing a period of rapid political, economic, and social transformation in which the rule of law is not yet perfect. In addition, the government’s goals, policies, and orientation are skewed. As a result, workers in a market economy have not yet enjoyed the corresponding rights of capital in this period, which have led to increasingly prominent labor-capital problems, imbalanced beneficial relationships between labor and capital, and conflicts in labor-capital relations.

7.1.2.2

The Inevitability of Government Intervention in Labor-Capital Relations

According to the general logic of the market economy, when the labor market is very sound and complete, the government does not need to intervene, so competition in the labor market could naturally be roughly balanced. However, due to the special nature of the Chinese labor market, conflicts of interest between employers and employees cannot be reconciled by market regulation alone, and a perfectly competitive market mechanism will lead to polarization of income distribution. In real life, the labor market is not a perfectly competitive market. Compared with capital, labor is in a naturally weak position, especially in a society with relatively abundant labor resources. Capital is always in a strong position, which determines that the two parties are not completely equal. With economic globalization, scarce capital with fast liquidity that seeks profits can be distributed all over the world in pursuit of benefits. Compared to capital, labor is much more abundant with less liquidity, which is especially true across countries. Although there is a small amount of transnational labor input and output, the cost is high with many barriers, which are both political and economic, as well as linguistic and cultural. Due to the large number of workers, it is easy for the employer to fall into the plight of collective action. According to Olson’s theory of collective action theory, the larger the size of a group is, the more difficult it is to organize collective action to safeguard its group interests. A larger scale of people means a higher cost of achieving collective and concerted action, which leads to the inconsistency of the individual being input in the protection of rights and interests and his personal interests so that the individual will have a free-riding psychology and opportunistic tendency. As a result, no one is willing to take action for collective interests; unless coercive means are taken, the interests of this group will not be effectively protected. This collective action theory is fully confirmed in the labor-capital relations of modern society. In general, employers can not only take actions to alienate laborers, such as offering bribes and dividing

7.1 The Perspective of the Transformation of Government Functions

339

them, but can also easily fire laborers. Even if laborers are not bribed, it is difficult for them to organize collective actions such as strikes and collectively bargain with employers to reach a consensus action plan for better wages and working conditions. Government intervention should be involved to strengthen the bargaining power of labor by establishing a collective bargaining system to entitle labor unions to collective bargaining power. The government also needs to formulate labor protection laws to reduce and prevent occupational damage by improving the working environment by force. Protection systems such as mandatory paid vacations should be implemented. Moreover, once the labor-capital relationship breaks down, a collective strike will have a negative impact on society such that production will face large-scale stagnation, and cities and society may even become paralyzed, which will involve all aspects of society as a whole, far beyond both employers and employees, and the government must not stay out of the business. Due to the particularity of China’s labor-capital relations, coupled with the oversupply of labor in the early stages of the reform and opening up, labor-capital relations are more unlikely to be adjusted through market mechanisms, so government intervention is required to correct unbalanced labor-capital relations. However, the government’s intervention has created vacancies and dislocations in functions and roles in dealing with labor-capital relations, so it has further exacerbated labor-capital conflicts, placing workers in a more disadvantaged social situation.

7.1.2.3

Changes in Government Functions and Labor-Capital Relations: Taking Labor-Capital Relations in State-Owned Enterprises as an Example

There are still many deficiencies in handling labor relations in current China, such as hysteretic laws and regulations in adjusting labor-capital relations, insufficient attention to the collective bargaining rights of laborers, the lagging construction of labor-capital coordination mechanisms, the household registration system that still damages the basic rights of migrant workers, failure of the labor dispute handling mechanism, and inadequate enforcement of labor inspection. At the same time, trade union organizations just become a mere formality or have not yet existed in a large number of nonstate-owned enterprises. The trade union in state-owned enterprises is only a “functional department” of the enterprise. It is often constrained by the management of the enterprise in protecting the interests of employees. The absent mechanism in handling labor-capital disputes makes the labor factors always in a weak position in the distribution process, and the employers are in a dominant buyer position that plays a key role in wage decisions. Taking the labor-capital relations in state-owned enterprises as an example, we analyze the changes in government functions and labor-capital relations in the process of China’s economic transformation. Under the conditions of the planned economy, the labor-capital relations of state-owned enterprises are highly integrated in terms of interests. In this model, the interests of enterprises and workers are included in the national interests. The state is the only “employer”, which becomes a party in the

340

7 An Analysis of the Causes of Disorders …

labor-capital relationship, while the operators and workers of state-owned enterprises are basically the same in terms of social status, identity, income, etc., that is, there is no class differentiation within the working class so that they constitute the other party of labor relations. Regarding status, business operators and workers are state employees, which are the masters of the country; in terms of income, there is no obvious gap between enterprise operators and workers, and the wages of some skilled workers are even higher than those of the operators of the enterprise.2 As far as the object of interest demand is concerned, since the government has grasped the right to distribute interest resources, the object of interest demand of the operators and workers of state-owned enterprises are directed to the government. Therefore, under the conditions of the planned economy, the interest relationship between operators and workers of state-owned enterprises is an identity interest relationship because they have similarities in the elements of their interests. Whether in the planned economy or the market economy, each interest subject in the labor-capital relations of state-owned enterprises has formed an independent interest form, which has independent interests appeal. When the structure of interests diverges, the labor-capital relationship model with integrated interests of state-owned enterprises is gradually replaced by that with differentiated interests. In the economic transition period, in state-owned enterprise labor relations, the interest relationship among the government, enterprises, and workers actually contains two levels. First, as an employer, the government must pursue the maximization of interests, which will inevitably conflict with the interests of workers. Therefore, there is a confrontational interest relationship between the two. Of course, because the government is an “invisible” employer, the formation of the interest relationship between the government and workers needs to pass through the intermediate link of the business operator. Since the interests of the business operator are closely related to the interests of capital, as an employer, the government has the same interest appeal with business operators to some extent. Second, as a nonemployer, the corresponding interest form of government is public interest. Under this interest framework, the interests of the government and workers are consistent. When workers’ interests are violated by the enterprise, the government could protect the interests of workers on the weaker side of labor-capital relations by adopting labor laws and policies. The interests between the government and enterprises are reflected as a fusion of complementary and adversarial interests. On the one hand, as an economic organization, the development of enterprises has promoted the improvement of social productivity, which facilitates the harmonious development of society and the realization of public interests. Given this, the interests of the company and the government are consistent, so there is a complementary interest relationship between the two. On the other hand, there is an adversarial interest relationship between enterprises and the government. Enterprises 2

The data from workers’ interview: “according to a retired veteran worker (a former model worker), from the time he came from Shanghai to Beijing in the late 1950s to support the construction of the new B factory, his salary as a Grade 8 technician has been the highest in the factory, and even the original factory director and secretary did not earn as high a level of salary as he did. After the reform and opening up, the wages have been adjusted several times, the salary level of factory-level cadres and some of the technical staff was gradually brought up.” Failiao Xiong (2007, p. 97).

7.1 The Perspective of the Transformation of Government Functions

341

want the government to provide more social public goods that are conducive to the realization of their economic benefits or at least do not want their economic benefits to be damaged; the government wants companies to cooperate to provide maximum public benefits for society, or at least it is hoped that enterprises will gain their economic benefits under the framework of the government’s pursuit of maximizing public interests.3 Under this adversarial interest relationship model, the government and the enterprise play an interest game under the guidance of their respective interests, and the maximization of corporate economic benefits may not be conducive to the realization of government social interests. For example, to reduce operating costs, companies may take actions that violate the interests of workers. Different interest orientations have formed different roles of the government, which will inevitably affect the interests of business operators and workers. Under the role of the public interest as the leading role, when the government handles the issue of labor relations, it will inevitably strengthen the protection of workers’ interests, supervise and correct the illegal acts of business operators, and coordinate various interests in labor relations by formulating mature and scientific labor policies. Under the role of the government’s interests as the leading role, the government may focus on the pursuit of economic interests but ignore the protection of social public interests so that the imbalance of labor-capital interests will not be corrected. In practice, many of the problems shown in the labor-capital relations of state-owned enterprises are due to the self-inflation of the government’s interests and the government’s one-sided pursuit of GDP.

7.1.3 Transformation of Government Functions and Corruption of Administrative Power When China was shifting from a planned economy to a socialist market economy, due to insufficient changes in government functions and expanded administrative power, the government undertook so many social and economic management functions that most of its functions were “offside”, “vacant”, and “dislocated”, which led to the expansion of rent-seeking activities and corruption.

7.1.3.1

Main Manifestations of Insufficient Transformation of Government Functions

The Overwide Scope of Government Power Excessive government administrative power is manifested by the government’s overwhelming oversight in social management and public service areas and even in the economic field, resulting in excessive administrative power interference in the 3

Wang Shan (2009).

342

7 An Analysis of the Causes of Disorders …

economy and playing functions of market overstepping their authority. China’s economic system is still in transition, so the government’s excessive intervention in the economic field has different levels of government performance. State-owned enterprises have been disconnected from government management departments, and most of the corruption of party and government offices and their staff has direct or indirect links with enterprises. As a result, some government officials use their control over enterprises for personal gain, and “power rent seeking” has become a breeding ground for corruption, which includes the following points: First, unauthorized fees collection, fine imposing, and expenses apportioning (the three illegalities in various names that increase the burden on enterprises). The second is that the government’s management of the economy is mostly achieved by the administrative approval system. Due to the pursuit of interest, some departments and local governments have even created approvals outside the law, which not only limits the competition of enterprises as the subject of economic activities but also increases the institutional costs of economic activities. The third is to use their power, as they can control mastered plans, projects, loans, raw materials in short supply, import and export licenses, land allocation and leases, to solicit benefits from the public by demanding bribes from enterprises or setting up obstacles to them, such as occupying corporate money and goods from enterprises, asking for bribes, and even getting private consumption to corporate reimbursement. Fourth, administrative departments and law enforcement, such as industry and commerce, taxation, public security, and environmental protection, use law enforcement powers to intervene in enterprises to force them to pin down. It is an indisputable fact that government power is too powerful in the process of economic transformation. From the perspective of government revenue and expenditure, the total revenue of the Chinese government reached approximately 34% of GDP in 2010, and public service expenditure constitutes a large part of government expenditure. The proportion of administrative and public service expenditures such as the wages of administrative institution in 2010, medical treatment, retirement, official vehicles, official hospitality, official overseas visits, and office expenses accounted for approximately 38% of all government expenditures,4 of which the “three official expenses” were an important cause. Globally, Chinese government expenditure accounts for 29% of fiscal revenue, compared with 9% in the United States, 5% in Europe, and only 4% in Japan. Japan’s administrative expenditure accounts for approximately 2.5% of the total budget, and the United States accounts for approximately 15%.5 In terms of administrative expenses on official business undertaken by taxpayers, the Chinese government may be one of the countries with more expensive official expenses in the world.” The amount of funds under the “government deposits” project increased from 198.5 billion yuan in 1999 to 1.696384 trillion 4

Quoted in Tian Lei and Shi Yeqiu, Government Revenue to GDP Ratio Reaches 34%, Administrative Cost Reform Urgently Needed, Phoenix Information, Nanfeng Window, September 1, 2011, http://news.ifeng.com/shendu/nfc/detail_2011_09/01/8852635_0.shtml. 5 Quoted in Zhou Tianyong’s View on New Round of Reforms from Central Party School: to be Completed in a Decade, Oriental Morning Post, June 28, 2010.

7.1 The Perspective of the Transformation of Government Functions

343

yuan in 2008, a 9.5-fold increase.6 However, in 2009, the national fiscal revenue was approximately 6.85 trillion yuan, of which medical care, education, and employment social insurance accounted for only 14.9% of the total, while the three expenditures in the United States were equivalent to 61.9% of the total federal government expenditure.7 People’s lives cannot be improved by intervening in the market with expanding government power. The overall welfare of society can be improved by gradually reducing all government revenues, including social security, administrative fees and land transfers, and ultimately controlling it to within 25% of total GDP; gradually reducing the government’s administrative and public expenditure and limiting it to 15% of fiscal revenue; and continuously increasing the income of residents, especially low- and middle-income residents.

Existing Direct Intervention Due to the lag in functional transformation, governments at all levels and their functional departments still directly intervene in all aspects of microeconomic activities that the government directly participates in market activities, which makes the government play the dual role of “athlete” and “referee”. Because the economic functional departments of governments at all levels hold many important factors of production and scarce resources, many economic systems, such as investment and financing, still need administrative approval. Therefore, the degree of marketization is insufficient, and the role of the market in economic operation and resource allocation is greatly restricted. In this way, government departments and their staff who can allocate production factors and interfere with microeconomic activities have become the key targets to buy off for stakeholders. Government officials in China are aware that the government prioritizes economic growth, and the Chinese economy is mostly driven by investment, which shows that investment is a shortcut to achieve rapid GDP growth. Local governments are pro-business and ignore or even sacrifice the rights and interests of the people and workers. This is because the government focuses on attracting investment when promoting economic growth because corporate investment and business performance can be directly counted in local GDP, which contributes to the performance of local government officials at all levels. China’s dual economic structure determines the almost unlimited supply of cheap labor, which does not mean that labor prices can be suppressed to very low levels for a long time. If the rights of workers can be fairly guaranteed by the government, workers who enter the modern economic sector can force companies to raise their wages through legal means. However, local governments at all levels who are pursuing growth performance may not be fair in implementing the law. When workers’ claims 6

Quoted in “Xinhua News Agency Researcher: China’s Gini Coefficient Already Exceeds 0.5, Could Lead to Social Unrest”, Economic Reference Daily, 21 May 2010. 7 Quoted from People’s Daily, Powerful Nation Community, Powerful Nation Forum, http://bbs1. people.com.cn/postDetail.do?id=107782901, March 6, 2011.

344

7 An Analysis of the Causes of Disorders …

conflict with their employers, local governments often do not provide administrative and judicial relief to migrant workers. The lack of rights has led to the loss of workers’ bargaining power with their employers, so the rise of wages lacks incentives that working conditions cannot be improved. It can be seen that inequality of political rights is the most fundamental cause of economic inequality.

Large Government Agencies The giant system of government institutions has led to a particularly large number of departments with overlapping functions and low administrative efficiency, causing a serious waste of social resources. All kinds of corruptions have severely damaged the government’s image and ability to govern. It has not lost all credibility with the people but also shaken the foundations of society. After the reform and opening up, the government did not decrease but became increasingly larger with economic marketization. After the reform and opening up, the government did not decrease but became increasingly larger with economic marketization. It has evolved from a three-level government to a five-level government with too many administrative levels and overlapping functions. Therefore, almost every five years, China begins a reform of China’s administration system to streamline government organs and reduce staff. However, after each reform of the streamlined organization, the number of organizations on the surface has decreased, but the number of functional departments within the organization has increased, greatly offsetting the improvement of efficiency, and the staff will even increase significantly, resulting in lip service that there is no achievements in the reform but a strange circle of “simplification, expansion, resimplification, and re-expansion”. For example, there are 19 cadres at or above the deputy department level in a department-level unit in the Department of Agriculture of Guangdong Province, of which 7 are at the department level.8 There are 3.1 million civil servants in the United States, so the ratio of officials to civilians is 1:94. With the same statistical method, China’s civil servants are close to 70 million, so the ratio of officials to citizens is 1:18.9 From an economic perspective, the ratio of fiscal support personnel to GDP is 39 people per million US dollars in China, which is much 8

Guangdong Agriculture Department Secretary: what to do with seven cadres at one department level, Southern Metropolis Daily, March 7, 2012, http://news.cn.yahoo.com/ypen/20120307/907 610.html. Chen Jiaji, a deputy to the National People’s Congress and current party secretary of Guangdong’s Agriculture Department, said at two sessions held just this year: a department-level unit, with 19 deputy department-level cadres, of which seven is at the department level, which is the Guangdong Provincial Department of Agriculture. Chen Jiaji explained that so many cadres in a province, mainly because of the merger of the Ministry system. It not only is a serious surplus of province-level cadres, the work of Director also a problem. Because the large departmental system caused by the bloated problem of officials is not uncommon, after the reform of the Ministry of Shenzhen City, the newly established Municipal Science, Industry and Trade Information Commission has one cadres and 20 deputy cadres. 9 Xinlijian, Ranked in second place in the world: where the taxpayers’ money goes, China Thinking Network, 2010-6-2, http://www.chinathink.net/aindex/documents/201006/9793.shtml.

7.1 The Perspective of the Transformation of Government Functions

345

higher than that of developed countries. Compared with the United States, China’s financial support personnel “exceed” nearly 20 times.10 With the measurement of the level of economic, political, and social development, the number of Chinese officials exceeds too many. The Chinese bureaucracy is probably the same group with the highest percentage of leading officials in the world, which is of top-heavy matter because of too many officials and fewer civilians.

The Monopoly Privilege of Economic Group Under the current market economic system in China, government departments are still in a strong position, and some government departments have a monopoly right to conduct political rule. On the one hand, this monopoly power has enabled it to effectively intervene in economic activities. On the other hand, it has also given some government departments or some government officials the power to intervene at will and to strongly intervene in market behavior, which severely hinders the normal production and operation activities of enterprises that are not conducive to the healthy development of our economy. At present, the administrative monopoly has a growing trend, which is reflected in the monopoly industry relying on political and administrative power to exclude competition, such as blocking the intervention of private capital in the name of national security; some state-owned monopoly enterprises merge and reorganize through administrative means to weaken competition; and some state-owned monopolies enjoy economic franchises that violate the principle of fair competition and cannot be restricted by laws, hindering the free flow of factors of production between different industries and sectors. For example, industry operation restrictions, which mean that only a few companies are allowed to monopolize certain industries, other companies are not allowed to enter and participate in competition freely so that monopoly profits are obtained and special interest groups are formed. The control of import and export quotas and approvals and franchise of foreign trade could bring benefits to officials and merchants; some government departments’ preferential policies for certain regions and groups are equivalent to providing these places and groups with a monopoly to obtain benefits, etc. Due to the strengthening of administrative monopoly, social wealth has transferred from competitive enterprises to monopolistic enterprises, which has become the latter’s monopoly rent, thereby widening the income gap between the two. The profit mechanism of monopolies formed by administrative power is different from that of market monopolies formed under general market competition. The formation of the industry monopoly is based on the authorization of some power subjects that lead the reform process. Relying on their market monopoly, these monopolies obtained monopoly benefits through the high monopoly prices recognized by certain government departments. The abnormally high income in the monotonous industry comes not only from high wage income but also from extrawage income, such as bonuses, housing provident 10 Fu Yang, 20 times more financial dependents in China than in developed countries? Beijing Evening News, February 10, 2006, http://news.163.com/06/0210/00/29IFEUH10001124T.html.

346

7 An Analysis of the Causes of Disorders …

funds, and various types of subsidies. Due to the relatively high income in the administrative monopoly industries, the income distribution effect has formed, resulting in the inevitably widening of the income gap of workers in various industries. In addition, monopoly state-owned enterprises prefer capital-intensive heavy enterprises and infrastructure projects, so the strengthening of monopolies has reduced the labor force absorbed by enterprises and further exacerbated the inequality of social income.

7.1.3.2

Transformation of Government Functions and Power Rent-Seeking

Rent-seeking activities are closely related to the government’s excessive intervention in the market. Without the excessive intervention of government departments and the special monopoly status provided by this intervention, rents cannot be sought. In the process of China’s transition to a market economy, the transformation of government functions has been seriously delayed, and the reform of the modernization of the government system has not been completed, so there are many misunderstandings of excessive intervention in the economy. These excessive interventions provide opportunities for rent-seeking activities, and many rent-seekers also easily find the basis for legal rent-seeking from government policies and regulations. This is the actual economic basis for corruption in China today and the institutional reason for the growing corruption.

The Failed Separation Between Government and Business—A Breeding Ground for Power-Seeking China’s traditional economic system implements a highly centralized planned economy, and the government and enterprise did not separate enough that the government directly intervenes in the production and operation activities of enterprises. As the traditional planned economic system transfers to the socialist market economic system, government functions and enterprises have not been truly separated, and government functions have not been truly separated. Corruptions such as abusing power for personal gains and the power-for-money deal have continued to breed and spread. The first premise of power rent-seeking is the excessive concentration of power and the government’s unlimited control of enterprises. As the government holds the destiny of the enterprise, it is possible to use the right to “control” the enterprise, and the enterprise bribes the government, which benefits them. As a result, rent-seeking activities seek benefits by using power to control the enterprise spread and gradually form a “seller market” of power. On the one hand, those with power are stimulated to ask higher and higher prices; even if they have only a little power, they will try their best to expand so that they will have the greatest “interest”. On the other hand, enterprises have to handle affairs with cumbersome procedures. Asking for bribes, taking bribes and offering bribes have become commonplace. During the convergence of the old and new systems, huge rents existed in the areas

7.1 The Perspective of the Transformation of Government Functions

347

of stock listing approval, land lease, financial lending, license application, foreign trade management, and some administrative monopoly industries. The existence of a large number of rents has not only led to unusually active rent-seeking activities but also induced power into the market and set rents frantically through power. Some new privileged stratum with vested interests need to be both “referees” who manage the market and “athletes” who participate in the market in which both money and power are needed. Therefore, in the transition period, the transformation of government functions was not sufficient, so the government-enterprise relationship in the planned economy period was still maintained. This old function and relationship became a breeding ground for power rent-seeking.

The Double-Track Price system—An Important Reason for Power Rent-Seeking At the beginning of reform and opening up, one of the practices in China was to realize the transition from a planned economy to a socialist market economy through a “double-track price system” of planned prices and market prices. Due to the doubletrack price system, the country’s material distribution can be divided into planned and unplanned prices, and price control has a difference between parity and special prices, which provides incentives and conditions for power rent-seeking. The difference between the market price and the planned price (official price) is equal to the economic rent. From seeking profits through different prices of a “double-track” price system in the 1980s to “rent-seeking” in factor marketization in the 1990s, people can easily observe many power rent-seeking phenomena. During the transition of the market economy, although the government explicitly canceled the double-track price system, in the actual economic operation process, this narrow system has gradually evolved into a double-track price system in the broad sense. The prices here refer to prices in a broad sense, including commodity prices, capital prices (interest rates), land prices, foreign exchange prices (exchange rates), imported commodity prices (limits and approvals), and so on. As long as a doubletrack price system exists, economic rents will be generated, incentivizing powerful officials and rich rent-seekers to participate in sharing economic rents. 例如, For example, some government departments control the loan limit of banks and interest rate, with the market interest rate twice as high as the official interest rate. Therefore, bank presidents, loan officers, and rent-seekers share the “interest rate rent” through rent-seeking; for example, some government departments control foreign exchange quotas and exchange rates, the market exchange rate is much higher than the official exchange rate, and officials who have the right to approve foreign exchange share rentrate rents with rent-seekers. The process of participation of government officials in all these sectors sharing economic rents is actually the process of power rent-seeking. To date, the impact of power rent-seeking under this double-track price system still exists. In the fields of urban relocation, land transfer, capital credit, and “moneymaking” in the capital market, various power rent-seeking phenomena continue to emerge. For example, some local governments use administrative power to requisite

348

7 An Analysis of the Causes of Disorders …

land from farmers at a low price and then sell it at a high price, thereby obtaining (land) spread income and forming (land) financial revenue for these local governments. In today’s government agencies, some officials who have the authority to approve or decide on funds, land, or projects often become renters of “fund rent”, “land rent”, and “project rent”, who create “funds”, the double price of “land” and “project”, shares the “fund rent”, “land rent”, and “project rent” with rent-seeker of the fund, land or project (i.e., the recipient of the fund, land, or project).

Insufficient Change in Government Functions—An Inherent Incentive for Power Corruption In the process of China’s transition to a socialist market economy, important changes have taken place in government functions, but compared to the process of economic marketization, the transformation of government functions is seriously insufficient. In the transition from a planned economy to a market economy, new institutional factors are mainly developed through “incremental” methods outside the traditional system, and changes within the system are lagging behind. On the one hand, the long-term development of “out-of-system increment” has laid the foundation for market-oriented resource allocation and has increasingly penetrated and expanded into “in-system”; on the other hand, the relations among “in-system” state-owned enterprises, state-owned banks and governments are intertwined, and it is difficult for the government to “separate” from the market. This means that in the system transformation, the “identity” of the market is often vague in some areas. The unequal status of the market and the impact of noneconomic factors in the transaction process often have an important effect on the outcome of competition and are also decisive factors for power corruption. When the government is still deeply involved in the market, it will inevitably restrict the government’s function in maintaining equal rights of market subjects and ensuring fair competition. At the same time, it will affect the government’s right to redistribute and the effective regulation of public policy on social income distribution. At present, the main reason for the widening gap between the rich and the poor in China is the inequality of opportunity, which means that because some government departments have excessive power to control resources, people who have access to this power can rely on this power to become rich through rent-seeking activities. Although administrative resource allocation has decreased significantly during the system transition, it still exists not only in the state-owned economic sectors but also in the nonstate-owned sectors in recent years. Under the functions of the market mechanism, the power to allocate administrative resources has the meaning of “price” that can fix the price, so there is the possibility of marketization of power “objectively”. The marketization of power in the allocation of administrative resources is the most important factor in the unfair possession and distribution of social wealth and its negative impact is far greater than the shortcomings of the market adjustment

7.1 The Perspective of the Transformation of Government Functions

349

mechanism itself and the imperfection of the social adjustment mechanism, but it also seriously distorts the latter. The marketization of power has led to the prevalence of kinship and nepotism in many areas, inhibiting fair competition based on quality and personal capabilities, so the mechanism for survival of the fittest in market operations often evolves into adverse elimination. Due to the imperfect system during the transition period, power operation lacks an effective institutional constraint mechanism. A small number of people who have control over the allocation of public resources can be able to achieve success one way or another, which means that it is easy for them to use power to exchange and gain their own benefits. Any public power should operate in an open and transparent environment. However, in the race for political power, the game has allowed many powers to be “private”, thus providing a breeding ground for power corruption, and cancer cells of power corruption have gradually penetrated into the political body and become increasingly difficult to cure.

7.1.3.3

Serious Consequences of Corruption of Administrative Power

When a market economy is implemented with unrestricted public power, power will inevitably enter the field of market exchange. For example, the “red top” is the result of a highly concentrated political system and imperfect market interactions, which is an illegitimate child of power and money. Power rent-seeking, an irrational activity beyond institutional norm, has seriously affected the sound operation and coordinated development of society in all aspects.

“Official Rank Standard” Becoming the Political and Cultural Mainstream of the Entire Society The abuse and corruption of power no longer makes power subordinate to the public’s interests but instead lives on money. Power becomes a useful tool for power seekers to obtain personal benefits, thereby fundamentally changing the nature of power, so power is gradually privatized, commoditized, and capitalized. Given this, there is an internal causal link between promotion and getting rich. Therefore, those in power are desperately accumulating power in order to obtain benefits that are more material, try to make their official positions higher and higher with increasing power, which is the “power accumulation” just like the capital accumulation. Those who are out of office regard being an official as a shortcut to get rich, so they will get into politics at all costs. In recent years, the hot topic of public service tests can also explain this to a certain extent. In recent years, public service tests have become a hot topic and are closely related to undergraduate employment problems.

350

7 An Analysis of the Causes of Disorders …

Leading to Waste of Social Resources and Intangible Loss of Efficiency to Society When seeking rent, to obtain personal benefits, people often do not increase profits by expanding production and reducing costs but use a large amount of labor, money and material resources to fight for the favor/preference of government, such as obtaining monopoly licenses from the government, materials with fair prices, low-interest loans, tax relief and free investment. These activities consume many scarce social resources and reduce the economic welfare of the whole society. The more government officials postpone doing something, the greater the potential losses to businesses and individuals. To avoid greater losses, businesses and individuals need to pay more rent to government officials to urge them to do so as soon as possible. In this way, government officials are often not committed to improving work efficiency in their daily work but are racking their brains to delay work, putting pressure on companies and individuals to force them to pay tribute. On the other hand, since all government agencies and officials who have the right to participate in the examination and approval can benefit from it, as long as they are slightly closed to it, relevant and irrelevant agencies and officials will try to participate in, set up checkpoints, and force companies or individuals to pay more for dredging costs. Corrupt activities make it difficult to establish competitive markets and cause potential efficiency losses to the allocation of social resources.

Causing Unfair Social Distribution and Loss of Government Legitimacy Corruption does not create wealth but redistributes existing social wealth, which is a transfer payment of social wealth. The existence of rent enables some people who have power or have some opportunity to gain power to obtain rent by virtue of special power and become rich in a short period of time. From the perspective of the income distribution of residents, due to the behavior of power rent-seeking, a large number of corrupt economies and abnormal income of power departments and those in power have been generated, which has led to a further widening of the income distribution gap. Such illegal and abnormal incomes, on the one hand, have widened the income distribution gap; on the other hand, this gap is also unacceptable to people, and it is also one of the most important factors of social instability. The history of people’s political life shows that no matter what kind of society, as long as corruption spreads, it will inevitably lead to the loss of government legitimacy and eventually to the collapse of the government. In a sense, corruption is the government’s gravedigger. In the future, the risk factor most likely to interrupt the reform and modernization process in China is corruption.

7.1 The Perspective of the Transformation of Government Functions

351

7.1.4 Transformation of Government Functions and Recessive Economy During the process of social change and economic transition, various problems will inevitably arise. Some of these problems are obvious, which can be reflected in the published statistics. Some are covert, so accurate figures are difficult to obtain or even completely out of statistics. A large amount of economic resources has been absorbed into this uncountable “black hole”, which has a powerful effect on both plans and markets, thereby forming a recessive economy. During the transformation of government functions, a large amount of “gray income” and illegal income brought by the recessive economy widened the income distribution gap and disrupted the income distribution order.

7.1.4.1

Government Will and the Recessive Economy

In the international community, the recessive economy is mostly a form of economy that is contrary to the will of the government, prohibited and restricted by laws and regulations, and hidden from the management and supervision of the government. Therefore, the recessive economy is usually referred to as the “dishonorable”, “illegitimate”, “irregular” “underground economy”, or “illicit economy”. In China, however, the situation is quite different. Many of the recessive economy phenomena are not only compatible with the will and behavior of the government but are also the result of government regulations and policies, as well as day-to-day management measures. The existence of a large number of hidden workers is a case in point. China’s government has long pursued an all-inclusive policy of high employment and has assigned the newly grown labor force to enterprises and various units by administrative means, thus creating a large amount of “on-the-job unemployment” and employment outside the system, which is one of the sources of recessive income. This is a direct consequence of the labor and employment policy of all-inclusive allocation. This is also true of other hidden incomes, such as “monopoly welfare”, which has long existed in China as a form of hidden income under the administrative monopoly. The government uses purely administrative orders to control prices, “pays for stability and solidarity”, and uses subsidies to suppress prices, leading to hidden inflation. All of this is related to government policy and is the result of excessive government intervention, which is also a direct result of our country’s hidden economy and the “monopoly”.

352

7.1.4.2

7 An Analysis of the Causes of Disorders …

Changing Government Functions and the Generation of Recessive Income

A large number of phenomena indicate that the emergence of the recessive economy and hidden revenues are closely linked to the transformation of government functions. On the one hand, the recessive income is from the accumulation of wealth by virtue of power, the loss of public funds, the lack of sound systems and management of public resources, or the monopoly of the market and resources generated by the revenue; on the other hand, it is a part of the government function change process, part of the supposedly legitimate visible income, due to the “lack of government function”. It has become “a quasi-legal, recessive income.” In the course of economic transformation, the market economic system has replaced the inefficient and ineffective planned economic system, which was dominated by top-down power, and socioeconomic activities are no longer driven by administrative orders but by economic interests in general. In the past, the power structure, which relied on top-down management and lacked public supervision, naturally joined the trend of pursuing economic interests and used its power to seek its own interests? The large amount of recessive income in society today shows that after more than three decades of economic reform, China’s political system has seriously lagged behind, with a lack of restraint on power, a large number of loopholes, and a lack of effective regulation on the use of public resources and the behavior of public officials, ultimately leading to serious distortions in the distribution of national income. Once power is combined with capital, it will gradually replace the market economy of free competition and evolve into monopolistic capitalism of the elite, leading to an increasingly unfair distribution of income and wealth, lower and lower economic efficiency and more acute social conflicts. The problem of income distribution is far from limited to the wage level. More unemployment, more layoffs, backward social security, and inadequate government public services may further contribute to the proliferation of the recessive economy and hidden income, all of which are related to the transformation of government functions. For example, in today’s society, why are there so many unlicensed and illegitimate stalls of all kinds? First, because there are many unemployed and laidoff; second, because social security is backward; third, because the government’s public services are not in place or are too costly; fourth, because the government’s mind is more focused on big projects and big enterprises, and pays little attention to these stalls that are related to people’s livelihoods, or instead considers them to be problems, so they are simply solved through city management, all of which are related to the change in the government’s functions. When the government is unable to provide employment and comprehensive social security, some unemployed or laid-off residents must find financial resources for themselves and their families. While facing various inconveniences or being unable to bear the high cost of public services when registering or registering, they can only bring in various kinds of hidden income for themselves and their families through hidden economic activities such as operating without a license and setting up stalls.

7.1 The Perspective of the Transformation of Government Functions

7.1.4.3

353

Power Rent-Seeking and Recessive Economy

The transformation of government functions has been seriously delayed in the process of China’s transition to a market economy. There are still many misunderstandings of excessive intervention in the economy in some areas. From a logical point of view, excessive government intervention has caused market distortions that generate economic rent, which inevitably spur rent-seeking activities. These excessive interventions have also led many rent-seekers to easily find the basis of rent-seeking from government policies and institutional regulations, thus generating corruption. Moreover, the greater the government’s excessive intervention level, the more significant the market distortions, the higher the economic rents, and the more a vicious circle of rent-seeking activities will appear. In the field of income distribution, the more common and higher-level rent-seeking method in current society is to use administrative and legal means to safeguard vested economic interests of interest groups or to redistribute vested interests. Rent-seeking activity builds a bridge between those who have political power and those who have wealth. One side exchanges political power for money, while the other exchanges money for political power to seek greater personal gain, thus producing alienation behavior of the “Economic Man” to maximize the benefits. In the process of rentseeking activities, government officials in some places not only play a passive and exploited role but also often take the initiative to create “political rent” and extract political rent.11 As a special element of recessive economic activities, “power rentseeking” puts the actions of some government officials in more complex and hidden transactions, which has entered the scope of recessive economies. Income distribution has never been a purely economic issue; it has also been a major political and social issue. Corruption is a rational choice made by people involved in corrupt transactions, driven by self-interest motives in pursuit of maximizing personal interests, after calculating costs and benefits. Some government officials and managers of state-owned enterprises have used various loopholes in the process of system transition to use state-owned assets for various hidden transactions for private gain. Some party members and cadres with various administrative powers have been bribed and embezzled, which are the major reasons for the common appearance of recessive economic activities despite repeated prohibition. Although power rent-seeking and corruption, which belong to political and social issues, do not directly belong to the category of income distribution, they penetrate into the field of income distribution and seriously affect the income distribution pattern. The corruption of public officials in transition has become a shortcut to maximizing personal benefits or income. Regardless of whether it is a real estate, coal mine, or a monopoly enterprise or a civil servant, “relationships” and “bills” should be relied 11

Political rent creation refers to the use of administrative intervention by government officials to increase the profits of private enterprises, which is creating rents artificially, enticing private enterprises to pay tribute to them as a condition of obtaining such rents; the political rent extraction refers to the policy put forward deliberately by government officials, as a threat, to damage private companies’ interests, forcing private companies to relinquish part of their vested interests and share them with government officials.

354

7 An Analysis of the Causes of Disorders …

on to enter the high-income class. Bribery and corruption are commonplace in some areas where the recessive economy is open and semi-open. Therefore, a recessive economy and hidden income will inevitably overflow as long as there is a tradeoff of money and power, such as power rent-seeking or bribery and corruption, thus making it impossible to ensure a transparent and fair income distribution.

7.2 Ownership Structure Adjustment Perspective Marx pointed out that the distribution of production conditions determines the distribution of production results. Therefore, the income distribution gap between residents will not be very large despite the potential existence of an underdeveloped economy and less well-off under a truly single public ownership condition. The income distribution gap will be relatively large based on real private ownership, yet it can be controlled. First, the development of private ownership itself is affected by large production requirements, thus generating increasingly differentiated property rights, substitution for unitary and partnership systems with shareholding systems, and the increasing middle class, which all restrict the expansion of the income gap. Second, the contradictions of bourgeois society will encourage the government to actively control the income distribution gap, such as welfare states and macroeconomic policies, which all belong to governments’ control of the income distribution gap. Third, the more developed capital countries are, the more developed their nongovernment sector whose development will also make up for some of the problems caused by the widening income distribution gap. However, as China is currently in the process of economic transition, it should pursue the pattern with the “public ownership remaining dominant and diversified sectors of the economy developing together” instead of pursuing a single public ownership or private ownership like bourgeois state. Various loopholes existing in the process of ownership structure adjustment will inevitably lead to chaos in the order of income distribution.

7.2.1 Ownership Structure Adjustment and Income Distribution Order 7.2.1.1

Current Status of Ownership Structure Adjustment

Since the reform and opening-up in 1978, China’s nonpublic sector of the economy has developed rapidly. By 2010, the proportion of the production of domestic enterprises to the total industrial output value of industrial enterprises above a designated size in China was approximately 73%, that of foreign enterprises was approximately 18%, and that of Hong Kong-, Macao-, and Taiwan-funded enterprises accounted for 9%. The proportion of the production of traditional public ownership enterprises

7.2 Based on Ownership Structure Adjustment Perspective

355

to the total industrial output of domestic enterprises was only approximately 13%, while the rest was produced by various emerging enterprises. The assets of publicly owned enterprises accounted for 14.4% of all corporate assets and 19.2% of domestic enterprise assets.12 From the perspective of employee employment, the nonstate sector has become the main channel for employment in China. With the decline of employment in stateowned units, the nonstate sector has become the main sector of employment and new employment. From 1996 to 2005, the number of employed persons in state-owned units decreased by 47.56 million, an average annual reduction of 4.756 million in ten years. In contrast, the number of employed persons in the nonstate sector increased by 121.65 million during the same period, with an average annual increase of 12.165 million in ten years. Moreover, this trend of decreasing employment in state-owned units and increasing employment in nonstate sectors is still developing. From 2005 to 2008, policy bankruptcy alone involved 2167 state-owned enterprises and 3.66 million employees of state-owned enterprises, and more than 2 million employees were resettled through the policy of “separating secondary lines of business from core one”, which totaled more than 5.66 million people.13 In addition, some people in public institutions lost their status or positions in state-owned units because of various public welfare units, such as “state-owned assets will gradually withdraw from public hospitals”, and various “reforms”, such as “downsizing for efficiency”. Most unemployed and some affected employees will work in nonpublic ownership units or nonstate-owned enterprises again if they are re-employed, further increasing the number of employees in nonstate sectors. In 2010, among industrial enterprises above a designated size,14 the proportion of employed persons in purely publicly owned enterprises composed of state-owned and collectively owned enterprises to the total number of employed persons of all enterprises fell to only 8.7%.15 Obviously, compared with the ruling position of the public sector of the economy at the beginning of the reform, a diversified pattern of ownership has been formed in today’s China.

7.2.1.2

Impact of the Ownership Structure Adjustment on the Income Distribution Order

The shift from a planned economy to a market economy requires ownership structure adjustment, that is, the shift from “yi da er gong (the commune system of ‘large in size and collective in nature’)” to “public ownership remaining dominant and diversified sectors of the economy developing together”. However, how to make 12

According to the relevant data of the China Statistical Yearbook 2011, we collate the data and get the results by calculating. 13 Quoted from “The State Council Executive Meeting Proposed the Reform of State-owned Enterprises to Protect the Legal Rights of Employees”, Xinhua News Agency, November 9, 2006. 14 Note: According to the statistical yearbook, industrial enterprises above designated size are enterprises with annual main business income of more than 5 million yuan. 15 According to the relevant data of the China Statistical Yearbook 2011, we collate the data and get the results by calculating.

356

7 An Analysis of the Causes of Disorders …

this change? How exactly did the nonpublic economy come into being? Should we develop “nonpublic” ownership and “public ownership” together, or should we change “public” ownership into “nonpublic” ownership, which are possible in reality. On the one hand, the nonpublic sector of the economy has developed rapidly while developing public ownership. On the other hand, some of the public sector of the economy has been transformed into a nonpublic sector of the economy through means such as sales. The relationship between public ownership and other ownership is inseparable from the aforementioned relationship between the government and the market. The nonpublic sector of the economy has developed rapidly, together with public ownership, in the decades of reform and opening-up in 1978. The rapid development of the nonpublic ownership economy together with public ownership is inseparable from government power. For example, the development of some large nonpublic ownership companies with big business is often closely related to government power, and some of them have their own power background. In other words, it is very difficult for China’s nonstate-owned economy and nonpublic economy to develop rapidly for more than three decades without relying on government power. It can be said that the development of the nonpublic sector of the economy is closely related to government power. Therefore, first-, second-, and third-generation private entrepreneurs will basically have countless ties with the power of government departments, and even some people themselves may be transferred from the power departments. Some cadres’ children obtain approval from government departments in charge of resources to resell scarce production materials and imported goods by using the power network. Obtaining approval means obtaining money in the environment of a shortage economy and a huge price gap. Speculative buying of foreign exchange is also a way to make money quickly. The upstart has never been entrepreneurs. Although they are apparently engaged in trading in shopping malls, their main transaction object is corrupt power, which brings their wealth. The real identity of the upstart refers to “Guandao (official profiteering)”. It can be seen that the development of China’s “nonpublic ownership” itself has obvious characteristics of a transition economy, which is very different from the situation in developed market economy countries. In addition, part of China’s public sector of the economy has become a nonpublic sector of the economy through auctions and other methods, which has gone through certain procedures on the surface. However, some of the procedures themselves may have problems and are little more than a name, causing a large loss of stateowned assets in the process of transforming the public sector of the economy into a nonpublic sector of the economy. In fact, a large number of public resources have become the source of some private profits in the process of auctions and corporate restructuring. Public resources have become a source of huge private income for some people, which can be divided into two cases. First, the public economy has completely changed into a nonpublic economy, that is, state-owned assets have been sold. In the process of state-owned asset sales, a large number of state-owned assets have eroded because of the state-owned assets with low valuation, providing private chances to make huge benefits. Another type of “non-publication” is essentially restructuring, that is, transforming the original public economy into a so-called

7.2 Based on Ownership Structure Adjustment Perspective

357

modern corporate governance structure. During the reform of state-owned enterprises’ property rights, a large amount of public resources in the past were no longer public resources after the restructuring of some state-owned enterprises, starting to have problems of insider trading and insider control. For example, the management of some state-owned enterprises sells some corporate assets to themselves at very low prices after buying off certain government officials. Alternatively, some ambitious private entrepreneurs, masters of “capital operations”, conspire with government authorities and the management of state-owned enterprises to obtain huge profits out of thin air by forcing prices down. In this way, public resources have become a condition and a channel for private profits to some extent. In addition, the high incomes of heads and employees of some state-owned monopolies are also formed in this way. The same is true of the rural economy, where collective ownership actually becomes the ownership of several leaders. Collective ownership is not like ownership by the whole population. The ownership by the whole people is clear, which means that the item is owned by the entire people. Collective ownership is the most inexplicable ownership where items are actually owned by their heads. The world’s first inventor of collective ownership was the former Soviet Union, whose main body, Russia, was also the first to withdraw from collective ownership. In addition, the government’s de facto right to control the collective economy allows the government and the leaders of the collective economy to unite to exert influence on the collective economy, such as the expropriation of farmers’ land. At present, there is no need for local governments to conduct “one-on-one” negotiations with farmers if they want to expropriate their land. The settled plan only needs talk with rural cadres such as village cadres and secretaries because of the collective economy. The government wants GDP and taxes, while developers want profits. As only a representative of collective property rights, the person in charge of the collective economy owns a very small share, which makes them prone to lean toward the government in the face of administrative pressure and lure of economic benefits, thus transferring the interests of some farmers. The transaction of property rights between land and state-owned enterprises in the absence of a reasonable institutional framework has become a very obvious process of reverse redistribution of wealth; that is, those who originally have power or are close to power and thereby enjoy more physical benefits not only pursue the monetization of welfare but also further impose unequal trading terms on people, thus occupying all the premiums brought by the capitalization of those physical assets. In fact, the premiums of these assets have long been realized by the market. The only basis for them to enjoy these premiums is their access to power instead of their finding of the value of these assets, which in turn drove the original legal owner and seized the original transaction rights that should have belonged to others. The above explanation indicates that the development of the nonpublic economy depends on power itself. In the process of shifting to a nonpublic economy or restructuring, the public economy must also obey this principle. Due to the intervention of the power economy, changes in the ownership structure may lead to a non-standardized income distribution. From this, for China and other countries that have switched

358

7 An Analysis of the Causes of Disorders …

from a planned economy to a market economy, the development of private property rights is also an important factor leading to the widening of the income distribution gap and the chaotic income distribution order in the process of the comprehensive shift of public property system to the partial private property system.

7.2.2 Ownership Structure Adjustment and Labor-Capital Relationships The nonpublic sector of the economy has grown rapidly with the encouragement, support and guidance of the government while consolidating and developing the public sector of the economy. With the deepening of the reform, the original planned economic system was gradually replaced by a socialist market economy system with Chinese characteristics where the market became a means of resource allocation. However, with the continuous strengthening of the market mechanism, capital, as a key element of the shortage, has gradually increased its strength and influence. Capital strengthening, capital power, and capital dominance have gained specific historical formation paths. At the same time, labor is constantly weakening, with a weak position in the formulation of labor contract relationships, the field of production, and the field of distribution.

7.2.2.1

Reform of Labor-Capital Relationships of State-Owned Enterprises

In the reform of the enterprise system with state-owned enterprises as the main body, laborers have established relationships with enterprises in the form of labor contracts, enabling them to change from “the unit people” under the planned economy system to “the contract worker”. Theoretically speaking, this transaction contract on labor factors is an agreement between labor and capital on the rights and obligations of both parties in accordance with the law. However, the signed labor contract is extremely unfavorable to labor in the process of Chinese enterprise restructuring. With the personal freedom of capital and the rapid proliferation of profits, capital has gradually penetrated into various socioeconomic relationships and further penetrated the political field while leading to the integration of social resources. More favorable conditions have been made for self-proliferation and expansion through alliances with politics to form powerful groups to influence government policy formulation. As capital began to become the leading force in social development, labor (force) not only failed to keep pace with its development but also saw a downward trend in its relative value and owner status as the reform progressed. In the past, there was no unemployment problem when workers entered state-owned enterprises, which meant that they had an “iron rice bowl” and that the company was responsible for all life and death. There was a contractual relationship between the laborer and the

7.2 Based on Ownership Structure Adjustment Perspective

359

enterprise when the labor market was gradually established after the market-oriented reform, which means the shift from the “iron rice bowl” of the laborer to a “clay rice bowl” that could be “broken” or “smashed”. For more than three decades since the reform and opening-up in 1978, the differentiation between capital and labor has become increasingly apparent. Owners of capital factors continuously strengthen and multiply their own capital by relying on their economic strength, social status and other advantages. The strengthening and proliferation of capital has further enhanced the strength of its owners, further expanded its scope of influence, and even put the fairness of national policies to the test. Taking the real estate industry as an example, “… Given that capital always flows to areas with higher profits, the maximum and fastest proliferation of capital must be the real estate market in China with more people and less land. Beyond that, only country has land ownership and government has the power to expropriate and buy and sell land, which will undoubtedly prompt the capital to be allied with government power, transferring risks and uncertainties to a large number of vulnerable groups.”16 In this context, it is difficult for workers to get rid of their relatively poor lives and backward status through their own efforts, which limits their own development. At the same time, with the continuous improvement of the income level of private business owners and the reform of state-owned enterprises, senior executives of state-owned enterprises have gradually achieved rapid income growth through a high annual salary system and option system. The income level of the representatives of the capital continues to rise, while the laborer is still in a clearly weak position in income distribution. With the further enhancement of China’s social status and economic strength, the “Matthew Effect” between capital and labor factors has become prominent: the owner of capital factors has become increasingly powerful due to their continuous accumulation of social and economic advantages, becoming the leading force of socioeconomic change, while the vulnerable position of workers is also more obvious. As owners of different elements, the gap between the rich and the poor widens among members of society.

7.2.2.2

Changes in Labor-Capital Relationships of Private Enterprises

Workers can receive wages, a certain amount of bonuses, and endowment insurance in publicly owned enterprises during the practice of China’s economic transition. Although the relevant system expressly stipulates that the profits of publicly owned enterprises are owned by the state, workers still receive social security and other income that should be paid by the profits of the enterprises, thus failing to fully realize the property rights of labor in publicly owned enterprises. The specific manifestation of the serious erosion of worker’s interests by the capital interests in nonpublicowned enterprises is as follows: the capital party (business owner) tries to screw down wages or be in arrears of wages, the company collects the so-called deposits of the employed workers, working hours are prolonged, the capital party (business 16

GuoTaihui (2006, p. 12).

360

7 An Analysis of the Causes of Disorders …

owner) does not pay all sorts of insurance for their labor, and ordinary workers are not entitled to participate in corporate profit sharing except for technology-based and managerial workers who participate in the distribution of some profits. Sometimes compensation for the value of labor power and cost recovery are impossible in nonpublicly owned enterprises, let alone the realization of the property rights of the labor force. In the early stage of the development of the private economy, China’s private enterprises basically pursued a market-oriented distribution system where enterprises implemented autonomous distribution and business owners unilaterally determined the wages of workers. With the deepening of the reform of publicly owned enterprises, wage competitiveness and its role as a wage template are gradually weakened, while the wage problem of private enterprises is gradually exposed. Since the beginning of the twenty-first century, the Chinese government has implemented a collective contract system, that is, a system for determining wages in the enterprise unit through mutual consultation between employers and employees. However, the practical effects of the promotion of this system were unsatisfactory because of difficulties such as insufficient negotiation mechanisms between workers and employers and the common phenomenon of wage decisions made by employers unilaterally. Except that it is difficult to promote equal consultations for determining wages, there are still other violations related to wages in private enterprises, such as paying wages below the minimum wage standard and deducting workers’ wages arbitrarily, and cases such as exploiting workers for their weak positions are not uncommon. Corresponding to the violation of workers’ legitimate rights and interests, the profits of private enterprises have grown rapidly. These profits also include employees’ lost share in low wages, arrears of wages, illegal overtime, no social security, and poor production safety conditions, that is, which includes the lost part of the employees’ legitimate rights and interests. This part of the income, according to Marx’s theory of surplus value and Samuelson’s earlier point in “Economics”, belongs to the employer’s exploitation of employees. In addition, a large number of peasant laborers working in enterprises are in a state of low wages and no social security, which have not only intensified disorderly competition in the labor market but also impacted increasingly more urbanites and college students. Peasant laborers have left land and houses in the village with social security functions, while most young people and college students in cities do not have houses and land to serve as a bottom line. The living conditions of millions of new-generation employees recruited by nonstate-owned enterprises each year are not as good as those of peasant laborers. The infringement of the legitimate rights and interests of workers is widespread due to the poor labor rights and interests of the private sector, low income level of workers, and poor quality of employment. As the amount of employment has surged in nonstate sectors, social contradictions and social conflicts will continue to spread, thus further increasing the potential risks of social instability. Along with China’s economic transition and ownership structure adjustment, the lagged coordination of labor-capital relationships and the prominent contradiction of “strong employers and weak employees” all occurred in state-owned enterprises or private enterprises. The labor-capital contradiction and the imbalance of interests

7.2 Based on Ownership Structure Adjustment Perspective

361

between them not only affect social stability but also hinder economic development. Low labor income directly curbs the growth of domestic demand. Low income, excessive labor intensity, and poor working environment also damage the physical and mental health of workers. Workers have no more time, money, and energy for skills training and research into technology because of fatigue, extremely long hours of work and low income, thus losing opportunities for higher income.

7.2.2.3

Impact of Ownership Structure Adjustment on Labor-Capital Relationships

During the transition from a planned economy to a market economy, China has not yet established a set of labor-capital relationship systems that are compatible with the market economy and enterprise development, which has caused various problems in labor-capital relationships. In the state-owned economic sector, labor-capital relationships have been difficult to ease, while the reform of large state-owned enterprises’ shareholding systems and the management system of monopolistic industries has progressed slowly due to the unification of investment bodies or the lack of fundamental change in the state-owned capital’s “sole majority shareholder” ownership structure. In large state-owned enterprises that have not undergone shareholding reforms, the phenomenon of integration of government administration with enterprises and nonseparation of government administration from state assets management is still more serious. The corporate governance structure is incomplete in companies that have undergone shareholding reforms whose shareholders meetings, board of directors, board of supervisors are ineffective because they did not play its due role. With the adjustment of the ownership structure, capital-labor relations further deteriorate because of corporate assets misappropriated by company management, personal gain by abusing power (or public property turned into private property), a high annual salary for senior executives, and unreasonable income distribution. China has restored and developed the private economy under extremely special historical conditions to supplement the shortcomings of the public sector of the economy and attract folk capital and foreign capital to develop industrialization. However, given that the administrative control-based labor relationship system that is compatible with traditional publicly owned enterprises has not been shaken off, the required market-based labor-capital relation system with self-governance between labor and capital has not been established in private enterprises whose trade unions and employers’ organizations have shown characteristics of being controlled by the administration. Due to factors such as ideology and institutional inertia, the construction of the labor-capital relationship system of private enterprises features laissez-faire. Furthermore, greatly influenced by the public economic management system that occupies the dominant position of society, the labor-capital relationships of private enterprises mainly depend on individualized labor contracts. The legal systems related to labor-capital relationships mostly stipulate some labor standards whose implementation mainly depends on the consciousness of enterprises and the

362

7 An Analysis of the Causes of Disorders …

supervision of labor watchdogs. Due to the scale and distribution of private enterprises in practice, it is beyond the reach of supervisory departments at all levels, forming the characteristic of employers’ dominance and arbitrariness in the laborcapital relationships of private enterprises. In addition, there is a serious imbalance in the labor-capital relationships of private enterprises because of the existing institutional obstacles to the development of the nonpublic economy and the insufficient mechanism for fair competition among enterprises of various types of ownership, which makes rights easier to infringe on, thus easily causing labor disputes. During the process of further adjustment and improvement of the ownership structure, if the basic income of workers cannot be effectively guaranteed, the income of employees and the economic growth rate are seriously disproportionate, it will inevitably lead to the ever-widening labor income gap, the ever-increasing labor dispute cases, and the ever-growing burden of government management departments, also has a serious impact on the lives of some workers and social stability, ultimately affecting the stability and economic development of the entire society.

7.2.3 Ownership Structure Adjustment and Political Administrative Power 7.2.3.1

Chinas Market-Oriented Reforms and Wave of Nationalization

The basic content of market-oriented reforms is to relax the government’s control over resources and open the market that was originally monopolized by state-owned enterprises to private capital. The overall direction of the economic system transition is to make private enterprises the subject of economic activities. The fundamental basis for the miraculous growth of the Chinese economy over the past three decades was that the government deregulated, which gave individuals a certain space for activities, thus explosively releasing the pent-up entrepreneurial spirit of Chinese people. Individuals use their relatively freely accumulated capital to enter a wider and wider market area, which is far more efficient than state-owned enterprises, creating wealth for the capital holders themselves and for the entire society. By the mid-1990s, significant progress was made in China’s reform in both the establishment of the macroeconomic system and ownership structure adjustment. The situation in which the state-owned economy dominated the world has changed, with a large drop in its proportion to the national economy. Although the stateowned economy accounts for less than half of GDP, the government and stateowned enterprises are still the main controllers of scarce economic resources. For example, the state-owned sector occupies more than 70% of credit fund resources.17

17

Cited from: Wu Jinglian: “Guojinmintui (The State Advances as the Private Sector Retreats) Reform Enters Hard Challenges”, “China in the Next 30 Years”, Central Compilation and Translation Press, 2011, p. 90.

7.2 Based on Ownership Structure Adjustment Perspective

363

Although employees in state-owned industries such as electricity, telecommunications, petroleum, finance, insurance, water and electricity supply, and tobacco account for less than 8% of the total number of employees in the country, the total income covering wages and extrawage income accounts for 55% of the total national wages.18 Due to the leading position of the government and state-owned enterprises in the national economy, it is difficult to improve the financial, fiscal and taxation systems that are suitable for the market economy. Instead, state-owned enterprises have shown a fairly obvious and strong “renationalization” trend. First, with the “permits” for private enterprises to enter some areas as a precondition, private enterprises are not allowed to remain open. Second, some wholly state-owned and state-owned absolute holding companies have launched mergers and acquisitions of small and medium-sized private enterprises, which further strengthen the monopoly position of such enterprises. Although marketization has become the political consensus of society as a whole, there has been a phenomenon called “renationalization” or “new nationalization” in society in the economic field. State-owned enterprises produced a “crowding out” effect on private enterprises due to their expanding market share and the sustained substantial growth of profits that have been concentrated, especially in central enterprises. It is certainly in the public interest if state-owned enterprises achieve natural expansion by relying on their own competitiveness and market luck, but in fact, the development and growth of state-owned enterprises rely on the protection of preferential policies to a large extent. The strong tendency of many laws and policies in the economic field is as follows: the requirement for enterprises to enter at a high starting point. Or something seems fair like the increase of the size of an individual enterprise and of industrial concentration, which seems to promote the entire industry to improve production efficiency and the level of technology, in fact, is conducive to the expansion of state-owned enterprises, thereby squeezing the living environment of private enterprises. China’s many industries with scale are exactly the state-owned enterprises formed by the state’s investment at no cost, or only the transnational companies have the entry standards required by the policy. At the beginning of the entry of private capital, of course, it is not possible for it to have a large scale. Even if it has been in for several years, corporate financing will become a difficulty due to changes in government policies, thus making it impossible for it to expand its scale rapidly. Therefore, the emphasis on the scale and practical effect of the technical level makes it impossible for private enterprises to enter many important industries. Even if they had fortunately already entered, they would be forced by the government to withdraw or join state-owned enterprises. Large state-owned monopoly enterprises can tilt the government’s industrial policies toward themselves mainly because they can resonate with the government. Stateowned enterprises have a monopoly on economic security, energy security, aviation security, equipment security, and telecommunications security. Their persuasive 18

Cited from Cong Yaping and Li Changjiu: “The Imbalance in Income Distribution Causes Economic and Social Risks to Increase Power Capital”, Economic Information Daily, 2010-05-21, http://finance.sina.com.cn/roll/20100521/02277976554.shtml.

364

7 An Analysis of the Causes of Disorders …

power is overwhelming once the interests of monopoly enterprises are tied to national security interests. At the same time, these monopolies have a direct interest relationship with government agencies. Industrial competent authorities or government regulatory departments in related fields are inextricably linked to these monopolies. The achievements of these departments are also directly related to the performance of the enterprises they supervise, which makes it possible for these enterprises to have their own interest spokespersons within a government. Therefore, the formulation of many industry policies is guided by monopoly enterprises, while many industrial policies are tailored to monopoly enterprises. In contrast, private enterprises lack the ability to lobby the government and channels. Additionally, they cannot form common demands because of the lack of real autonomy. Even if certain common demands are formed, they cannot effectively enter the government’s legislative and decision-making processes. Economic theory and the history of the East and West countries in the twentieth century have proven that the efficiency of state-owned enterprises cannot be compared with that of private enterprises. The overall efficiency of the economy will be greatly improved by opening the market to private enterprises. Competition will be weakened if private enterprises retreat in some areas, which will inevitably lead to a decline in the overall resource utilization efficiency of society. Of course, with the logic of catch-up psychology and “modernization-worship”, the government easily accepts the rhetoric of state-owned enterprises and tends to maintain the monopoly position of some state-owned enterprises, strengthening their monopoly position in certain specific circumstances. Since the founding of the People’s Republic of China in 1949, the Chinese people have always had a catch-up psychology in the face of the power of the West, while the government has always believed that the most efficient catch-up subject was state-owned enterprises. As catch-up psychology reached its peak in the mid-1950s, the government adopted a comprehensive planning system to achieve economic growth by simply developing state-owned enterprises. The planned economy did create a miracle of growth but was an unsustainable system. With the collapse of the planning system, a large number of state-owned enterprises went bankrupt and closed after the 1980s. Although stateowned enterprises became the object of elimination and reform, the ideology that the state-owned economy was more important than the private economy has not changed. The strength of the Chinese economy began to increase in the mid-1990s, which promoted the gradual integration of the Chinese economy into the international economic system. People began to pay attention to international competition, and a “modernization-worship” gradually formed among decision-makers. The relevant department officials’ superstition about the enterprise scale and the technical level prompts the government to emphasize the establishment of large-scale enterprise groups and participate in international competition, shifting the defensive of the past to the offensive of the present which kept expanding. Especially in recent years, private enterprises surviving in the cracks of the existing systems can only start in the resource industries and basic industries with a small scale and low level, naturally being rejected by governments at all levels. Governments at all levels have adopted many measures to encourage the development of joint ventures and have also adopted

7.2 Based on Ownership Structure Adjustment Perspective

365

many measures to protect the monopoly of certain enterprises, while policies and measures to encourage the development of private enterprises have mostly failed. Based on the government’s “grabbing-hand” and “helping-hand” models, studies show that, compared with other political relations, the government background of the chairman is positively related to the excess employees of local state-owned enterprises. The mechanism used by the government to intervene in local state-owned enterprises and lead to their excess employees is to appoint the person with government background as chairman. Obviously, government intervention has actually reduced the efficiency of social resource allocation. The government’s “grabbing hand” has obviously damaged enterprises, while the government’s “helping hand” has a very weak positive effect on enterprises.

7.2.3.2

Difficulties in the Development of Private Enterprises in the Crack Between State-Owned Monopolies and Foreign-Funded Enterprises

In recent years, a large number of state-owned monopoly enterprises in the telecommunications, petroleum, and financial industries have been restructured and listed overseas, which further strengthened the monopoly of related industries, producing the effect of abducting regulators. The strong monopoly position of these restructured and listed companies has a considerable weight in the valuation of their company’s stocks by foreign investors. Decision-makers understand that any policy measures that may weaken these companies’ monopoly position will cause their stock prices to drop sharply. The rational choice of the decision-making department is to continue to maintain the monopoly position of these companies when they are in a dilemma that both the image of the Chinese concept in the eyes of foreign investors and the affordability of the company should be taken into account. In recent years, there has been no progress in the marketization of the telecommunications sector, while the oil industry has even regressed. Monopoly enterprises used industrial policies to crowd out many private enterprises, generating the process of “renationalization”. The listing of state-owned commercial banks overseas and domestically can indeed obtain a large amount of capital, which also makes the Chinese banking industry have a few characteristics of marketization on the surface. However, under a special mechanism, superficial marketization may preclude true marketization, and private commercial banks may lose the right to market access. Private capital, at most, can only participate in state-owned capital-controlled banks to transfer resources to it in some cases. However, it is difficult to obtain space for independent growth for private capital. Many people measure the degree of marketization by the proportion of the “nonpublic economy”. Due to the economic growth model that relies heavily on foreign investment in recent years, economic development relies heavily on foreign-funded enterprises in the competition launched by local governments for growth. Therefore, most of the “nonpublic economy” are foreign-funded enterprises. The influx of foreign investment is not entirely attracted by natural endowments, which is largely

366

7 An Analysis of the Causes of Disorders …

the result of deliberate government incentives. To attract foreign investment, some local governments have adopted a systematic policy that is “friendly, secure and enriching to business people”, which refers to foreign businessmen. Foreign-funded enterprises are indeed private enterprises, which have become a force that distorts market order because local governments have given them an unequal privilege under which it is difficult for a local domestic-funded private enterprise to thrive. Compared with foreign-funded enterprises, domestically funded private enterprises in the same local market have been discriminated against by the local government in terms of land, income taxes, tariffs, and supervision, which inhibit their development, putting them at a natural disadvantage. To attract transnational companies to invest locally, some local governments have introduced various preferential policies. For example, transnational companies can easily obtain land at low prices, while local private enterprises are facing such resource constraints. Obtaining such preferential policies for foreign-funded enterprises means that private enterprises are crowded out, which distorts the market order. The economic growth rate in most parts of the Yangtze River Delta, including Shanghai, is very satisfactory. However, the growth of local domestically funded private enterprises has lagged significantly, lagging behind neighboring Zhejiang and even worse than that of the central and western regions. It can be seen that GDP growth has not helped the transition of the system and the ownership structure adjustment, or even counterproductive. In short, in the process of economic transition, the Chinese economy has formed a fairly obvious two-tier market structure: the upper level is privileged foreign-funded enterprises and government-related enterprises, while the lower level is domesticfunded private enterprises that are subject to systematic discrimination. The two kinds of businesses mentioned above live in very different political, legal, regulatory, fiscal and tax environments.

7.2.3.3

The Paradox of Market Transaction of Land in the Process of Urbanization

In the 1990s, the capitalization of physical assets originally controlled by the state began, the most important of which was land sales. Economists regard the capitalization of physical assets, especially land, as a progress in marketization because the land can be traded. Assets can have market value only if traded. However, the existing Land Administrative Law divides land into three categories in China: agricultural land, construction land, and unused land. The land use is directly regulated by the state. Because the government strictly restricts the conversion of agricultural land into construction land, there are actually two types of land in China with absolutely unequal rights. One is state-owned urban land owned by the whole population, which can generate construction land use rights that can be transferred by the government for industrial development, commercial use, and residential use. The other type is rural land under collective ownership. According to the law that strictly protects cultivated land, farmers’ ownership is subject to the strictest restrictions without being allowed to convert these parts into construction land without authorization.

7.2 Based on Ownership Structure Adjustment Perspective

367

With the rapid development of urbanization and industrialization, the original state-owned land is far from sufficient. Therefore, with the rapid expansion of urban areas, the transformation of collectively owned land to land owned by all people has also accelerated. The government has complete rights over the land owned by the whole people in cities and towns, while the right to change the land use for farming and pastoral land owned by farmers collectively belongs to the government. Farmers do not have complete rights, while local governments enjoy de facto control rights over collective rural land whose initial transaction is carried out by the government’s behavior of land expropriation. As farmers are unable to meet the needs of urbanization and industrialization on their own initiative, urban expansion is carried out through the government’s expropriation of farmers’ land. The government set prices based on the past agricultural income of the land rather than the future benefits of the land in the process of land expropriation. The premium of the land is completely shared by the local government and real estate businessmen. Although farmers are legally the owners of the land, there is no way for them to oppose such a pricing method, and the farmers are helpless even if the local government does not pay any fees. It can be seen that the initial transaction of rural collective land has assumed the character of plunderer to some extent. Under the existing political and judicial framework, land expropriation basically puts both parties in an absolutely unequal position; more specifically, it is impossible for farmers whose land is requisitioned to conduct equal negotiations with the government who expropriates the land. Moreover, farmers are legally and institutionally fixed out of the modernization process when modernizing the land owned by farmers. The farmers’ right to convert their land was legally restricted, which forces them to wait for the government to modernize the land they own. Some local governments have even resorted to violent methods to impose their conditions and unfair terms on farmers by abusing power in the process of government land expropriation, while farmers do not have any legal channels for bargaining when their land is expropriated at extremely low prices. Fundamentally, this expropriation system deprives farmers of their freedom and right to modernize themselves. The government changes collectively owned agricultural land into national land owned by the whole population through land expropriation and then transfers it to urban industrial and commercial land in some way. At present, some local governments are forcibly expropriating land from farmers at extremely low prices. Land use rights are transferred to their related real estate developers through a long-term agreement transfer system, and land value-added income is then distributed between local governments and real estate developers. In recent years, real estate developers have occupied half of the rich list, which is the best evidence. Although the Constitution stipulates that all land in a city is state-owned, in fact, it is in the hands of businesses and individual residents. Therefore, the government can only truly own this part of the state-owned land through demolition through which the urban government’s political ownership of these lands can be implemented into legal ownership so that the government can truly use it for transfer. However, most urban local governments will use administrative methods to lower the compensation standards in the process of demolition, but they are keen on marketization when transferring land. Given local governments’ exclusive monopoly supply and arbitrary

368

7 An Analysis of the Causes of Disorders …

control of the scale and timing of land supply, the more market-oriented the process of transferring land, the more likely the price will be bid up to a very high point. Finally, the resulting huge prices of land can only be borne by the city dweller who buys the house. At the same time, any unit or individual must apply for the use of state-owned land in accordance with the law and purchase the construction land using right of the state-owned land from the government if they want to carry out construction. The government has the power to monopolize the supply of industrial and commercial land and urban housing land. As a monopolistic land supplier, it is almost impossible for the government to transfer land to individual households and housing cooperatives formed by families. Those who can obtain land from the government will mainly be large enterprises and real estate developers, which has also led to developers’ monopoly of commercial housing supplies. Moreover, the more market-oriented the process of transferring land is, the fewer developers are capable of obtaining land from the government. Therefore, the market-oriented real estate market inherently tends to be oligopoly, which leads to the ever-narrowing range of consumers’ choices. The high land prices caused by the monopoly of land and high housing prices caused by the speculator’s behavior of price gouging make it impossible for ordinary people to buy houses on the one hand and turn them into high rents for commercial houses on the other, which increases the prices of goods and services in cities and becomes a tax that all urban residents must pay, further intensifying the accumulation of wealth. The “land-household” dual monopoly model makes urban residents rely more on developers to supply housing, creating a double deprivation mechanism. On the one hand, during the process of transforming collectively owned rural land into state-owned land owned by the whole population, the farmer not only fails to obtain the return of land appreciation but also loses land ownership and the right to self-modernization. The return of land appreciation is obtained by some local governments and real estate developers in the process of land acquisition and land grants. On the other hand, urbanization itself becomes a land nationalization movement where urban residents not only lose land ownership but also face a heavy cost of housing, which represents the surplus profit of the local government and developers. The Ministry of Land and Resource’s data shows that the total price of national land leasing was 2.7 trillion yuan in 2010, a year-on-year growth of 70.4%, the real transferred land area was approximately 80,000 hectares, and a year-on-year growth of 105%. The local government, developers and banks benefit the most.19 The “landhousehold” dual monopoly model inevitably leads to an abnormal wealth distribution pattern in which wealth is concentrated in the government and real estate.

19

Cited from: The Total National Land-transferring Fee is 2.7 trillion in 2010 whereabouts remaining a mystery, China Business Times, January 21, 2011, http://zhuzhou.focus.cn/news/201101-21/1173994.html.

7.2 Based on Ownership Structure Adjustment Perspective

369

7.2.4 Ownership Structure Adjustment and Recessive Economy 7.2.4.1

Invisible Income Generated from the Ownership Structure Adjustment

In the process of transitioning from a traditional planned economy to a market economy, China’s ownership structure was adjusted from a single public ownership to the pattern with “public ownership remaining dominant and diversified sectors of the economy developing together.” However, what is public ownership as the main body in practice? How to depublicize part of the public economy? What are the rules and procedures? It is not very clear. How should public things continue to work, and how should public things safeguard public rights and interests? How to prevent insider control? None of them were well resolved. Under this prerequisite, ownership restructuring is like “crossing the river by feeling the stones”, which will inevitably lead to the privatization of public assets, power rent-seeking, and a large number of invisible incomes, leading to chaos in the income distribution order. During the auction or restructuring of the state-owned economy, a large number of state-owned assets were lost, a large number of public resources became a source of huge private income for some people, and public resources became an important source of private invisible income. Various monopoly income, gray income and black income have been brought, along with various power-for-money deals, in the process of urbanization of rural land, commercialization of agricultural land, and isolation of the land market (only entered the market after requisition). The existence of these invisible incomes has widened the income gap between residents to a certain extent.

7.2.4.2

Recessive Economy and Invisible Income in Different Ownership Structures

For administrative institutions, the subsiding competition is always racing secretly, which even spreads to state-owned enterprises monopolized by the government due to the weak accountability caused by the absence of extrabudgetary fund supervision systems and methods, coupled with the trend of “departmentalization of government power, benefiting branch power, and individualization of department benefits”, with an ever-growing black hole. In June 2010, the Audit Office pointed out that some central departments and affiliated units had misappropriated financial funds and granted subsidies of 1.095 billion yuan in violation of regulations, and over 300 subsidies had been granted without authorization.20 These administrative institutions have brought a large amount of treatment and income through various fake invoices, some of which exist in the form of physical goods, especially the treatment and income enjoyed by higher-ranking cadres and enterprise operators, which has 20

Yan Changtao and Zhu Mingxi: Huge Tax Loopholes Caused by Recessive Economy, http://blog. sina.com.cn/s/blog_6bfdfccd01010ebh.html.

370

7 An Analysis of the Causes of Disorders …

a richer form of existence. Regardless of the form in which these invisible incomes exist, they all have a certain value, which can be expressed in currency, so they are also monetary income. Those who enjoy this kind of treatment mean a relative increase in their wage income. Due to the unclear boundary of property rights, state-owned assets belong to “the entire people” in name and are actually occupied by various entities through layers of agents. The irregularity of property transfer provides convenient conditions for “stealing”, making the use of various concealed methods to benefit from state-owned assets a common problem in society, and implicit transfer of state-owned assets has become an important source of private invisible income. According to relevant reports, during the 2009 audit of the Beijing-Shanghai high-speed rail project, 17 construction units, including Sinohydro Corporation and China Railway 16th Group Co Ltd., were found to be settled using invoices that did not comply with national regulations, with a total amount of 0.52 million yuan. In 2010, 16 construction agencies, including China Railway’s 11 bureaus and Beijing Construction Engineering Group, used 1297 invoices, which were false, fake or forged, to enter the ledger, with a total amount of 324 million yuan.21 Some people in state-owned enterprises who hold tight supplies have pocketed differential loans with fair judgment by selling the planned quotas, which also opened the door to bribery. The two parties jointly performed a series of farces that involved speculators’ fraudulent buying and selling with official backing, corruption, and rent-seeking. The hidden economic activities brought about by corrupt practices such as corruption and bribery, rent-setting and rent-seeking have caused a large number of invisible elements in the personal income of relevant powerful figures, generating a large amount of invisible income. The state implements excessive protection and intervention in certain industries by using administrative power to restrict competition, forming monopoly industries that are generally state-owned enterprises. Some monopolistic industries and departments have produced various hidden economic activities due to the lack of competition mechanisms and the shortcomings of the management system, causing longterm differences in the income of employees in different industries. For example, the petroleum, water supply, power supply, gas supply, and telecommunications departments have been in an exclusive monopoly position for a long time. They rely on their monopoly position in the production and operation process to obtain high monopoly profits, which are ultimately all or partially transferred to the hands of the employees of the unit and enterprise. The employees of these units and enterprises, especially executives, have also received a large amount of invisible income in addition to wages, which has eventually exacerbated the income gap between employees in different departments. The income distribution order has been distorted by the loss of a large amount of capital caused by improper management of land revenue in the process of government land acquisition and demolition. The National Audit Office disclosed that in 2009, 68.4 billion yuan of land special funds were not included in budget management, 21

Yan Changtao and Zhu Mingxi: Huge Tax Loopholes Caused by Recessive Economy, http://blog. sina.com.cn/s/blog_6bfdfccd01010ebh.html.

7.2 Based on Ownership Structure Adjustment Perspective

371

and 38.1 billion yuan of land transfer fees were not collected22 in 11 provinces. It is not difficult to imagine that tens of billions of unsettled transfer fees will bring huge economic returns to relevant officials and generate a large amount of invisible income. In the process of economic transformation, the government is required to make ownership structure adjustments to vigorously encourage the development of the private economy. However, the government has not provided corresponding services, leading to the emergence of a recessive economy. In the restructuring and reorganization of state-owned enterprises, a large number of employees were laid off and reassigned. When self-employed, only a small number of these employees rented houses in the market and streets to do small businesses, and more than 90% of them became street vendors and mobile business owners without licenses. The operations of enterprises run by individuals but attached to public institutions in the countryside have no legal identity and carry out production and business activities by the name of the enterprise to which they attached. In addition, because they are unable to equally participate in market competition with state-owned enterprises, especially state-owned monopoly enterprises, it is common for many collective and private enterprises to survive in cracks and operate without licenses. These economic activities that are illegal and not registered are all recessive economies that lack government management and supervision. Moreover, the phenomenon of tax evasion is serious in China, where most rich people make fortunes by tax evasion. Enterprises make use of national policies and tax incentives to result in false losses and real profits and reach the purpose of tax evasion and enjoyment of various national policy preferences by stealing, leaking, avoiding taxes and corrupting foreign exchange, off-account operations, and evaluating intangible assets at high prices. According to the 2009 Audit Information Quality Inspection Results of Shanghai Automobile Group Co., Ltd. by the Office of the Financial Supervisor of the Ministry of Finance in Shanghai, the company has problems of accounting violations such as false assets of 848 million yuan, false revenues of 361 million yuan, and false profits of 558 million yuan. Land Rover dealers across the country will be accused of evading a value-added tax of 260 million yuan for refusing invoices.23 Even if large enterprises do so, tax evasion by other small and medium-sized enterprises and individual industrial and commercial households throughout the country is even more common. With the adjustment of the ownership structure in economic transformation, many recessive economic activities, including invisible benefits in administrative institutions and state-owned monopoly industries, invisible transfers in the loss of stateowned assets, capital loss in land transfer, unlicensed operations and tax evasion

22

Xiang Yunzhang, Li Xiaodan: Wang Xiaolu: Cross-Validation for Recessive Income Political Reform for Solving the Problem, Economic Observer, October 9, 2010, http://business.sohu.com/ 20101009/n275485496.shtml. 23 Yan Changtao, Zhu Mingxi: Huge Tax Loopholes Caused by Recessive Economy, http://blog. sina.com.cn/s/blog_6bfdfccd01010ebh.html.

372

7 An Analysis of the Causes of Disorders …

activities of enterprises, companies and individual industrial and commercial households, have been presented, creating a large amount of invisible income for relevant interest departments and personnel.

7.3 From the Perspective of the Relationship Between the Central and Local Governments The transformation of government role should be given priority in the transition from a planned economy to a market economy, that is, the government should be more fiscal decentralization, beneficial for market economy, and helpful in healthy development of the market economy than highly centralized and fully intervened to economy. In our country, we, on the one hand, adopt a fiscal decentralization system characterized by fiscal contracting and tax sharing so that the development of the local economy will provide economic incentives for local government officials; on the other hand, the political centralization system in which local government officials are appointed by central government and GDP-centered assessment basis which is important for promotion of local government officials have given political incentives to local government officials. Both economic and political incentives have given local governments a strong incentive to increase GDP, and the change in intergovernmental relations has directly brought economic disparities and income gaps between regions.

7.3.1 Adjustment of Intergovernmental Relations and Income Distribution Order The economy and market under the planning system are completely different. In the planned system, there is an imperfect legal system and paramount administrative power, and the government controls all resources, including natural resources and human resources. and formulates an all-scheduled plan, giving detailed instructions to each factory and person and how to use each piece of coal and kilograms of steel so that everyone and all resources are used for the pursuit of goals set by the planned agency. At the same time, the division of power between governments is also very unclear. As a network in which individuals act independently and interact with each other, the market is not controlled by a top-down center, so everyone is pursuing what he likes in legitimate laws, and moral rules for most resources are not owned by the country. The division of power between governments at all levels is relatively rigid, neither does the government arrange every detail of the “economy”, nor does it make production plans and exchange of roles for each enterprise and person, so individual rights are fully protected. The relationship between the central and local governments at all levels is required for the shift from a planned economy to a market economy. In fact, the reform of

7.3 From the Perspective …

373

the fiscal system was the first step at the beginning of reform and opening up. For more than 30 years, the relationship between the central and local governments has been greatly adjusted, especially since the introduction of the tax-sharing system in 1994. The proportion of central fiscal revenue to national revenue has increased from 22% in 1993 to 52% in 2010, which means the great improvement of fiscal centralization.24 Although in general, the local government is less powerful than the central government, since the income from funds such as land transfer income and the returned tax is local income, the actual proportion of central government revenue is only 31%.25 In addition, the power of the local government has actually been strengthened by flexible powers and the central government’s transfer payments. Different models have been shown in many aspects, such as income distribution, which can be proven by the widening income gap among residents. The widening regional income disparities are due to the level of economic development, the income distribution system, and factors related to intergovernmental relations. Many things are not clear in the process of economic restructuring, so it is necessary “to wade across the river by feeling for the stones” (to make stable progress in exploration). Reform and opening up cannot be achieved at the same time, which means that the eastern region should be given priority and followed by others, and even in the east, the models in various provinces and cities are different. Everyone has his advantage, so it is inevitable for irregular income distribution order. If the central government hides the truth from the masses, which is the occasion in the past, there will be no such great regional disparity. Of course, the model of the planned economy in the past was at the expense of economic efficiency, was more costly and less advisable. However, within the market economy, society will be more equal if relatively uniform and standardized standards can be set for income distribution, especially income redistribution, including the salary of civil servants.

7.3.2 Adjustment of Intergovernmental Relations and Labor-Capital Relations The relationship between the central and local governments is mainly a power relationship based on certain interests. In economic restructuring, there is an irrational distribution of administrative power, an unclear division of financial power responsibilities, and the asymmetry and mismatch of financial resources and administrative power configuration among governments at all levels, which have led to the “misplacement” and “deficit” among governments in performing public service functions. Affected by the mismatch of local financial resources and administrative powers, the scope, order and standard of public services provided by local governments have been artificially distorted to a certain extent, which not only caused the low level of 24

Quoted from 31% of Central Fiscal Revenue’s Concentration is Lower Than International Level, Economic Observer, November 12, 2011, http://finance.ynet.com/3.1/1111/12/6453022_2.html. 25 Ibid.

374

7 An Analysis of the Causes of Disorders …

local residents’ income and overall welfare but also affected, to a certain extent, the decisions in labor relations made by local governments. On the one hand, taking profit maximization as their sole goal, business owners ignore social responsibility and wantonly violate and consume the interests of workers, causing labor-capital disputes and conflicts. In contrast to the power of production factors with excess labor and scarce capital, parties with capital have more speech rights, but the negotiation costs of individual workers will be very high, which undoubtedly makes them in a weak position. Trade unions, organizations that protect the rights and interests of workers, are improperly organized, economically dependent and affiliated with the government or enterprises. Therefore, they cannot express the interest demand of employees independently and negotiate with management on behalf of workers, which makes them play a limited role in and even has no impact on safeguarding labors’ interests. What employees care about most is wages and benefits, but most companies’ trade unions only organize some employee activities and evade once involved in the fundamental interests of employees. Obviously, the lack of an independent intermediary force that truly represents the interests of workers between our government and enterprises caused the lack of an equal negotiation mechanism in labor relations and seriously imbalanced interests of both employers and employees. On the other hand, the local government unilaterally emphasized economic construction and provided preferential conditions for investors, ignoring the protection of labor rights. As GDP is the most important indicator in the performance evaluation index system for officials at all levels, local governments at all levels, inspired by performance-oriented and financial decentralization centered on economic construction, have extensively participated in economic activities. Therefore, a governmentled, investment-driven and export-oriented economic growth model is formed. Because investment promotion projects can bring rapid GDP growth to the local area and more tax to local governments, which shows their achievements, many local governments connive employers’ behavior that does harm the interests of employees, neglect safety issues that threaten workers’ health or even endanger life to attract investment projects and complete economic indicators. Compared with economic growth, the interests and safety of the people have become insignificant. Low wages and cheap labor have been regarded as advantages for attracting investment. Focusing on the development of the economy has become centering on safeguarding the interests of investors and appealing to investors. This one-sided economic growth is still largely obtained at the expense of labor rights and interests, which does not meet the requirements of sustainable development of modern civilization and a harmonious society. Moreover, a large amount of resources is still controlled by local governments who have almost absolute power over local land, which cannot be intervened by the central government. A large amount of commercial land is expropriated and removed by local governments who have compulsory powers to impose unfair transaction terms on farmers or demolished households. Local governments even promise to supply land for free to some enterprises when the local government invites investment. In addition, the prices of land and labor have also been artificially suppressed

7.3 From the Perspective …

375

by local governments, further worsening labor-capital relations. With intensified competition among local governments, “strong capital and weak labor” has become more apparent in local governments than in the central government.

7.3.3 Adjustment of Intergovernmental Relations and Political Power 7.3.3.1

Adjustment of Intergovernmental Relations and Competition Among Local Governments in China

Competition is able to promote market and efficiency. Most domestic and foreign economists applaud the local competition that has developed in China over the past three decades. There are always imperfect rules of law and incomplete private property rights systems in China. The government still controls most of the elements, and the financial system is also inefficient and always full of potential risks. However, over the past three decades, China’s economy has miraculously maintained rapid growth. Economists try to explain the mystery of China’s rapid economic growth through intergovernmental competition. More specifically, most scholars ascribe the growth miracle of China for more than three decades to the competition for growth among local governments.

Connotation of Competition Among Local Governments in China The concept of intergovernmental competition is probably systematically derived from the concept of “competitive governments” proposed by Albert Breton, based on which Carsten Herrmann-Pillath (He Mengbi for Chinese name), professor of the Department of Economics of the University of Witten and director of the Institute of Comparative Studies of the Cultural and Economic System of Witten University proposed the theoretical framework of government competition, according to empirical research on the transition of Russia and China. The prototype of local government competition is the competitive government in the federal system, which mainly focuses on the competition between the central government and local governments. In the federal system, every government is directly responsible for its voters. Therefore, each government tends to attract and maintain people, capital, and technology by providing and improving service-oriented public goods. Each government has a sound governance structure by which people are able to control the government’s competition strategies and goals. At the same time, the activities of each government must be reviewed by independent judges, and the people are capable of fighting each government. Therefore, this is a kind of benign competition. These two systems also ensure that intergovernmental competition does not harm the interests of other governments and local people and is positive to the entire society and local

376

7 An Analysis of the Causes of Disorders …

economic development. However, positive competition is not restricted by reasonable rules, so governments lacking internal constraints are likely to adopt distorted competition strategies to bring the overall order to a bad equilibrium. Therefore, several conditions are required for competition among local governments. First, the restriction of national laws on local governments is needed to prevent competition strategies such as local protectionism; the second is the control and restraint on local governments posed by local people, which constitutes an internal constraint for local governments. Of course, timely and effective relief for people provided by national judicial institutions is demanded when the rights and interests of the local people are infringed upon by local governments for their political achievements. In China’s economic restructuring, local government competition refers to political and market competition among governments. Political competition among local governments shows that local governments compete for scarce resources controlled by the central government, and market competition among local governments manifests as local governments competing for scarce resources controlled by the public, such as residents and enterprises. The final choice of the central government directly affects competition among local governments and may even ultimately influence the result of the competition. Due to the lack of formal rules and the special national situation in China, there are unspoken rules that are beyond description but can be sensed in the operation of power, which are formed through long-term practice and are generally accepted and agreed upon in the system in some places or departments, playing an important role in guiding the operation of power. For example, phenomena such as “superior has the policy, inferior has the countermeasure”, “obtain and guarantee official positions by false achievements”, and “to achieve the purpose of requiring funds for the project by relationship in ministries and departments” are well known.

Motivation of Competition Among Local Governments in China Since the reform and opening up, a fierce local government competition pattern has been formed in China in the context of a series of institutional arrangements. Since the 1990s, to maximize political performance, local governments at all levels have launched “competition for growth” to promote the growth of GDP in their jurisdictions. One of the most important means is competition for investment, which has prompted local governments to increase investment in infrastructure, improve the investment environment, and accelerate the deepening of the financial market. This has enabled the Chinese economy to rapidly merge and integrate into the international division network in terms of manufacturing and trade strategies. Therefore, an attractive investment environment and surprising openness have resulted from local competition for growth. At the same time, local competition has also produced certain institutional advantages, such as the fundamental reduction of errors in centralized decision-making and the rapid spread of efficient innovation. Although China has a relatively low degree of political decentralization, local governments are precisely the driving force for economic growth. If every local government is responsible for its voters, it is entirely possible for local governments

7.3 From the Perspective …

377

to pursue other values instead of investing in “competition for growth” because of the various preferences of people. However, in China, local officials are assessed by a GDP growth-oriented model, which encourages and controls local officials through political tournaments. The performance of local government officials is assessed and compared by a center from top to bottom in accordance with a single economic standard. In this kind of political tournament, GDP growth is a key indicator for assessing the performance of local officials, while obtaining political promotion by pursuing the rate of economic growth is an important part of the objective function of local officials.26 In the fiscal decentralization system, local governments have tried every means to increase investment projects and stimulate economic growth through investment after obtaining available fiscal revenue. With financial pressure and promotion incentives, the economic growth-centered performance view and the top-down performance evaluation system naturally induce government officials to invest in competition for growth to maximize performance. Local officials pursue the maximization of regional economic interests and their own political interests, while the central government focuses on the interest maximization of the whole society. In the current system, local governments still control the factors and can influence corporate behavior by legal and illegal means. Therefore, local governments also have the ability to determine a local economy in fierce competition between local governments and their officials for GDP growth. Local governments have the discretion to manage local economic and social affairs and are able to use a large number of economic and administrative resources at their disposal to indirectly influence and guide the investment behavior of other economic entities through a series of methods to realize their investment willingness. Therefore, if there are inconsistent objective functions of the local government and the central government, the local government may externalize part of the cost of economic growth, leading to the loss of whole social welfare. “Regional property rights of local governments” is a concept that can properly explain the main incentives for local government competition. Each local government regards important resources in its jurisdiction as its own, while private and corporate property rights and other rights must be subject to this dominance of the local government. These two aspects make it necessary and possible for competition among local governments and lead to a huge difference in consequences of competition among local governments in contemporary China and intergovernment competition described by Breton and Carsten Herrmann-Pillath (He Mengbi for Chinese name).

Lack of Inherent Constraints on Competition Among Local Governments in China There is actually a principal-agent relationship in local government competition. The internal constraints of the government and the constraints of local residents are particularly important for local government competition. Similar to the company’s internal 26

Zhou Li’an (2008, p. 238).

378

7 An Analysis of the Causes of Disorders …

principal-agent relationship, if the corporate governance structure is improper, management will engage in exhaustive competition by the resources of shareholders and gain a temporary benefit for themselves at the expense of shareholders’ permanent losses. Such moral hazard also exists in China’s local government competition. Competitive strategies that bring benefits to some local governments and officials may not be beneficial to the people. In contrast, some local officials will even adopt strategies that harm the interests of the local people to obtain good political performance. Since the 1990s, competition among local governments in China has been a competition without rules or internal constraints, which has led to commercialized local governments, a powerful local economy and coarse local power. In the normal order of the rule of law, the property rights of everyone, every enterprise, and every government property are very complete, so the main strategy for local government competition should be to improve the local institutional environment within the limited authority. However, in China, the local government is the property right owner of the city, which can control various factors and distribute privileges, immunity, and subsidies in accordance with its own preferences without restriction, so its competition means are not constrained by the system. Due to the fierce competition between local governments and the lack of definition and protection of the right of interests, a government competition rule that is similar to market rule has not formed, and a rule framework for restricting these competing entities has not been generated and effectively implemented, leading to various unfair competition actions by the government, such as local protectionism and regional blockades. However, no one has the will and ability to stop them. Meanwhile, competition among local governments will inevitably distort competition between individuals and businesses within a locality. With urban property rights, local governments arrange urban economic activities in accordance with their own goals and adopt discriminatory policies against different individuals and enterprises according to their own preferences. As a result, there are unequal freedom and rights of individuals and businesses within cities. Generally, the local government will give privileges, immunity, and explicit or implicit subsidies to those who are helpful for the efficiency of the city. Other projects and others must even make way to ensure higher efficiency of the projects favored by the local government. China’s local government competition is a confusing knowledge trap. If only the consequences of competition are considered instead of initial rights allocation, it can be said that this unconstrained local government competition is highly efficient. However, if the initial allocation of rights is taken into consideration, the conclusion will not be optimistic. China’s local government has its general rights as a government, which is the same as that of a country with a sounder rule of law. Competition between local governments within this limit is legitimate competition and will not damage the rights and interests of others, but it can only bring limited efficiency. In addition, Chinese local governments have extraordinary power except for their due rights. They have certain control over the rights belonging to individuals and businesses and tend to use them in accordance with the principle of maximizing their performance. Some local governments can completely disregard the constraints of the

7.3 From the Perspective …

379

rights of individuals and enterprises and take their property and rights as a resource input in exchange for high local economic growth. Local officials do business at the expense of things that should belong to others, regardless of cost, which is another form of “soft budget constraint”. This kind of soft constraint can naturally enable the government to push conventional factor investment in a short period of time, making countless economists form an “illusion of efficiency”.

7.3.3.2

Local Government Competition and Income Distribution Order

Local government competition will promote local governments to maintain economic prosperity in the region and may also cause distortion of resource allocation. The current competition among local governments in China has encouraged local governments to create various favorable conditions for inviting investment and to maintain continuous economic improvement for local GDP growth. Moreover, local governments’ efforts to seek self-development often lead to defeats due to the lack of corresponding institutional norms. The wrong performance evaluation indicators directly lead to the wrong positioning of the role of local governments, which causes local governments’ various unfair competition behaviors regardless of the actual situation. In economic restructuring, local administrative power always participates in income distribution, making the initial distribution of the entire society favorable to local governments and to enterprises favored and supported by local governments. The participation of administrative power in income distribution has become an important factor in the distortion of initial distribution. One of the basic characteristics of China’s local government competition is that some of the freedoms and rights of individuals and businesses are snatched by local governments. In particular, many local governments’ competition strategies are to please investors at the expense of the welfare of local people. For example, lowering farmers’ land prices and curbing wage increases to attract foreign investment have widened the income distribution gap, disrupted the distribution order, and induced labor-capital conflicts and contradictions. This kind of unfair competition among local governments has not only widened the gap in local economic development and regional disparities in residents’ income levels but has also inhibited the rise in local residents’ income levels. In the (east, middle, west) gradient advance of China’s economic system reform, regional disparities in the level of economic development have been formed because each place is advancing through exploration and the economic base and resource distribution of each place are different. In addition, residents’ various income sources and inconsistent distribution will inevitably lead to diversification of regional income differences. Since the reform and opening up, with the guidance of common prosperity, China has implemented a policy of allowing some people and some regions to become rich first and giving priority to the development of eastern coastal areas. To promote the rapid development of the eastern coastal areas, the state has not only given the coastal areas a certain amount of funds in direct investment but also given

380

7 An Analysis of the Causes of Disorders …

preferential policies in various aspects to the coastal areas, thereby creating a favorable policy environment for the development of the coastal areas. Therefore, with the advantages of capital, technology, and talent in the eastern coastal areas, reform and development here is much faster than that in the central and western regions, and residents’ income has increased significantly. The strategy of giving priority to the development of the eastern region makes the economic development of the eastern region far exceed that of the central and western regions and the income of residents in the eastern region much higher than that of the central and western regions. However, with the capitalization advantage of income and the guidance of the principle of “giving priority to efficiency and giving consideration to fairness”, people getting rich first are also able to attract talent and other resources. Instead of bringing along other people, the “Matthew Effect” exacerbates the income gap between residents in the eastern and western regions.

7.3.3.3

Adjustment of Intergovernmental Relations and Corruption of Local Administrative Power

After the implementation of the fiscal decentralization system, local governments, in accordance with sustainable development strategy enacted by the central government, should supervise methods of local capital production, formulate different measures based on local realities, and guide the use of capital through fiscal and taxation measures to promote sustainable economic development. However, due to the asymmetry of information between the central and local governments and the unbelievable punishment of local government officials by the central government, some local governments lack long-term expectations. Different goals of local governments also lead to distinct internal mechanisms of their behavioral decisions. Different from the service-oriented governments democratically elected by local residents in Western developed countries; the primary goal of many local governments in China is to maximize local GDP growth, not the welfare of local residents. For short-term GDP growth, some local governments may connive in investment projects that endanger the welfare of residents and even conspire with local enterprises to destroy the environment and resources, greatly damaging the welfare of local residents and longterm economic benefits. At the same time, when some local governments devote themselves to local economic construction, some government officials engage in rent-making activities by their power to intervene in the economy for personal gain. As a result, corruption of local administrative power appears. With the economic and political incentives of the central government, local governments have achieved economic growth goals through different behavioral decisions. As China’s economy grew rapidly after the reform and opening up, some local government officials blindly expanded the economic scale, ignored the public service functions of the government and reduced the service awareness and quality of the government, leading to many negative problems. For example, market segmentation between regions; fraud behavior of some local government officials to complete economic targets; “image projects” and “achievement projects” have been spawned;

7.3 From the Perspective …

381

great financial waste and efficiency losses caused by repeated construction; disordered market order and misplaced government functions; widening income gaps between regions; endlessly emerging production safety accidents and environmental pollution accidents. Local governments are in the fiscal decentralization system, so the negative externality brought about by capital projects is affected by local government penalties and will determine their different government behaviors. If the punishment rate is relatively low, the negative externalities constraint for the capital account will be limited, while if the punishment rate is relatively high, investors often need to reduce the probability of being punished by bribes to maximize output. Corruption is invalid for this punishment mechanism but has a more negative impact on the sustainable development of the economy, environmental protection and the welfare of local residents. There are characteristics of a “zero-sum game” in the unique promotion mechanism of the Chinese government, which means that the promotion of one person will inevitably reduce the promotion opportunities of others, so fierce political competition has been transformed into some local governments’ vicious economic competition for political gain, in which economic benefits and environmental pollution are not taken into consideration. The “Rural Enclosure Movement” and “Urban Demolition Movement”, beginning in the 1990s, have brought about great influence in development zones, including the growth of local GDP and various serious problems. In some places, powerless farmers and demolished households cannot obtain the compensation they deserve, while the “enclosure alliance” formed by “powerful people” and “developers” makes a fortune. Authorities in some places try to “develop” the local economy through the “Rural Enclosure Movement” and “Predatory Demolition”, which caused a large amount of land transfer loss and tax loss. The huge wealth obtained by collusion between government and businessmen makes a few people get rich overnight, exacerbating the “polarization” of society, of which the essence is “robbing the poor and helping the rich”. The “illegal cost” of local government officials in enclosure and demolition is low, but their “benefit” may be considerable. Specifically, they can receive benefits provided by developers, and some people can also receive promotion for this “political performance”. Therefore, illegal enclosure and compulsory demolition in some places have existed until now.

7.3.4 Intergovernmental Relations and Recessive Economy “All choices in political activities must have externalities. In a sense, the choices made will affect all the others27 ”. On the one hand, the local government acts as a “public person”, representing the electoral exercise of power in a unified manner and representing the public interest; on the other hand, officials of local government departments are also “economic men” who pursue the maximization of personal and 27

Buchanan, Musgrave, translated by Cheng Chengyu: Public Finance and Public Choice: Two Different Views of the State, China Finance and Economic Press, 2000, p. 162.

382

7 An Analysis of the Causes of Disorders …

sectoral interests. They also have their own interest pursuits, preferences, and aspirations, pay attention to their own political activities, and pursue the maximization of personal interests. If there is no moral order, it will inevitably be for some local government officials to carry out activities for self-interest. In this way, they will consciously or unconsciously seek private interests for this department or individual and pursue the maximization of private benefit of control in the intervention of the economy but do not pay attention to the efficiency and image of the government. As a result, the personal interests of local government officials at all levels will be internalized into government interests and externalized into the interests of the people under a legal cloak. For example, some local government officials ignore tax losses to pursue departmental interests and maximize personal interests in political activities; as long as it is conducive to GDP growth, they are often willing to “store wealth among people”, “store wealth in the enterprise”, and “be a poor county”. These are all related to intergovernmental relations and decentralization. The purpose of government intervention in the economy is to correct market failures. However, there is often administrative omission in some local governments due to the externalities of government behavior. Specifically, they turn a blind eye to some excessive economies, including smuggling and counterfeiting, which are all related to intergovernmental relations and the decentralization model. In the decentralization model, although the income from invisible economic activities such as smuggling and counterfeiting is invisible income, the development of these underground economies has stimulated local economic growth. It will increase invisible employment and reduce the pressure on local governments even without an increase in GDP, so some local governments usually adopt an obscure attitude. Influenced by the idea of local protectionism, some local governments “govern the outside but not the inside”, that is, they do not control or even connive at illegal acts such as smuggling, counterfeiting and trafficking; they only investigate cases involving other places, while do not investigate or be perfunctory and avoid the important and dwell on the trivial for local cases. Even in a few places, there is a misunderstanding of “getting profits by smuggling” and “making fortunes by faking.” Therefore, smuggling, counterfeiting and selling fakes are regarded as a way out for the development of the economy, the fight against smuggling and counterfeiting and invigorating the economy are in opposition and various obstacles are created for the case which should be investigated and dealt with locally by foreigners. Obviously, local protectionism has become a protective umbrella for recessive economic prosperity, such as smuggling and counterfeiting. In addition, in China’s economic restructuring, while various unfair competitions are taking place among local governments, some local officials, due to the existence of information asymmetry, will also use their authority in public organizations to pursue the maximization of personal control benefits, to widen the space for rent establishment and rent-seeking, to carry out various power corruptions like power-money deal, and power-sex deal, which will lead to the growth of various invisible incomes of local government officials themselves. The results of this research group show that from 1998 to 2007, the average recessive economic scale of eastern China was 10.3–15.5%, that of central China was 9.3–13.6%, and that of western China was 11.5–14.5%. The scale of the recessive

7.4 The Perspective of Reform Based on the Distribution Principle

383

economy in the eastern, central, and western regions shows the same trend of change, and the recessive economy and the official economy are growing simultaneously, to a certain extent. On the one hand, the recessive economy distorts competition between regions and leads to inefficient goods and labor markets, resulting in a negative impact on economic development; on the other hand, the recessive economy will lead to unfair income distribution and widen the income gap. Meanwhile, official macroeconomic statistics are distorted due to recessive economies in various places. In 2009, China’s GDP increased by 8.7%, which is much lower than the total amount of local GDP, reaching double digits. As long as local GDP data are linked to performance assessment, statistical fraud is inevitable in the process of unfair competition by local governments, while policies or actions based on unreliable data may be impractical.

7.4 The Perspective of Reform Based on the Distribution Principle In economic restructuring, changes in China’s income distribution principles will inevitably bring about a certain gap in residents’ income. After the founding of the People’s Republic of China, China implemented a single public ownership system of means of production according to the nature of socialism and Marx’s “Critique of the Gotha Program”. The principle of “distribution according to work” has been adhered to for a long time, so the income gap of residents is not too large. Since the reform and opening up, with the establishment and improvement of the socialist market economy, the adjustment of the ownership structure of “the public ownership remaining dominant and diverse sectors of the economy developing side by side”, and the gradual establishment of income distribution system of “distribution according to work is dominant and multiple distribution methods coexist, the income distribution system has changed fundamentally. Changes in income distribution principles will inevitably lead to widening income gaps among residents due to differences in economic development levels, resource elements and wealth accumulation in different regions, as well as personal background, abilities, endowments, etc.

7.4.1 Reform of Distribution Principles and Income Distribution Order 7.4.1.1

Formation of China’s “Deduction Before Distribution, High Deduction and Low Distribution” Model

After the founding of the RPC, party and state leaders as well as people of the whole country hoped that the country would become politically and economically

384

7 An Analysis of the Causes of Disorders …

stronger. To this end, a development strategy of giving priority to heavy industry and military industry was formulated. Heavy industry and military industry are both capital-intensive and technology-intensive industries, for which available economic resources at home and abroad are very limited due to the constraints of social realities such as politics and the economy at that time. There, the state has chosen a way that can reduce costs. The state has consciously adopted plans and policies to reduce the prices of agricultural and sideline products and to reduce part C in the cost of developing heavy and military industries. Through the implementation of a nationwide low wage system, labor costs and part V in the cost have been reduced. As a result, the initial pattern of “low wages” in China’s residents’ income distribution has been formed. China’s traditional distribution model is actually borrowed from Marx’s “Critique of the Gotha Program”, adopting a distribution method of “deduction before distribution, high deduction and low distribution”, which emphasizes the state’s comprehensive control and intervention in social and economic development. In the initial distribution of social products, an authoritative center of the state makes necessary deductions first, and the rest is distributed to workers as personal income according to the principle of “distribution according to work”. Therefore, it is called “deduction before distribution”. At the same time, as China was facing various political and economic difficulties at the time, a “high deduction and low distribution” in the field of distribution was formed. In the traditional planned economy, China has always adopted the distribution model of “deduction before distribution, high deduction and low distribution”. During the transition from a planned economy to a market economy, although the state has taken various measures, such as tax and fee reform, to repeatedly adjust the deduction proportion to “high deduction” and the government has also tried to slightly increase the income level of residents in recent years, the distribution pattern of “deduction before distribution, high deduction and low distribution”, which has existed in the distribution field in China for a long time, has not fundamentally changed.

7.4.1.2

Problems in the “Deduction Before Distribution, High Deduction and Low Distribution” Model

In the “deduction before distribution, high deduction and low distribution” model, the proportion of overall income of laborers has always been relatively low in GDP, and they have low consumption capacity, which goes against the normal cycle and turnover of the economy. The problems of this distribution model are mainly as follows. First, “deduction before distribution, high deduction and low distribution” has kept China’s laborers and residents at a low income level for a long time, while there is a very high and inefficient accumulation rate of the country, which has caused considerable waste. Second, the “high deduction and low distribution, deduction before distribution” model artificially reduced consumption, leading to a lack of demand for economic development in China. GDP growth was mainly driven by investment, which brought a series of problems, including “overcapacity” and

7.4 The Perspective of Reform Based on the Distribution Principle

385

structural disharmony. Third, low income will inevitably lead to high employment, that is, “low distribution, low income, but high employment”. Only one laborer in a family is unable to keep a family because of low income, so more family members have to be employed. However, inefficient investment in China is not very helpful for employment, which has led to serious invisible unemployment in rural areas and dualistic urban–rural structures. Fourth, due to the low income, it is necessary to increase welfare guarantees, such as publicly funded medical care, welfare housing, enterprises burdened with social responsibilities, and public institutions burdened with social responsibilities, which makes some medical services, housing, and some goods that should have been purchased not enter the market for exchange but “selfsufficient” through internal “integration” and allocated instead of exchange, resulting in the artificially reduced scale of market exchange. Economics holds that “efficiency depends on the division of labor” and “division of the labor is dependent on the size of the market”, that is, the larger the market is, the more adequate the division of labor and the higher the efficiency will be. However, these welfare policies have artificially reduced the scale of market exchanges and market efficiency. Fifth, the “low distribution and high welfare” model makes workers lack tax awareness and weak in concepts of democracy and legality. According to the traditional distribution method in our country, there is no personal income tax, and the government provides various benefits instead of residents paying “charges and taxes”, resulting in changes and distortion of the relationship between ordinary people and government, specifically, the relationship of public servants and parents, clients and agents. For ordinary people, it is the government that gives all kinds of care and meticulous care instead of them to support the government. Therefore, the supervision and awareness of the government have diminished, increasing the difficulties in building democracy and legality. China’s income distribution pattern in the “deduction before distribution” and “high deduct, low distribution” models, on the one hand, has caused residents’ income to grow slower than the economy in China. Based on comparable prices, from 1979 to 2009, urban residents’ per capita disposable income and the average annual per capita net income of farmers increased by 7.3 and 7.2%, respectively, which are both lower than the average annual growth rate of China’s economy of 9.9% in the same period,28 disturbing the improvement of residents’ consumption capacity. On the other hand, the income distribution gap is large, and wealth is held by a few people, which reduces the average consumption tendency of the whole society and is not conducive to the growth of consumer demand.

28

Quoted from Twelfth Five-Year Plan Lowering Annual Economic Growth Target, Raising Residents’ Income Growth Target, Spring City Evening News, March 6, 2011.

386

7.4.1.3

7 An Analysis of the Causes of Disorders …

Impact of Income Distribution Principles on Domestic Consumption Demand

In the transitional economy period, with the gradual liberalization of various aspects, people are urged to increase income, and income driving in economic development has become more important. Only by increasing the income of workers can consumption be expanded. However, the final distribution pattern of China’s national income is “giving priority to the government and enterprises”, making a continuous decline in the final distribution ratio of residents. In China’s current national income distribution pattern, the proportion of residents’ income is significantly lower and continues to decline, while the proportion of labor remuneration in the initial distribution has been declining among the disposable income of residents, especially the long-term low income of ordinary workers, which shows serious inequities. Statistics show that the proportion of China’s urban and rural residents’ income to GDP has fallen from 56.18% (1985), the highest level since the reform, to 43.42% in 2007, a decline of nearly 13 percentage points in 22 years, and decreased to 43% at the end of 2009, which was at a record low. However, the ratio of government revenue to GDP has increased from 17.39%, the lowest point in 1995, to 32.87% in 2007, an increase of 15 percentage points in 12 years,29 and has reached approximately 34% by the end of 2010.30 Corporate capital gains rose from 38.83% in 1993 to 45.45% in 2007, an increase of 6.62 percentage points.31 Among them, the proportion of total wages of employees in China’s GDP dropped from 13.32% in 1995 to 11.21% in 2008, and that of labor remuneration for employees working in urban areas also dropped from 13.6% in 1995 to 11.7% in 2008.32 In 2001–2009, the average annual GDP growth rate was 10.5%, and the per capita disposable income of urban residents and the per capita net income of rural residents increased by 9.9 and 6.6%, which were 0.6 and 3.9 percentage points lower than the average annual growth rate of GDP, while in 1993–2010, the national fiscal revenue increased from 444.9 billion yuan to 8.31 trillion yuan, a growth rate that was more than twice the growth rate of urban and rural residents’ income.33 Due to problems in the income distribution pattern, the consumption index of the high-income class with the ability to consume has been

29 Quoted from 10% Increase of Proportion of Residents’ Income to GDP Within 5 Years, Oriental Morning Post, February 23, 2011. 30 Reform is Urgent, ifeng.com, Southern Window, September 1, 2011, http://news.ifeng.com/she ndu/nfc/detail_2011_09/01/8852635_0.shtml. 31 Quoted from China’s Proportion of Residents’ Income Decreased Minimum Wage Standards in Various Provinces and Cities Increased, People’s Daily, people.com.cn, June 7, 2010, http://news. sina.com.cn/c/2010-06-07/150120427834.shtml. 32 Quoted from China’s Proportion of Residents’ Income Decreased Minimum Wage Standards in Various Provinces and Cities Increased, People’s Daily, people.com.cn, June 7, 2010, http://news. sina.com.cn/c/2010-06-07/150120427834.shtml. 33 Quoting from Song Xiaowu: The Proportion of Labor Compensation in the Company to GDP has fallen sharply in the past 20 years, Economic Information Daily, February 9, 2011, http://www. rky.org.cn/c/cn/news/2011-02/11/news_10144.html.

7.4 The Perspective of Reform Based on the Distribution Principle

387

saturated, while the vast number of middle- and low-income classes with consumption willingness has insufficient consumption capacity due to the low income, leading to insufficient domestic demand in China. China’s economic growth is excessively dependent on investment, and consumption does not play a strong role in driving economic growth, mainly because of the irrational pattern of income distribution and the irregular distribution of income, which restrict the further expansion of consumer demand. Since the reform and opening up, while the average income of all strata of Chinese residents has generally increased, the income distribution has also been rapidly polarized, with a considerable part of the national income being owned by a few rich people, while ordinary people, who make up the vast majority of the population, have a meager income. Although we should not take lightly the old welfare economics doctrine that maximizing the income of the lowest income strata is the only way to maximize social welfare, we can at least infer that the marginal propensity to consume of the lowincome strata is higher than the marginal propensity to consume of the high-income strata. The preliminary research conducted by this research group shows that income distribution is an important factor affecting the consumption level and consumption capacity of China’s urban and rural residents. Practice since the reform and opening up has shown that the widening gap in income distribution between urban and rural residents has inhibited the growth of urban and rural residents’ consumption demand, especially the release of rural residents’ consumption potential, which has further restricted the level and speed of China’s economic growth.34 The wealth of the highincome class, which was created in the process of China’s economic transformation, has either been squandered in small amounts and used to buy luxury properties, or has become “sinking funds” that have nothing to do with boosting economic growth, or has fled abroad through various channels, while peasants and the urban middle- and low-income class, who make up the majority of the population, suffer from income poverty. (a) Shrinking consumption capacity. Under this pattern of “a few rich people having nowhere to spend their money, while the majority of the poor lack money to spend”, China’s society’s aggregate demand is weak and its economic growth lacks intrinsic momentum.35 On the one hand, the widening of the income distribution gap will lead to an increase in the savings rate, an increase in the savings rate means a decrease in the consumption rate, and the decrease in effective demand will restrict the development of the whole social economy; on the other hand, the widening of the income distribution gap suppresses consumption demand and investment demand,

34

Yang Canming, Guo Huifang, and Sun Qunli, On Expanding Domestic Consumption Demand and Regulating Income Distribution Order, Fiscal Studies, No. 3, 2010. 35 Zhou Xiaochuan’s speech at the Global Think Tank Summit: Only when Americans save more and Chinese spend more will there be hope for the world economy, Wuhan Evening News, July 6, 2009, http://news.163.com/09/0706/01/5DGL2823000120GR.html.

388

7 An Analysis of the Causes of Disorders …

and the average consumption tendency and marginal consumption tendency gradually decline, leading to insufficient consumption demand, which in turn restricts the increase in investment demand. The widening income gap is the root cause of the shortage of effective demand or aggregate demand.36

7.4.1.4

The Impact of the Reform of the Distribution Principle on the Income Distribution Order

The shift from a planned economy to a market economy requires a shift from “distribution according to work” to “distribution mainly according to work, with a variety of distribution methods coexisting”, so distribution according to factors has become an inevitable trend. However, on the premise that the proportion of residents’ labor remuneration to GDP is low and declining and the labor-management mechanism is not sound, which factors should be allocated? How do these elements themselves come together? How does the government regulate the revenue generated by these factors? Thus, these problems have not been solved in time. It just so happens that there are many irregularities in the process of factor-based allocation, as many basic issues are not resolved and some elements are not always properly formed. Moreover, in the process of economic transformation, due to the differences in economic conditions and the imperfect legal and institutional environment, the existence of local protectionism that divides the market makes it impossible for the factors in different regions to move freely and fully, the factor advantages of each region cannot be complemented, and the factor price differences are also very large, resulting in the “first to get rich” driving the “first to get rich”. The policy of moving from the “post-rich” to the “rich for all” is a mere formality. The disparity in income distribution is too great, and much of the disorder in income distribution is also related to the distribution of income according to factors. The Seventeenth National Congress of the Communist Party of China proposed that the property income of the people should be increased. Some experts believe that if this point is emphasized in a one-sided manner, without supporting measures, the income gap is likely to widen further. The richer the property is and the richer the property is, the more a “horse effect” will be formed. From the point of view of the relationship between the distribution of income according to work and other distribution methods, the economic transformation and the change in the principle of income distribution, in the absence of many supporting measures, will bring about irregularities in the order of income distribution of Chinese residents.

36

Yang Canming, Guo Huifang, and Zhao Ying, “On Economic Development Mode and Income Distribution Order”, Finance and Trade Economics, No. 5, 2010.

7.4 The Perspective of Reform Based on the Distribution Principle

389

7.4.2 Reform of the Principle of Income Distribution and Labor Relations 7.4.2.1

Determination of Labor Productivity and Wage Levels

Douglas North, winner of the Nobel Prize in Economics, has a fascinating summary of a market economic system that “encourages each individual to develop his or her individual strengths”: when the “personal rate of return” that an individual derives from his or her economic activity is close to the rate of return that society derives from the same activity. The economy operates most efficiently when the “social rate of return” is low; when the “personal rate of return” is much lower than the “social rate of return”, individuals do not strive to create value for society, and their leisure time is also appreciated. That is, when a person contributes to society and receives an immediate and justifiable “dividend” from that contribution, many people, motivated by profit, will be eager to benefit society. If this “bonus” is abolished or only a very small “bonus” is rewarded, far out of proportion to its contribution to society, people will prefer to be idle. In a mature market economy, people are more likely to be idle than productive. It can be seen that in a mature market economy, the personal rate of return on one’s economic behavior should be close to the social rate of return, i.e., when a person does something, the benefit he gets from it is equally proportional to the benefit society gets from it. Moreover, the greater the social contribution is, the higher the individual’s income to make society efficient. High wages lead to high efficiency, as Adam Smith said: “The wages of labor are the reward of diligence, and diligence, like other human qualities, is the more diligent the reward”. Abundant means of subsistence increase the physical strength of workers, and the pleasant hope of a better life and a better old age increase their efforts. Therefore, workers in high-wage areas are always more active, industrious and agile than those in low-wage areas.37 “the generous reward of labor is a necessary effect and natural phenomenon in the growth of national wealth. In addition, the subsistence of those poor laborers who are barely able to sustain themselves is the natural phenomenon of stagnation in a hundred trades”.38 Wages are based on labor productivity, which is the value created by one worker per hour or per year. The United Nations publishes figures on the productivity of workers in all countries of the world, and United States workers are the most productive in the world, creating $63,885 in value a year, while Chinese workers create only $12,642. On an hourly basis, Norwegian workers are first, creating $37.99 worth of value per hour; American workers are second, creating $35.63 per hour; and Chinese workers are $5.67 per hour. The difference in results between annual and hourly measures of labor productivity is largely due to differences in the average number of hours workers work per year across countries. Americans work 1804 h a year, while 37

Adam Smith, A Study of the Nature and Causes of National Wealth (vol. 1), translated by Guo Dali and Wang Yannan, Commercial Press, 1972, p. 59. 38 (English) Adam Smith, A Study of the Nature and Causes of National Wealth (above volume), translated by Guo Dali and Wang Yannan, Commercial Press, 1972, p. 53.

390

7 An Analysis of the Causes of Disorders …

Chinese workers work up to 2200 h.39 It can be seen that Chinese workers not only work long hours but also have extremely low wages, and the growth of workers’ wages cannot keep up with the growth of corporate profits. From 2000 to 2010, the total profits of industrial enterprises above a designated size in China increased by an average of 35.5% per year, but the growth of workers’ wages was only 14.1%!40 In the early 1960s of the last century, when Japan’s postwar economy had only been recovering for approximately a decade, it put forward a plan of “doubling national income” and realized it ahead of schedule, embarking on a development path of high wages, high benefits and high added value. In 2007, the average annual minimum income of 183 countries and regions in the world was 41,535 yuan, while China’s minimum annual income was 6,120 yuan, which was 16% of the world average; the ratio of minimum wage to per capita GDP was 58% of the world average, while China’s minimum annual income was 6,120 yuan, which was 16% of the world average. The proportion is 25%.41 These data indicate that the current overall income level of the Chinese population is too low, especially for the low-income class at the bottom of the ladder, that the income level is too low and the gap with the highincome level too wide and that the low income of Chinese workers has threatened China’s economic development.

7.4.2.2

Savings Rate and Factor Prices of Capital Markets Savings Rate and Factor Prices of Capital Markets

While the world average household consumption was 61% of GDP per capita in 2007, China’s share fell from 47% in the early 1990s to 34% in 2007.42 This is the key to China’s economy’s overreliance on exports and its inability to boost domestic demand. Some economists attribute the low consumption to China’s lack of a basic social security system (e.g., medical insurance, pension system, etc.) and the lack of security of people who have to save excessively against the unexpected. China’s savings rate rose from 36.3% in 1992 to 51.3% in 2008, an increase of 15 percentage points.43 Among them, the proportion of enterprise savings was 11.3% in 1992 and reached 22.9% in 2007; government savings increased from 4.4% in 1992 to 8.1% 39

Quoted in Xue Yong, Hatred of the Rich: The Struggle between the Rich and the Poor in Contemporary China, Jiangsu Literary Publishing House, 2009, p. 29. 40 The Theory Bureau of the Propaganda Department of the Central Committee of the Communist Party of China (CPC): “From How to See What to Do: Theoretical Hotspots Face to Face, 2011,” Learning Publishing House - People’s Publishing House, August 2011. 41 Quoted in Liu Zhirong, “A Study of World Wages,” retrieved from http://www.dapenti.com by the China Institute for Institutional Reform. 42 Ibid. 43 Ma Jiantang, director of the National Bureau of Statistics, speaking at a global summit of think tanks, quoted in Yu Lan, “China’s central bank governor Zhou Xiaochuan says the ratio of household savings to GDP is basically stable”, July 4, 2009, China News Network, http://blog.sina.com.cn/s/ blog_540e98160100hxw0.html.

7.4 The Perspective of Reform Based on the Distribution Principle

391

in 2007, both of them doubled; and the proportion of household savings in GDP was relatively stable, basically kept approximately 20%, 17% in the low time and 20% in 2007.44 Obviously, China’s consumption rate has nothing to do with changes in the savings rate, and the lack of domestic demand cannot be explained by the savings rate alone; the real reason is actually that the Chinese people do not have money. According to World Bank estimates, from 1998 to 2005, the share of wages in GDP in the United States remained at 56% after a long period of decline45 ; in contrast, the share of workers’ compensation in GDP in China declined from 53.4% in 1990 to 39.7% in 2007, a decline of 13.7 percentage points46 ; it can be seen that, although many countries have The share of wages in GDP has declined, nowhere has the decline been as dramatic as in China. The initial distribution was too “pro-capital”, with an overall low proportion of workers’ compensation and wide disparities between industries, leaving the population at large with relatively no money to spend. In China, large state-owned enterprises and well-connected large companies occupy all kinds of monopoly advantages and can obtain low-interest loans from banks. There are two paths for banks to keep giving financial concessions to large companies: one is to keep the savings rate of the people low so that banks can provide funds to large companies at low interest rates. Although the economic growth rate of the United States is less than half of China’s, the bank’s regular savings interest rate is close to or even more than 5%, higher than the growth rate of GDP; China’s economy has maintained a high growth rate of approximately double digits, and the savings interest rate is quite low. In other words, ordinary Chinese people have worked hard to earn that money but have to maintain high savings because of the lack of social security, but the return on savings is far below market value. Second, private enterprises or SMEs are cut off from their financial resources, or they are only given loans at high interest rates. As a result, small and medium-sized enterprises, which were the most job-creating, were not able to grow, and even university graduates could not find jobs. While the manufacturing sector relies on economies of scale, the service sector relies more on the dynamism and creativity of small businesses. China’s capital-intensive model has stimulated manufacturing while inhibiting the development of labor-intensive services, and the slow growth of the labor force has naturally depressed the wage bill as a percentage of GDP.

44

Zhou Xiaochuan, “China’s Household Savings Ratio to GDP Relatively Stable”, 2009-07-03, Shenzhen News, http://www.sznews.com/finance/content/2009-07/03/content_3885262.htm. 45 Source: Quoted in Xue Yong, “Hatred of the Rich: The Struggle between the Rich and the Poor in Contemporary China”, Jiangsu Literature and Art Publishing House, 2009, p. 31. 46 Quoted in “China’s wealth gap at least 40 times larger, unlikely to close until 2015”, CBN Daily, May 12, 2010.

392

7.4.2.3

7 An Analysis of the Causes of Disorders …

Changes in Labor Relations as a Result of the Reform of Distribution Principles

In the era of the planned economy, labor-management relations manifested themselves as the formal labor-management cooperation relationship between workers and employers and the actual labor-management relationship or administrative subordination relationship between workers and employers and the government. Under the principle of “public ownership + distribution according to work”, the government, as the dominant party, is the actual employer in an absolute position. It is in a relatively smooth and moderate state, with the artificially created explicit labor-management partnership obscuring the potential hidden labor-management conflicts. In the process of China’s move toward a market economy, economic relations have undergone tremendous changes, and along with the reform of distribution principles, China’s labor-management relations have also undergone profound changes. With the establishment of the market economy system and the gradual development and formation of the labor market, more exploration and practice of income distribution systems have been carried out around the country. In accordance with the principle of “efficiency first, equity second”, a system of guaranteed minimum wages for enterprises, a system of wage guidelines, a system of wage guidelines in the labor market, and an annual salary system for enterprise operators have been set up, and a marketed mechanism for income distribution is gradually being established. However, due to institutional, systemic, environmental and other factors, the income distribution mechanism could not develop in harmony and synchronization with economic growth and income growth, and the closely related phenomenon of partial disharmony and partial instability in labor-management relations gradually came to the fore. In the process of reform, there is a huge gap between the labor side, which has acquired the status of an independent entity, and the management side in terms of economic strength and social status. In the market game, the advantage of the management side is obvious, and the problem of labor-management conflict has begun to intensify, becoming the main manifestation of labor-management relations. Labor-management relations affect the development of enterprises, and the relationship between labor and management is complementary to that between income distributions. In market competition, investors always pursue profit maximization by all means, while workers pursue job stability and income maximization, resulting in conflicts and contradictions between the two parties in terms of wages, benefits, social security, etc., and causing labor disputes. After the restructuring of state-owned enterprises, the original income distribution system is broken, and the economic interests of employees are redistributed, resulting in old and new labor relations that cannot be replaced smoothly. In state-owned enterprises, although “distribution according to labor” is still emphasized as the main position, the corresponding system design is still very imperfect, coupled with the “first deduction before distribution, high deduction and low distribution” distribution model and “efficiency priority” distribution model. The influence of the principle of “fairness and equity” has always placed the factors of labor in a weak position in the distribution process. Collective wage consultation in enterprises is virtually nonexistent, withholding wages, suppressing

7.4 The Perspective of Reform Based on the Distribution Principle

393

wages, distributing wages in a disorderly manner, using piece-rate wages to cover up overtime work, and increasing labor intensity to increase labor productivity have become problems reflected by employees in the distribution of income in enterprises. In the distribution structure of many private enterprises, there are no different forms of wage distribution according to different types and characteristics of production and operation, and many private enterprises pay their employees based on the minimum wage standard; the wage guide price in the labor market and the wage guide line in enterprises are not implemented; the low unit price of piece-rate wages and the arbitrary nonpayment of wages are increasingly becoming the focus of tensions and difficulties in labor-management relations. The fact that a large number of non-State enterprises have no trade union organizations or no form of trade union, that the coordination mechanism for labor-management conflicts is seriously lacking, that employers can extend working hours at will, that many workers do not have the necessary labor protection, and that many non-State units do not participate in social insurance reflects the fact that the pattern of “strong capital but weak labor” has been formed in China. Under the conditions of a market economy, all factors of production as commodities have prices, and the level of factor prices is determined by the competition between supply and demand in the market, i.e., the marketization of factor prices. The basic principle of factor distribution is that when the factor owners transfer the use value of the factors, such as workers selling their labor, capitalists lending their capital, and landowners leasing their land, the prices of these factors “wages, interest, and rent” go to their owners, thus forming the income of the factor owners. However, in the process of economic transformation, the principle of income distribution was adjusted from “distribution according to work” to “distribution according to work is the mainstay, and multiple modes of distribution coexist”. This basic problem has not been solved, and the strong position of capital in the distribution is evident, with the distribution of factors leading to further conflicts in labor-management relations. Due to the inadequacy of the factor market, the contributions of various factors cannot be realized in full accordance with fair market values; due to the lack of a system for the protection of workers’ rights and interests and the inadequate protection of the labor rights and interests of vulnerable groups in society, in China’s current situation of oversupply of labor and shortage of capital supply, the value of labor has long been seriously deprived of capital, and the strong position of the employer has become even more obvious.

7.4.3 Reform of the Principle of Distribution and Political & Administrative Power Theoretically, a government-led society is fairer than a purely free market capitalist society. However, in the preceding years since the reform and opening up, the Chinese government has always applied the principle of “prioritizing efficiency and balancing

394

7 An Analysis of the Causes of Disorders …

fairness” and has always favored efficiency in dealing with issues of fairness and efficiency, and many of the policies it has introduced also embody the principle of prioritizing efficiency. Under China’s traditional planning system, the “distribution preference” is to value the state and the collective over individuals and residents; in the process of economic transformation, the “distribution preference” under the capital-led system is also to value enterprises and capital over individuals and labor. Therefore, if the government continues to emphasize efficiency in its choice of values for economic development, it will undoubtedly increase the distribution of resources and income in favor of the former. Moreover, in the midst of the transition, China does have some social problems in the areas of social justice, education, health care and housing, which have led to a series of vicious circles, such as the “wealth of the country and the weakness of the people” the inability to strengthen domestic demand, dependence on external demand, and being at the lower end of the industrial chain in the international division of labor. Suppression of factor prices is an essential element for the proper functioning of the planned system, as it is the only way to maintain inefficient state-owned enterprises. In a planned economy, factors are largely controlled by the government, and the government does have the means to develop the economy, e.g., it can maintain artificially low interest rates for long periods of time through the state-owned banking system and administrative controls. Low factor prices inevitably induce investment frenzy because by investing, rent can be obtained out of thin air. The basic model of a planned economy is, therefore, to keep investing in cheap resources. The backwardlooking advantage in knowledge, coupled with artificially suppressed factor prices, allows the planned economy to maintain high growth for a certain period of time, but this growth is unsustainable because it does not actually create wealth but rather uses power to acquire resource rents. The Austrian school of business cycle theory suggests that artificially suppressing interest rates below the “natural rate of interest” inevitably leads to a lengthening of the production process in society as a whole, a shift of resources toward the production of intermediate investment goods and a shrinking of resources for the production of final consumer goods. In the process of economic transformation, the principle of distribution shifted from “distribution according to work” to “distribution mainly according to work, with a variety of distribution methods coexisting”, as the basic problem of “factor prices” was not solved. The official prices of factors deviate significantly from international market levels, as well as from the price levels determined by supply and demand. However, factor prices in China are low not because of an oversupply of land, capital and labor but mainly because of the long-term extensive and deep intervention of administrative power in the micro-economy, which to a certain extent has distorted market trading activities, resulting in a great deal of rent-seeking room for certain government officials to manipulate factor prices in the process of factor allocation. Governments at all levels can control the conditions of transactions, artificially suppress and manipulate prices, undermine the order of the market economy and hinder the normal operation of the economic system, resulting in a “two-track system” of prices in the distribution of factors. Thus, the surplus obtained by Chinese SOEs did not come from innovation or from the added value of knowledge but from

7.4 The Perspective of Reform Based on the Distribution Principle

395

the resources themselves, from the difference between the official price and the international market price or the price determined by normal supply and demand. China is in the process of transitioning from a planned economy to a market economy, but the market economy system is still imperfect, power is still highly concentrated in the government, and microeconomic entities have relatively little management autonomy. If the allocation of public power does not reflect the principle of “separation of powers and checks and balances” and is instead overly concentrated in the hands of one person, unit or department, then power is likely to lead to corruption. As public officials have greater power to determine who will have access to economic resources and opportunities, in a rapidly developing and GDPdriven economy, economic success may depend more on the ability to influence officials and less on market activity. As a result, bribery, extortion and kickbacks will become effective ways to influence the distribution of wealth. In particular, in the “first hand” hold people, money, material situation, the first hand is easy to jump out of the power circle, become personally grasping, direct control of the real power faction, become detached leaders, supervisors. As a result of the system “loopholes” a lot, supervision and lack of power, this kind of one-dimensional leadership, often therefore becomes a personal leadership, driven by “economic man” interests, this lack of openness, transparency, always in the “dark box”. Power that is not subject to supervision and control will inevitably deviate from the right track, and corruption of power will emerge as a result. From the beginning of the reform to the end of the 1990s, China implemented the policy of “allowing some people to get rich first, so that the first to get rich leads the second”, and later put forward the principle of “prioritizing efficiency and taking into account equity”, exchanging the disparity in income distribution for faster economic growth, thus causing the disparity in income distribution between regions, industries and different income classes is widening. In addition, the distinctive features of China’s dual economic structure and the household registration system restrict the movement of peasants to towns and cities, and the “urban–rural barrier” policy has further constrained the development of the rural economy and the growth of peasant incomes. Another systemic problem is that the current government-led Chinese tax system has limited or even counter adjustment of taxes on income. Theoretically speaking, income tax on labor will lead to a reduction in the share of labor allocation, income tax on capital will lead to a reduction in the share of capital allocation, and income tax will lead to a reduction in the share of capital and labor allocation at the same time, the magnitude of which is related to the scope of taxation, factor output elasticity and other factors. China is a complex tax system with transfer tax and income tax as the “double main body”, with value-added tax, business tax, consumption tax, corporate income tax and personal income tax as the main taxes in China. Some studies show that the value-added tax in China reduces the distribution shares of capital and labor factors at the same time, but its influence on the distribution of capital factors may be relatively small, and the influence of value-added tax on the distribution of labor factors may be larger against the background that the source of residents’ income is mainly labor factors. The personal income tax has both labor and capital income components and has the nature of taxing both capital and labor

396

7 An Analysis of the Causes of Disorders …

at the same time.47 However, in general, because China has not yet established a comprehensive and classified personal income tax system for the regulation of personal income tax, the regulation of the high-income class is limited, the loss of tax revenue is serious, the vast majority of tax revenue comes from wage earners, and the result of the imposition of personal income tax mainly leads to a decline in the share of labor distribution. Regarding corporate income tax, state-owned monopolies use state resources to obtain high profits but bear the same tax burden as enterprises in fully competitive industries and do not pay resource tax and profits to the state treasury. In addition, China has not yet imposed a property tax, and when the “distribution according to labor” shifts to a “distribution according to factors”, property income will further widen the gap between the rich and the poor, resulting in the “Matthew effect”.

7.4.4 Distributive Principle Reform and the Recessive Economy The policy of “low distribution and high welfare” under the pattern of “high deductions and low distribution” in China has resulted in a large amount of hidden income in the income of many people, such as various subsidies, distributions in kind, allocations outside the system, and monetary wages that are not shown, resulting in a large amount of wealth flowing into the pockets of individuals. (b) The reform of income distribution, which constitutes hidden income. In the process of income distribution reform, although the principle of income distribution shifted from “distribution according to work” to “mainly distribution according to work, with a variety of distribution methods coexisting”, it then shifted to “combining distribution according to work and contribution according to the factors of production”. However, the pattern of “high deductions and low distribution” in our country remains unchanged, resulting in the low proportion of labor remuneration in the primary distribution of income and the low proportion of income in the national income distribution. If the income allocated to workers in the first distribution is too low, the income level of workers is not raised through normal channels, and the income of workers is not made up through redistribution and third distribution, under the stimulation of various economic interests, part of the GDP will become people’s income through other links in social reproduction, i.e., through abnormal channels, thus leading to the proliferation of the recessive economy and underground economy and affecting China’s economy. (a) Development and social stability. The shift from a planned economy to a market economy has resulted in the rapid development of China’s economy, an increasingly rich material life and a strong urge to increase people’s incomes. In reality, a low level of income contradicts the strong urge to increase income, and to narrow or close the

47

Guo Qingwang and Lv Bingyang, On the Impact of Taxation on the Distribution of Factor Income, Economic Research, No. 6, 2011.

7.5 A Perspective Based on Factor Liquidity

397

income gap between the ideal and reality, some organizations, enterprises and individuals have resorted to various means, such as tax evasion, second jobs (employment outside the system), rent-seeking and even corruption, to obtain additional hidden income. With the reform of the economic system, China’s private enterprises and individual economy have developed rapidly, but at the same time, a large number of unemployed people have been laid off. In the process of economic development of the private and individual economy and the self-selection of laid-off people, excessive government regulation (e.g., licensing system) has raised the cost of entry, coupled with inefficient levels of public services and cumbersome approval procedures, which have raised the transaction costs of their public registration, causing this group of enterprises and individuals who had hoped to engage in the formal economy to go underground, generating large amounts of hidden income. The contradiction between the “low income” and “high consumption” of certain authorities and government officials has also led to an increase in various types of illegal and abnormal income in China, such as rent-seeking power and trading in influence and money, and frequent corruption cases have exposed the huge appropriation of public wealth by individual cadres. The frequent cases of corruption have exposed individual cadres’ huge appropriation of public wealth, such as the use of state assets for private purposes, tax evasion, the use of power for personal gain, corruption, bribery, fraud, trading in influence, smuggling, and the sale of counterfeit and shoddy products, as well as the use of monopoly advantages and imperfect loopholes in institutions and policies to allow some people to exploit “loopholes” and obtain various kinds of black, gray or irregular incomes. Income, etc., has fostered a community of the ultrarich. According to the Supreme People’s Procuratorate, in 2009 alone, the country filed and investigated 18,191 major corruption and bribery cases, investigating 2,670 state employees above the county level, including 204 at the department level and eight at the provincial or ministerial level. Chen Tonghai, former chairman of Sinopec, took nearly 200 million yuan in bribes, setting a record of 160 million yuan for the largest single bribe since the founding of New China.48 This kind of irregular and unreasonable income brought about by the chaotic distribution order is neither the result of the government’s distribution mechanism nor the role of the market mechanism to intervene in the field of distribution, which reflects the privileged effect of the power to participate in the distribution and is also the most unfair and disparate part of China’s income distribution.

7.5 A Perspective Based on Factor Liquidity Under the system of what Smith called “natural liberty”, the “city” as an economic form could naturally cover the countryside, albeit to varying degrees, and this system 48

Quoted from China’s wealth gap is approaching the social tolerance “red line”, Economic Information Daily, May 10, 2010.

398

7 An Analysis of the Causes of Disorders …

of natural liberty meant, above all, the unrestricted use of persons, goods, capital and all other factors. Land moves freely between urban and rural areas, between regions and between industries. Natural and reasonable urbanization requires the government to go away and let the city expand naturally so that farmers and citizens can move freely in both directions. Only in this way will there be no absolute contrast between cities and countryside, the gap between regions and industries will not be too large, urbanization will be able to absorb farmers, and farmers can become the main body of urbanization.

7.5.1 Based on the Mobility of Elements and the Order of Income Distribution The equity of distributive motives is more important in influencing people’s decisionmaking behavior than the equity of distributive outcomes, and its implication is that the equity of the distributive process is more important than the equity of distributive outcomes.49 Another key reason for the chaotic income order in China is the lack of a unified and unobstructed factor market in the country, which deviates from the logic of the market, although the forms and basic structures of the factor market are now available. Economic development is inseparable from labor, capital, technology and other factors of production, and the supply of these factors within a region or interregional flows will have a significant impact on the development of the economy, regional income disparities and employment. Assuming that the factor market is perfect, that the factor market and the commodity market are also smooth and that price changes can be timely and sensitive to each other, the process of the market guiding the flow of factors will also contribute to the coordinated development of localities and the narrowing of the income distribution gap. If the marketization process of various regions is not synchronized and the flow of factors is not free, residents lose the opportunity to choose fairly, and the “foot voting” mechanism fails, the differences in income distribution between regions will be increased, while the “Matthew effect” of the market will certainly make the income distribution gap between regions widen. There is a trend toward gradual expansion. The shift from a planned economy to a market economy requires that markets be open and that factors move freely, regardless of industry or region. If the market is fully competitive, open and free flowing, the disparity between industries and regions will be better controlled. However, in the process of China’s economic transformation, due to the segregation of urban and rural areas, the intervention of power, the incompatibility of reforms, including the household registration system, administrative affiliation, personnel file system, etc., and local protection, factors are not yet

49

Chen Yefeng, Zhou Ye’an, and Song Zifeng, “Are People Concerned with Distributive Motives or Distributive Outcomes?” (p. 4).—an examination of two views of fairness under the perspective of the ultimatum experiment”, Economic Research, No. 6, 2011.

7.5 A Perspective Based on Factor Liquidity

399

able to flow freely, and openness and competition are not yet sufficient, which gives rise to problems. In a planned economy, the disparity between industries and regions can be controlled by the “visible hand”; in a market economy, the free movement of factors and the disparity between industries and regions can be controlled by the “invisible hand”. However, in China’s transition from a planned economy to a market economy, the degree of marketization is low, the market is imperfect, the free movement of factors is not yet possible, the cost of migration is relatively high, and the role of the “invisible hand” is limited, resulting in the widening of income distribution gaps among industries and regions; along with the interference of power and many inequities and irregularities, this has led to a widening of the gap between industries and regions. The “invisible hand” also has difficulty working. On the one hand, the “visible hand” is somewhat impotent; on the other hand, the role of the “invisible hand” is limited, and the “two hands” are not strong enough, resulting in a lack of coordination between industries and between urban and rural areas. Factor mobility is closely related to income disparities between industries, between urban and rural areas and between regions.

7.5.2 Mobility of Elements and Labor-Capital Relations With the advent of economic globalization and the knowledge-based economy, society has begun to undergo a major shift from manual labor to intellectual labor. Among the main elements of distribution, namely, labor, capital, technology and management, capital and management account for an excessively large proportion of the distribution, while labor accounts for an excessively low proportion, thus discouraging workers’ enthusiasm. In China, due to geographical restrictions on the free movement of workers, a small number of talents with scarce intellectual resources and those with capital and technical resources have become buyers in the labor market, while a relatively large number of surplus ordinary labor resources, especially low-qualified workers, are at an obvious disadvantage in the labor market and have become losers or victims. Against the background of global “strong capital and weak labor”, labor relations in China are also in a situation where the power of capital is becoming increasingly stronger and the status of workers is constantly declining. As China has yet to establish an integrated urban–rural labor market, the provision of an integrated urban–rural system has lagged behind, and the “dual household registration system” established under the conditions of the planned economy has not been adapted to the rapid development of industrialization and urbanization and has not undergone corresponding changes. Along with the process of reform and opening up, the long-standing dual household registration system separates the countryside from the city, resulting in the separation of the urban and rural markets, restricting the free flow, rational allocation and optimal combination of urban and rural factors of production, and hindering the rational flow of urban and rural population and labor

400

7 An Analysis of the Causes of Disorders …

and the formation of a unified national market. On the one hand, this has led to an imbalance between urban and rural areas in terms of capital, labor and technological development; while on the other hand, it has made it difficult and costly to transfer rural labor, inhibiting farmers’ employment and income growth. At the same time, the existence of the household registration system prevents the vast majority of rural laborers and their families from obtaining legal recognition for permanent residence in cities, and their migration is expected to be only temporary or mobile.50 As they do not have urban hukou and cannot obtain the status of urban residents, farmers are still subject to a considerable degree of discrimination in terms of employment, income distribution, and sharing of public goods. They do not have the same job opportunities and social status as urban residents, their jobs are not stable or even secure, and they cannot obtain the same employment conditions and remuneration as urban residents. Thus, although marginalized urban migrant workers have the dual identity of “urban people” and “rural people”, they are at the same time “marginal people” who can hardly be recognized by traditional farmers and accepted by urban residents. “They are the most striking manifestation of China’s urban–rural and industrial-peasant divide. At present, they are mainly found in the mining, construction and service industries, doing dirty and tiring work that urban workers are reluctant to do, but they do not enjoy, or cannot fully enjoy, the benefits and other rights and interests to which they are entitled as regular employees of their employer or as urban residents, and they receive relatively low pay. Migrant workers who are discriminated against in terms of their status not only have their wages permanently suppressed but are also commonly owed wages in arrears. With the deepening of marketization in China, public opinion is now very concerned about the free flow of farmers into cities. It should be said that it is the right of farmers to be legally accepted in cities. However, under the current system, the free flow of peasants into cities only means that the size of the urban and rural populations on both sides of the segregation is adjusted, but the segregation itself remains unchanged. From the point of view of political justice and economic efficiency, the most important thing is to break the urban–rural segregation system itself, i.e., without the process of land acquisition by the government and centralized development by developers, city residents can freely go to live in the countryside, and farmers can also freely go to live in the city so that the urban boundaries can be expanded without nationalizing the land. Moreover, the freedom of urban residents to live in the countryside is in fact a process of natural flow of urban resources to the countryside. The main intention of the current dual land system is to protect agricultural land and prevent cities from occupying too much land in the countryside, but in reality, the land resources under the form of enclosure are seriously wasted, and it also leads to an unintended consequence: it prevents the spontaneous free flow of urban resources to the countryside. This flow could have served as a catalyst, allowing those elements that circulate less efficiently in the rural economic system to naturally enter the urban economic form, thereby significantly increasing its efficiency while 50

Cai Fang, Du Yang, Wang Meiyan,“The Household Registration System and Labor Market Protection”, Economic Research, No. 12, 2001.

7.5 A Perspective Based on Factor Liquidity

401

also bringing urban public goods into the countryside. Most importantly, farmers can use the land they own as capital, naturally integrate it into the urban economic system, and form a symbiotic relationship with the urban population, becoming de facto urban in an economic and social sense on their own land. Unlike the present situation, where land is a purely administrative object of government expropriation, expropriated farmers are completely excluded from urbanization and are not even connected to the city that has developed on their land. The fragmentation of the labor market and discrimination in employment between regions has resulted in obstructed labor mobility and underemployment, and this systemic discrimination in labor mobility directly affects the growth of labor employment and labor income. All employment policies, security systems and the provision of social services in cities and regions are implemented through the presence or absence of local hukou, and discriminatory treatment of outsiders is rooted in the hukou system. As the regional distribution of labor migration is closely related to regional development, along with the promotion of the gradient development strategy, the income gap between China’s regions has widened further, and the rapid economic development of the eastern region has attracted a large number of laborers from the central and western regions to the developed eastern region. Because the eastern region not only opened up to the outside world early but also saw rapid market development, the high level of marketization has continuously eliminated institutional barriers to the interregional mobility of labor and has become a major absorption area for labor mobility. The development of factor markets and the degree of marketization of resource allocation play a leading role in regional economic growth and labor migration. Influenced by factors such as household registration restrictions, lifestyle differences, difficulties in integrating cultural concepts and local protectionism, the cost of labor mobility across regions is high, and “distance” has an obvious impact on migration decisions. The greater the distance is, the more difficult it is to transfer information about the labor market, the greater the cultural differences, and the higher the transport and psychological costs of migration. In terms of industrial labor migration, the employment space in traditional industries has been further reduced. Under the trend toward globalization, the situation of our enterprises, which are inexperienced and ill-prepared, is very serious, and many of them have closed down in the face of international competition, with the number of unemployed and laid-off workers rising further. New immigrants moving from the countryside to the cities compete with the existing unemployed residents of the cities, especially the unemployed laid-off workers, for the already limited resources for development, with the result that their common living space is further compressed, and the number of urban unemployed, new immigrants and the poor further increases in the short term. Due to the relatively high cost of living in cities, unemployment means the loss of all sources of livelihood, and these people can only become a new group of poor, leading to the further expansion of new urban poor groups. At the same time, due to market access and industry differences, many enterprises require workers to be skilled in the relevant industries. On the one hand, the contradiction between unlimited production capacity and limited consumption capacity forces many enterprises to reduce labor costs by means of low wages to improve their

402

7 An Analysis of the Causes of Disorders …

competitiveness, which to a large extent leads to a reduction in household budget expenditure and a further deterioration in the living conditions of vulnerable groups whose consumption capacity is already limited, and the problem of urban poverty becomes increasingly acute. On the other hand, the difficulties of interregional labor mobility, the low level of education of those involved in labor migration and the high technical requirements of workers in the industry have not only led to a shortage of available “technicians” and managers in a large number of urban enterprises but also to the inability of many enterprises to recruit suitable production workers, resulting in the loss of jobs. “Labor shortage”. In terms of the direction of labor force transfer, the service industry is an industry that can absorb a large number of jobs, and a large amount of surplus labor in China can be transferred to the service industry in just the right proportion. However, one of the structural problems in China is the service sector, which has caused difficulties in the transfer of labor. The value added of the service sector in China is 40%, and the share of employment in the national economy is 33%, while the figures for these two indicators abroad are 60 and 65%, respectively.51

7.5.3 Mobility of Factors and Executive Authority In the area of primary distribution, due to the intervention of administrative power in the market, the freedom of market subjects is not fully respected, and their equal status is not effectively guaranteed; under the dual system of household registration and local protectionism, which divides urban and rural areas, there are still certain restrictions on the free movement of factors of production; the dual pricing mechanism of factors by the market and the government leads to an unreasonable price formation mechanism and insufficient market competition. This, coupled with the fact that the market order is not standardized, with some administrative monopoly enterprises or industries taking advantage of their monopoly position to obtain monopoly profits, and with the fact that some public powers are monetized and capitalized for private gain, etc., has seriously undermined the operation mechanism of China’s market economy and the principle of exchange of equivalents. At present, the development of China’s factor market is lagging behind, and the formation of prices for various types of factors is extremely uneven due to the existence of a fragmented system. Generally, the pricing power of our labor and technology factors is basically determined by the market, while the pricing power of factors such as capital, land and energy resources is mainly determined by the state. Under such circumstances, the factor price formation mechanism will inevitably be distorted, unable to form a competitive factor market, and unable to ensure the efficiency of resource allocation. The inability to form an effective factor price system

51

Quoted in Central Party School Zhou Tianyong on New Round of Reforms: to be Completed in a Decade, Oriental Morning Post, 28 June 2010.

7.5 A Perspective Based on Factor Liquidity

403

leads to distorted price signals, which inevitably leads to losses in resource allocation. For example, since the reform and opening up, China has transformed from a traditional planned economy to a market economy, but due to the central government’s long-standing strategy of prioritizing the development of heavy industry and the direct control of the planned economy over the central and western regions as a base for the development of heavy industry, the price system has been distorted, and the market economy has been unable to develop fully, causing the marketization of the central and western regions to lag behind that of the eastern regions, which, coupled with the slow pace of price reform, is not conducive to the development of a market economy. The development of the market economy in the central and western regions has inhibited the development of their comparative advantages, leading to a widening gap in regional development in China since the reform and opening-up. In the process of developing and forming factor markets, labor was the earliest factor to be marketized, and after the 1990s, with the reform of the state-owned employment system and the rapid development of the nonstate economy, the structure of employment in society underwent major changes, with the nonfarm employment of farmers no longer being limited to short-term mobility but having a long-term, professional and urbanized character. Under these circumstances, the institutional arrangements associated with the traditional concept of “migrant workers” have obviously lagged behind, and the basic rights and social security of workers have become prominent issues in the marketization of labor factors. Government power has a significant influence on the allocation of capital among different groups and their income levels, and the lag in the marketization of capital factors in China is reflected in the lending market and the equity financing market. At present, small and medium-sized enterprises and private enterprises in urgent need of development funds in China are facing a bottleneck in financing, while the lending market, which mainly serves the capital needs of state-owned enterprises, not only fails to adapt to the reality of diversified market entities but also contains great systemic risks. For the equity financing market, on the one hand, there is a single hierarchy, high barriers, and the inability to meet the financing needs of enterprises, and on the other hand, there are systemic flaws in the national stock market. The relationship between government regulators, exchanges and major investment institutions is in fact the relationship between “competent authorities” and management targets, which is one of the main reasons why a large number of poor-quality companies are listed for profit and difficult to eliminate from the market. The prices of most natural resource factors are still controlled by the government, which underprices natural resources in the process of industrialization in China to control the cost of raw materials for enterprises. As a result, the prices of various resources have been partially transferred to industrial goods through the “scissors difference” or to certain government officials through the “two-track system”. As a result of restrictions on market access, government control, licensing systems and so on, the government land factor has been marketized on a large scale, a primary market characterized by government monopoly concessions has been formed, and a secondary market characterized by the transfer, rental and mortgage of land use rights and other forms of transactions. In actual operation, the government has almost

404

7 An Analysis of the Causes of Disorders …

excluded the right of land use rights owners to participate in transactions and has directly become the subject of market transactions. In recent years, a large number of civil disputes have occurred in the process of urban eviction and agricultural land expropriation, which is not just a matter of compensation but a profound reflection of the contradiction between the government monopoly on expropriation and marketization and a reflection of the government’s function in the marketization of land and the shortcomings of the power operation procedures. Local governments at all levels, to speed up economic development and increase local GDP, often attract more private investment by reducing the cost of capital inflow, and the most directly dependent resource is land. The vicious competition among local governments has led them to attract investment in the process of transferring land elements, often by competing to lower land sale prices. Some of the local governments even seek only temporary performance and lack overall land use planning, blindly giving away land at low prices during their tenure. The local government’s decision to maximize its own interests reduces the overall interests of society as a whole, resulting in the overexploitation and irrational expansion of the land’s social carrying capacity, which reduces the overall efficiency of urban land development and the loss of land capital at low prices, resulting in the “tragedy of the commons”.52

7.5.4 Factor Liquidity and the Recessive Economy At present, the development of China’s factor market is lagging behind, and there is serious systemic segmentation. In the labor market, there is market segmentation and discrimination in employment; there is unequal pay for the same work, unequal pay for the same job, confusion over nonwage income and nonmonetary benefits, and prominent irregularities such as illegal income and “gray income”; there is an imbalance in the structure of the capital market and a serious loss of state-owned assets; the marketization of land is progressing slowly, and there are serious violations of the law in transactions; and the technology market is not a market for technology. A well-developed market network has not yet been established; price controls in resource markets have expanded the field of hidden economic activities. The fragmentation of the labor market has made it difficult for migrant workers and urban laid-off unemployed individuals to re-enter the workforce, and many unemployed and unemployable people are forced to engage in unlicensed hawking, leading to the rampant growth of this hidden economic activity. “Monopoly welfare” also persists as a form of hidden income, and equity in primary distribution is to a large extent difficult to achieve. Local protectionism of local governments hindering the flow of factors is a negative factor that cannot be ignored in the process of economic development in China and is also an important cause of frequent hidden economic activities and government failure. Local governments always start from the economic interests of the region 52

Liu Hong (2009).

7.6 The Perspective of Motivating and Restraining People

405

in their economic decision-making, take maximizing the interests of the region as the objective function, choose the strategy that is most beneficial to the economic development of the region, and adopt local protectionism to restrict the free flow of scarce resources to protect and develop the economic welfare of the residents of the region. For example, setting hurdles, controlling local resources, blocking regional markets, implementing resource monopolies, strong intervention and restricting the flow of scarce resources undermines the fairness of competition, greatly restricts the optimal allocation of scarce resources, leading to resource reallocation and inefficient resource allocation. Due to the fragmentation of factor markets and the obstruction of factor flows, it is difficult to form a unified large national market, and coupled with information asymmetry, local protectionism also provides a lucrative opportunity for hidden “smuggling” between different regions of the country. Market access and other basic systems related to the starting point of primary distribution and opportunities, there are differences in treatment between stateowned and nonowned, monopolistic industries and nonmonopolistic industries; government-led fixed investment has many institutional loopholes in the management of funds, and there are irregularities in the management of public expenditure and public resources such as land and minerals, as well as a lack of transparency in the access of land and other natural resources to the market, resulting in trading of power and money. “Tofu-dreg projects” of various scales have been carried out. On the one hand, these activities have led to the loss of large amounts of state assets and tax revenue, and on the other hand, they have brought various kinds of hidden revenues to the holders of administrative power. In the process of China’s transition from a planned economy to a market economy, the imperfect development of the market, imperfect systems, unequal opportunities and the penetration of power into the market have led to distortions in the distribution of resources and widespread rent-seeking and corrupt behavior, resulting in large amounts of hidden income for government officials and widening the income gap between classes.

7.6 The Perspective of Motivating and Restraining People The change in income distribution has become a powerful lever to promote institutional change in the process of China’s economic transformation. The policy of “Encourage some areas and people to become rich before others”, and its change in income distribution after reform and opening up, have formed a powerful inspiration for people to pursue institutional reform. Such institutional reform constantly induces people to break through the various rules and regulations that restrict the development of productive forces and then to seek their own greater development. Due to a lack of effective incentive and restraint mechanisms and strict supervision for corrupt officials, some moral problems arise in society, such as moral decay and the ugliness of human nature. For example, for-profit merchants ignore the interests of consumers, countries and society. This has directly or indirectly disrupted China’s pattern of income distribution and led to the growing gap between the rich and poor.

406

7 An Analysis of the Causes of Disorders …

7.6.1 Incentive Restriction Mechanism and the Pattern of Income Distribution China’s transition from a planned economy to a market economy requires a change in the restraint mechanism for people. Restraints for people mainly include moral restraint and system restriction; there should be a corresponding moral and system restraint mechanism for people in any event; for example, restraints such as moral and party discipline can be used under a traditional planned economy. Legal constraints need to be used on the condition of a market economy because moral restraints are no longer effective. However, in the process of shifting from a planned economy to a market economy, the process of converting legitimate resources into legal norms is always lagging behind since China has not truly moved toward legalization; the old regulation system is no longer legitimate and applicable, although it is lawful, because it deprives people of their rights to engage in a justified career. In this context, the original moral system is under attack, while new moral norms have not yet formed; the original system restriction is in need of reform, while the new system restriction has not been perfected in time, which objectively brings about a certain degree of “moral vacuum” and “institutional vacuum” and creates soft restrictions on people. This has largely contributed to the deterioration of income distribution during the transition period. In the economic transition period when the new policy has not been formed, while the old policy has not been improved, some people are likely to fish in troubled waters. In the process of China’s transition from a planned economy system to a market economy system, the lack of incentive restriction mechanism and frictions and contradictions between the old and new systems inevitably lead to disorder and confusion in income distribution, thereby allowing some people to get rich first through “taking advantage” of the transition process. An important policy of reform and opening up is to allow some people to get rich first and make fortune by hard work. However, people’s natural chasing interests determine that there must be a small part of people to capture social wealth by speculation through making use of the loopholes in policies, laws and regulations in the transition period of the planned economy to the market economy because economic transition can only “crossing the river by feeling for the stones”. At the beginning of reform and opening up, these people (malfeasant, royal relatives, speculators and so on) all tried their best to reach out to the rapidly increasing social wealth after the reform and opening up by using illegal means, which caused the initial unfair distribution of social wealth. Social wealth is increasing with the development of the economy; the occurrence and spreading of corruption phenomenon aggravate the disordered and unfair distribution in whole society, which is caused by some reasons such as expansion of official rights and the lack of supervision, the animal nature of people chasing interests and the convenience provided by power, the lack of various supervisions and the loopholes of the legal system, and the expanding psychological comparison.

7.6 The Perspective of Motivating and Restraining People

407

7.6.2 Incentive Restriction Mechanism and Labor-Capital Relationship 7.6.2.1

Institutional Restriction

In the process of China’s economic transition, rules are the product of people’s actions and interactions in a certain order; the generations of rules and the change of system of rules internalize into an endogenous variable of economic process. That is, administrative rules are formed in the interactive process of government officials, entrepreneurs, consumers, and public opinion; the entrepreneurs themselves in the process of transition are the main body to generate rules and promote rule change. New institutional economics believes that institutional change is gradual, which leads to an imbalance in institutions; some people and some regions use new institutions to obtain benefits and realize income increases and multiple channels of income sources, while others and other regions are in a lagging system and have low income and singular income sources. In China, institutional factors play a decisive role in the distortion of the labor market instead of the market itself. China has not yet formed an effective way to regulate and guide the orderly operation of the labor market, and the distortion of the labor market is embodied in many aspects, such as existing disorders, chaos, disputes and disputes in operation, and a lack of legal means to restrict and correct and imperfect market systems and regulations. China’s dual structure is obviously the institutional cause of labor market distortion. Most of the rural population flowing into cities can only engage in low-end manual work due to the longstanding weakness of rural residents’ human capital, and the works they engaged in have extremely low wages and very obvious polarization trends of wages compared to other industries. In addition, the income, insurance, and welfare of migrant workers are not guaranteed due to the segregated urban– rural identity authentication system, and even their legitimate rights are vulnerable to infringement. The trend of a widening gap in residents’ income will continue because the dual structure of China’s urban–rural areas and the dual-track system of factor markets such as labor and capital are difficult to crack and eliminate in the short term. The management system of population mobility, which is dominated by the household registration system, has a profound and huge impact on the formation of the income gap between urban and rural areas and between regions. In addition to restricting the movement of urban and rural populations, the household registration system has become the best tool for the implementation of discriminatory policies in urban and rural areas and the region because of the protection for the interests of urban local residents and is added by different statuses, rights, obligations, and treatment from the beginning. Urban and rural residents, natives and outsiders enjoy very different treatments in economic, political and social aspects with the help of the boundaries formed by the household registration system. Urban and rural residents, natives and outsiders are treated differently in terms of housing, employment, labor treatment, medical care, and education resource sharing; rural residents and outsiders are not treated with equal national treatment; the political treatment and

408

7 An Analysis of the Causes of Disorders …

speaking rights also have great differences between farmers and city people, natives and outsiders; these discriminatory differences have become an important part of the income gap between urban and rural residents and between regions. Inspired by the promotion of political tournaments, not only is there a serious conflict between the goal of motivating officials and the rational design of government functions but also the GDP-oriented achievement view has led to that many local government officials often cooperate with local enterprises on local issues. These local government officials do not maintain the legitimate rights and interests of laborers but are also partial to the side of capital and become accomplice to violate the interests of laborers when dealing with the labor-capital relationship. In addition, China’s people’s congress system lacks its due force of constraint. China implements the Unicameral National People’s Congress and exercises the highest state power in a unified manner. In accordance with the principle of democratic centralism, people’s congress system is a political system in which voters directly or indirectly elect deputies to form people’s congresses, which are the organs of state power and administer state affairs in a unified manner. However, in fact, people’s congress system lacks its due force of constraint, which because of the long-standing view of “rule by people not by law”, the large number of deputies to the National People’s Congress is not convenient to carry out regular work; and the proportion of officials in NPC deputies is too high. According to the statistics of professor Wang Guixiu from Central Party School, China has nearly 3000 deputies to the people’s congress, but nearly 70% of them are leaders from administrative units, enterprises and public institutions; that is, 70% of the NPC deputies are party and political officials at all levels; most of the remaining 30% are the chairmen and general managers of large enterprises or companies.53 Thus, it can be seen that China has the world’s largest number of deputies to the National People’s Congress and the large number of officials among deputies than anywhere else in the world. As the most direct and effective way for people to express their opinions, the annual people’s congress allows officials to speak for the people, and their credibility is inevitably questionable. Therefore, as someone has jokingly said, “People’s Congress” has become the “Official and Merchant Congress” or “Official and Merchant Art Federation”. In general, the weakness of institutional constraints, the differences in policies and systems between urban and rural areas, eastern region and Midwest area, special economic zones and nonspecial economic zones, monopoly and nonmonopoly industries, the distribution idea of “letting some people get rich first” and economic development strategy of “efficiency first”, have caused that farmers, agriculture, the central and western regions, disadvantaged groups, disadvantaged industries and inefficient enterprises have fewer opportunities, poor competitiveness, and shortage of science and technology in the primary distribution, and have been at an unfair position in the starting point and process of the income distribution, which inevitably lead to unfair income distribution results. The lagging reform of China’s social security 53 Zhu Sibei: China Economic Times: “Official Congress” Highlights the Lack of Fairness, People.cn, http://www.people.com.cn/GB/news/37454/37462/3198798.htm.

7.6 The Perspective of Motivating and Restraining People

409

system cannot meet the basic requirements of market economy development, which weakens the assistance for urban employment and laid-off workers and leads to an increase in the number of urban poor people and an increase in the income distribution gap among urban residents.

7.6.2.2

Moral and Ethical Restriction

The operation of the market economy must conform to market discipline and follow the market discipline to create maximum efficiency and profit beyond the will of humans. It will produce an active effect on the economy if the political, ethical, and belief systems are in line with people’s desire to pursue wealth; it will be reformed if they violate the goal of economic and wealth growth; it will be bribed if the system has serious inertia or is too difficult to rebuild. It is often that officials trample on ethics of power, entrepreneurs trample on business ethics in the transaction of increasing wealth through bribery, and officials and entrepreneurs refuse to correct the injustices they generate based on ethical principles, which is equivalent to giving validity to various social inequities. Government officials and entrepreneurs believe that any system should focus on the goal of achieving economic and wealth growth instead of moral restriction in the process of China’s economic transition. It completely violates Adam Smith’s market economy theory, which is that a sound market economy should enable one to contribute to society while pursuing the best interests of the individual. In a market economy, profit is undoubtedly the goal placed in front of every enterprise, but in fact, the existence of an enterprise is conditional upon the existence of society; profit and social responsibility do not have to choose either of them. Enterprises should be based on the concept of entrepreneurs’ social responsibility instead of entrepreneurs’ concept of rights, and enterprise businesses should pay attention to ethics. Even in the opinions of Adam Smith and the most successful entrepreneurs in the laissez-faire economy, capital has a strong moral imperative. The enterprise must consider its own social value in the premise of survival and striving for development, which means what kind of moral orientation the enterprise should adopt during the transition from the planned economy to the market economy and the continuous development of the market economy. The pursuit of profits is indeed the duty of entrepreneurs, and it also conforms to economic logic to take certain measures to lower the price of labor. However, there should be a limit to such measures, and this limit needs to be defined by law and morality. The legal definition is the responsibility of the government; the enterprise is likely to overstep the boundaries set by law if the government does not shoulder this responsibility and blindly protects the enterprise without paying any attention to labor demands. The enterprise will inevitably overstep the limits that people think are reasonable and legal and treat laborers in a way that people cannot accept if there is no moral and ethical restriction at this point, that is, the so-called “sweatshop”. In the absence of effective institutional restrictions and moral and ethical restrictions, the normal rights of enterprises expand into an uncontrolled privilege, which leads to obvious labor-capital contradictions, constant labor-capital conflicts and strained labor-capital relationships.

410

7 An Analysis of the Causes of Disorders …

Human moral principles and values are the higher justice than the market discipline, and this justice is also the basis for us to constantly modify the social injustice created by imperfect markets. Another problem of China’s market economy is that enterprises are not pressured by community ethics. For example, a boss thinks that he does not owe anything to the workers who have worked for more than ten hours for him after making a fortune; and everyone’s lives can be entirely different; he is willing to spend all the money that workers earn associating with foreign bigwigs, entering the world’s wealthy men’ club and getting into “high society”, but unwilling to think of the feelings of neighbors, use charitable and decent wages to make himself a kind member of the community; he even wants to taking the money to go far away instead of stimulating the “domestic demand” of Chinese economy. Those workers who earn many money for the boss but can only receive a meager wage, especially migrant workers, often cannot even pay for their children’s education, ultimately leading to poor domestic demand and poor quality of the next generation of labor. The prosperous economic development in the future must cultivate social memes such as personal moral sentiments, neighborhood fraternity and responsibilities and sympathy for others. Although the minimum wage and medical assistance for poor people do not conform to the principles of the market economy, they have played an invaluable role in maintaining social development, so they have also been integrated into the world’s most mature market economy system. Enterprises also need to have social responsibility; as American entrepreneur Craig Hall said, entrepreneurs can and should be a part of social development and a part of society as a whole, which should have a layer of rights and responsibilities relationship to society as a whole.54

7.6.3 The Incentive and Restraint Mechanism and Executive Power Corruption In the process of economic transition, China’s change model of “gradually crossing the river by feeling the stones” means that the law always lags behind people’s actual behavior; the intervention and regulation of government are still exist in many fields because the market economic system has not yet been fully established; and still to this day, the powers of government always reluctant to give up the control for resources and stringent control for market. Government intervention and regulation are realized through the operation of power and always give government officials immense power without any restriction. Due to the influence of planned economy thinking and the imperfect market system, there are many irregularities in government behavior when government officials exercise their powers, while the current system lacks effective supervision and restraint on them; some officials have weak moral consciousness and legal sense; and rent-seeking activities will occur in the presence of rent because they naturally give up rational thinking and abuse of power for personal gain. The 54

Business Ethics and Social Responsibility, Private Economy News, ycwb, April 23, 2004. http:// www.ycwb.com/gb/content/2004-04/23/content_680917.htm.

7.6 The Perspective of Motivating and Restraining People

411

excessive involvement of government power in economic activities is an important reason for the current corruption of administrative power and the widening income gap.

7.6.3.1

Lack of Institutional Constraints and Power Rent-Seeking

During the period of China’s economic transition, the lack of effective institutional constraints on power operation can lead to a small number of people who have control over the allocation of public resources being resourceful; under the condition of imperfect systems, some local government officials are prone to exchange and seize self-interest by using power in handling local affairs, resulting in the phenomenon of power marketization. Although China has significantly reduced administrative resource allocation, it still remains widespread in state-owned economic sectors and shows signs of infiltration into nonstate-owned sectors. The power of administrative resource allocation has a “price” meaning under the condition of playing the role of the market mechanism, which enables power marketization. For example, the phenomenon of power marketization still exists in many fields, such as urban demolition for reconstruction, land transfer, capital and credits and money encirclement in capital markets. Power marketization in the allocation of administrative resources is the most important factor of the possession of social wealth and maldistribution in the absence of effective institutional constraints on power operation. The lack of normative legal restriction, staged progressive reform and its defects, such as system vacancies, institutional contradictions and system dummies, have led to serious imbalances in power and responsibility within the executive power and some loopholes, such as essentially extinct supervisory mechanisms for superior leaders, dummy internal supervisory systems and unconnected funds management and systems of project examination. Coupled with blocked social supervision channels, in addition to internal supervision and peer-level supervision for party and government officials, other relevant organizational supervision, mass supervision, and public opinion supervision are not supported. These frictions and contradictions between the old and new systems have left institutional space for various types of power-for-money deal and rent-seeking activities such as embezzlement and corruption, which are also the source of the system of China’s excessive illegal and abnormal income.

7.6.3.2

The Lack of Supervision and Restriction Mechanism Indulges Rent-Seeking

At present, China has initially formed a multilevel and comprehensive supervision and restriction mechanism, which has played an important role in all areas of social life. However, there are still many defects in the existing supervision and restriction mechanism, and its functions are far from being fulfilled, mainly as follows:

412

i.

ii.

iii.

55

7 An Analysis of the Causes of Disorders …

There are problems existing in inner-party supervision systems. First, the awareness of inner-party supervision is weak. As the main targets of innerparty supervision, some leading cadres believe that inner-party supervision is too cumbersome and arm-twisted, and affecting work efficiency, while other leading cadres believe that supervision cannot solve any problems at all because it is only a soft trick; as the main body of inner-party supervision, many party members do not have a sense of supervision responsibility, and fear that the implementation of supervision would offend leadership, destroy the harmony and be suffered revenge. Second, the system and norms of inner-party supervision are incomplete. Many rules and regulations remain on the general principles such as many “forbidden” and “prohibited” regulations, but there are no specific measures about how to punish those violators; some systems lack the necessary procedural rules; it is inevitable to occur buck-passing when treating method is ambiguous, and even there is no specific functional department to supervise and implement system. Third, the implementation of innerparty supervision is insufficient. Some party organizations do not perform their supervisory duties seriously, which results in weak supervision within the party organization; in particular, protecting and conniving at disciplinary problems of leading cadres leads to corruption phenomena such as rent-seeking. Fourth, the leadership system of inner-party supervisory bodies is inappropriate. As a specialized supervisory body within the party, the commission for discipline inspection at all levels nominally implements the dual leadership of party committees at the same level and the discipline inspection committees at higher levels; however, in fact, the party committees at the same level have real leadership over them, which has led to supervisory bodies relying on party committees at the same level, lacking due independence. As a result, the functions of discipline inspection commissions at all levels have been restricted to a large extent, resulting in weak supervision, air supervision and out-of-supervision in many links. It is difficult for NPC supervision to play its due role. In China, the general public should be the main body to supervise and restrict government, and the representative body of the Chinese people is the People’s Congress. As the highest authority and legislature, the People’s Congress shoulders the responsibility of supervising government agencies and their staff. However, at present, the “People’s Congress” does not set up supervisory permanent bodies, and its supervisory role is difficult to truly exert and implement. The public supervision is weak. As Article 41 of the Chinese Constitution states, “Citizens of the People’s Republic of China have the right to lodge a complaint, accusation or impeachment to state organs for any violation of the law or dereliction of duty of state organs and civil servants.”55 However, in fact, citizens’ supervision rights are not guaranteed by any law or system

Constitution of the People’s Republic of China, People’s Daily, Version 1 on December 5, 1982, which adopted at the fifth meeting of the Fifth National People’s Congress of the People’s Republic of China on December 4, 1982, http://www.people.com.cn/item/faguiku/xf/F01-A1010.html.

7.6 The Perspective of Motivating and Restraining People

413

except for the channel of “petition letter”, although constitution gives the right of supervision rights to citizens. China’s public supervision is weak, and the power and effectiveness of its supervision cannot be effectively exerted. Due to the inability to effectively supervise and restrict power, out-of-control power is caused in the process of China’s economic transition, giving some abusers a chance to use this loophole; some grassroots cadres even regard the performance of official duties as a benevolence to the people, which means that power rent-seeking has built a bridge between benefactors and beneficiaries.

7.6.3.3

Imperfect Legal System Brings Power Rent-Seeking

Power needs to be restricted and legal systems to regulate and guide it because unrestricted power will tend to be corrupted, and human nature has factors of benefit tending and harm avoidance. In recent years, China has made great achievements in legal system construction, but the legal system for supervising and restricting power is still incomplete because there is no systematic legal system for the establishment, operation, exercise, and legal responsibility of power and a lack of specialized legality to curb government officials’ corruption, such as the “Anticorruption Law”, “Anti-Graft Law”, “Supervision Law” and “Property Declaration Law for Civil Servant”. In the past period, China’s lagging economic legislation did not meet the requirements of a market economic system construction; the economic behavior and administrative power of market entities in the market have not been fully regulated and restricted; different types of markets existed the condition of disorder and out of control to a certain extent because economic operation has no sufficient legal basis; the ambiguous boundaries of state-owned property rights have resulted in a large loss of state-owned assets due to a lack of effective legal control measures. It is inevitable to produce rent-seeking corruption phenomena of power-for-money in such an environment that lacks strong legal control. Any public power should operate in an open and transparent environment. However, the game has allowed many powers to run “underground” in the race of political power, which provides a breeding ground for power corruption, and cancer cells of power corruption have gradually transferred to the political body and become more difficult to eradicate more corruptions.

7.6.3.4

Power Rent-Seeking and the Unfair Distribution of Income

Corruption and illegality have exacerbated the unfair distribution of income; the core of corruption is the excessive administrative power of the government and the lack of due supervision. Under the influence of various factors, such as benefit seduction and inadequate system supervision, some government officials conduct power-formoney deals and produce rent-seeking corruption by selling “governmental property

414

7 An Analysis of the Causes of Disorders …

rights” (administrative licenses, market access, public procurement bidding) to rentseekers. As Hume said, any rule is based on some degree of consent from the ruled. Government officials are happy to make control rules that bring maximum rents to themselves; the lasting maintenance of such rules is premised on the default of entrepreneurs, and the rules are likely to be changed by government if entrepreneurs continue to fight; the unreasonable rules will be permanent if all entrepreneurs adopt a bribery strategy without thinking for the sake of maximizing self-interest. For a modern market economy where so-called “impersonal exchange” predominates, the performance of contracts will be difficult to guarantee effectively because there is no law that conforms to generally acceptable basic justice and independent and impartial justice. In this case, the participants of economic activities have to go to “keep company with government” to protect the safety of their property. Then, the “new power” of rent-seeking occurs; one important aspect of corruption is that entrepreneurs buy over power. At present, the blocked channels for institutionalized interest appeal and the prevailing illegal means and noninstitutionalized ways of interest expression, such as “reach for the goal of projects and funds by using relationships”, lobbying, schmooze, backdoor deals dinners and gifts and money bribery, have caused some problems, such as black-box operation, rent-seeking from the local governments to individual departments of central government and unfair competition at local levels. By using the people, financial power and property rights they have, even some leading cadres have pocketed the state-owned assets and made huge losses of state-owned assets through taking illegal means such as corruption, bribery, embezzlement of public funds and collusion with illegal production operators. Corruption activities are increasingly rampant due to the expansion of the rent-seeking scale; according to statistics from scholars, the ratio of total rents to GDP is as high as 20–30%, and the annual absolute amount is as high as 4 trillion to 5 trillion yuan.56 The huge amount of rent will naturally have a decisive impact on the intensification of the gap between the rich and poor and the high Gini coefficient in Chinese society.

7.6.3.5

Moral and Ethics Restraint and Income Distribution

Affected by the hypothesis of economic man, there are some problems existing in current Chinese enterprises, such as the lack of social responsibility in some enterprises, the moral decline of entrepreneurs and the moral vacuum of enterprises in a certain sense. As a component of the market, some companies have also obtained many benefits for their own development through rent-seeking methods; however, in the long run, power-for-money deals not only increase the operating costs of the enterprise but also lead to market disruption and affect the overall interests of society, and eventually, all enterprises may be damaged together. It is inevitable to require enterprises to be an ethical “economic man” for the enterprise’s own interests and the stable market environment and the overall development of social welfare; that 56

Wu Jinglian (2011, p. 93).

7.6 The Perspective of Motivating and Restraining People

415

is, its profit-pursuing operation must be reasonable when the enterprise pursues the maximization of its own interests. Whether entrepreneurs buy privileges or redeem their own rights, in most cases, these corrupters (bribe payers or bribe takers) all know their mistakes in any society and have shame over these; this corruption is also subject to moral condemnation by others in society. However, the long-standing corruption in various fields makes corrupters do not seem to think that corrupt behavior is wrong in the process of China’s economic transition; the popularity of hidden rules has changed people’s basic understanding of good and evil, right and wrong. Corrupters take pride in corruption, and their act of accepting bribes also has an abnormal feature; a few officials also accept bribes because of their sense of bribery achievement. The bribery of some entrepreneurs seems to have become routine work because they immediately think of bribery instead of calculating the cost of benefits when they meet officials; as for the public, there is only anger and no moral condemnation of corruption because many people understand their corruption: everyone will be corrupted in that position. Obviously, there is no good market if there is no good moral and ethics and market culture. The function of Confucian is to awaken the moral spirit and sense of justice of the people and restrain the instinct of animals, thereby civilizing economic activities. An “able man” who wants to make a fortune is likely to open a business and go into business because of receiving education from Confucian, while a person who lacks this spirit of civilization will inevitably tend to choose the most direct method out of his rationality, that is plunder. In this mode of behavior, those who have intelligence and power bully others, while onlookers show more enviousness than disgusted for such behavior. Modern economics and ethics emphasize the individual’s freedom of choice; however, the individual rational ability can only see those visible benefits and cannot see or despise those invisible damage because the individual’s rationality is always limited. If an individual makes certain choices based on private rationality alone, it may be more profitable in the short term but have serious consequences in the long run, or it may increase its own interests at the expense of harming other people’s interests. The role of morality and ethics can expand the individual’s rational ability and urge the individual to consciously or even subconsciously exclude those bad choices, thereby leading to the benign evolution of market order.

7.6.4 The Incentive and Restraint Mechanism and the Recessive Economy 7.6.4.1

Institutional Constraints and the Recessive Economy

The defects of institutional constraints are important breeding grounds for the hidden economy. In the process of the transition between the new and old systems, the increasing gray income, illegal income and blood-red income have further aggravated the distribution contradictions and became a prominent problem in income

416

7 An Analysis of the Causes of Disorders …

distribution because of reasons such as frictions and contradictions between new and old systems, imperfect market growth and systems, unequal opportunities and intervention of power for market. In the period of system transition, all departments and localities and enterprises have control over public assets due to the gradual relaxation of the centralized control of public assets; the benefits caused by differences in public asset ownership are often transformed into the interests of the department, the region, the work unit and even the individual through the control of insiders. Many kinds of backroom deals are bred under the hotbed of the “examination and approval system” left by the planning system and lack checks and balances, which leads some people to become rich by exploiting loopholes in the process of transition. These people are often the approvers and people who approve the resale in the period of the doubletrack price system of urgently needed materials and approvers for land use, resellers and high-interest operators in the real estate boom. Some leading cadres cause a huge loss of state-owned assets because they pocket state-owned assets or engage in stock market manipulation by using their powers or adopting illegal actions such as corruption and bribery, embezzlement and power-for-money deals to abuse power for personal gains or illegal means to collude with illegal production operators. A large number of phenomena show that gray income is mainly generated around power and closely related to corruption because it often comes from the accumulation of wealth through power, the loss of public funds, public resources that lack a sound system and management or profits generated by a monopoly of markets and resources. For those who have political prerogative or economic strength, the soft limitation is equivalent to a good opportunity of “rent-seeking” and “rent-setting”; therefore, various kinds of gray income and black income are produced by illegal means, and various kinds of hidden income and nonstandardized income rapidly expand. The existence of tax evasion, smuggling, manufacture and sale of counterfeit and shoddy products and illegal transactions has also become the main sources of black income. Imperfect judicial systems and imperfect functions are another institutional reason why gainers of illegal and abnormal income cannot be effectively curbed. Judicial corruption has become an issue that has aroused the concern of the entire society in China’s transition from a planned economy to a market economy. Judicial corruption manifests in various forms: activities such as perverting justice for a bribe, soliciting and accepting bribes and protecting illegal business activities through the collection of benefit fees directly lead to or affect the production and proliferation of illegal and abnormal income; various income-generating activities of misusing judicial rights such as unreasonable charging, unjustified financial levies, fine, finding sponsors, agents and establish enterprises, paid service and disguised charges are the actions of judicial personnel to maximize their own interests by using judicial power and are also the impetus to indirectly stimulate and promote hidden economic development. An imperfect tax system and insufficient redistribution adjustment function are the system conditions for the acquisition and maintenance of illegal and abnormal income. Tax evasion has become a common social problem with the establishment of diversified micro market players and the diversification of income sources. At present, the situation of tax evasion exists in all economic entities with various forms

7.6 The Perspective of Motivating and Restraining People

417

of ownership; this phenomenon is particularly severe in noncorporate enterprises such as individual and private enterprises. Eighty percent of China’s individual income tax comes from the working class, and the high-income class that occupies a large amount of social wealth is often the long-term subject of large amounts of tax evasion. The important function of the government in the field of income distribution is to play the role of tax readjustment for income distribution; however, it is impossible to implement effective tax adjustments for high-income people because of the low proportion of high-income groups in current China, which also greatly limits the transfer payment ability of government for low-income groups. During the institutional transition period, it is inevitable to produce many policy and regulatory “vacuums” because the old economic management system is being destroyed, and the new market economic management system has not been established and perfected; then, the institutional “vacuum” produced during the institutional transition period provides environmental conditions for the rapid expansion of the hidden economy. Although the hidden economy existed under the traditional planned economy system, it is of little harm because of its relatively single manifestation and comparatively small scale and scope. In countries with mature market economies, although the hidden economy is widespread in many fields, its manifestation and development scale are relatively stable and have laws to follow, and it is easy to form regulations for its management, supervision, and sanctions. However, China is currently neither a traditional planned economic system nor a standardized market economy system and in a transition period of economic transition. Driven by the motivation of seeking their own interests, some people are pushing the rapid expansion of certain hidden economic behaviors. For example, the well-known kickback, a private coffer, false joint venture, pseudocollectives, tax evasion, excessive bonuses and, in kind, banquet at public expenses and facility trip are all carried out under the name of the “reform and opening-up”, “operational need” and “allow flexibility”; some people lead to a rapid expansion of the hidden economy by exploiting loopholes of the ambiguous policy limitation. Moreover, the hidden economy generated in this context has strong instability and variability because of its volatile patterns and fields. In addition, the widespread existence of fake nonstandard business practices and nonprice competition methods in nonpublicly owned enterprises has also become an important source of illegal and abnormal income. There are many loopholes, such as extremely unsound judicial, fiscal and tax systems, in the places with the most widespread hidden economy, which results in soft budget constraints, arbitrary interception of fiscal revenue, tax reduction and exemption on their own, and even serious tax evasion and tax revolt. Moreover, people’s moral concept is weak; the phenomena of sucking the country for their benefit are out in the open; the conditions of issuing excessive bonuses and material objects, banquet at public expenses and junket can be found everywhere. The hidden economy of Western developed countries exists as a counterpart of a relatively complete legal system and its management system; China’s hidden economy exists as a counterpart of the current legal system and its imperfect management system and as a symbiosis of a serious flawed incentive and restraint mechanism. Starting from tax evasion of the individual economy, corruption and bribery income

418

7 An Analysis of the Causes of Disorders …

of party and government officials at all levels, and the illegal and abnormal income such as personal consumption and income, smuggling and fake transformed from institutional spending, some scholars have estimated its scale and degree of influence for income gap57 and concluded that: First, several major illegal and abnormal incomes have obvious effects on the income gap of residents, and their impact on the overall income gap of residents was 13% (1991) −23% (1995); the Gini coefficient reflecting the overall income gap of all residents rose to more than 0.4 during the period of investigation due to the influence of this factor; second, the illegal and abnormal income gap accounted for 14.9% of the total income gap of residents; third, among the various illegal and abnormal income methods, the illegal income such as tax evasion of individually owned businesses and private companies had the greatest impact on the abnormal expansion of residents’ income, which accounted for about-53%; the illegal income fluctuation of the gap, the various impact of abnormal businesses and private companies accounted for some years. The analysis results show that illegal and abnormal income is the root cause of the abnormal widening of the income gap of residents in China at the present stage, and it is also one of the focuses of social concerns for the most unsatisfactory issue of common people. The “system vacuum” in the system transition and the rapid expansion of nonstandardized income are important endogenous factors that cause profound changes in China’s income distribution relationship.

7.6.4.2

Moral and Ethical Constraints and the Recessive Economy

On the surface, economy and morality have been seen as two unrelated fields, but in reality, economy and morality are always interdependent. Morality is essentially a product of the economy, and the economy is not a natural phenomenon without a value target because any objectives of economic development all imply the corresponding moral development goals, implicit or otherwise. Therefore, the market economy is a system of legalized economies, and it should also be a moral economy. The market economy requires both legal protection and moral guarantees; both of them are indispensable. However, in current China, people’s phenomena of moral disorder are staggering in the process of pursuing wealth. It is not wrong for business operations to obtain maximum profit or the satisfactory profit of investors; however, at present, the phenomena of unethical behavior from enterprises with unidirectional, distorted, gainful and conscious characteristics often occur in our socialist market economy. Psychological costs stem from the internal control of moral dimensions; psychological benefits are embodied as a sense of satisfaction and honor if psychological costs are embodied as a sense of guilt and shame. Due to the substitution and compensation between the benefits and costs at the economic level and the benefits and costs at the psychological level, the attractive economic benefits may weaken the psychological cost and drive the occurrence of unethical behavior when behavior subjects implement unethical behavior, even suffering compunction and 57

Chen Zongsheng Zhou Libo (2001).

7.6 The Perspective of Motivating and Restraining People

419

higher psychological cost. For instance, they take pride in tax evasion instead of being ashamed of it in the name of stimulating economic benefits and considering the overall interests of enterprises. These amoral phenomena have led to the growth of various hidden economies and hidden incomes, disrupted income distribution order and widened the income distribution gap. Equality and efficiency belong to the distribution rule throughout economic ethics; the sacrifice of “equality” not only does not exchange “efficiency” but also makes the loss of public for the “equality-justice” expectation and comprehensive decay and leads to the malignant distortion of economic ethics. Equality, efficiency and people’s attitude toward wealth together constitute the economic ethics system. In the process of China’s economic transition, “selfish desire” dominates people’s behavior in a very extreme form, which leads to the animalism expansion of people, dehumanization, the confusion of social order and the waste of wealth because people’s behaviors lose the support of humanistic spirit and morality and ethics, and desires of pursuing wealth finally become the impulsion with pure lust. For example, many government employees not only “serve the people” but also bring huge hidden income to themselves through corruption after obtaining national wages, that is, people’s hard-earned cash. The hidden economy and hidden income of the entire society suddenly swell because of “bad practices” such as arbitrary charge, demanding bribes by using the privilege, arbitrary fines and unjustified financial levies, and “anti-moral” behaviors such as counterfeiting and false goods, prostitution and betting. In contemporary China, people’s selfish desires are extremely inflated, and society as a whole lacks a sound public–private concept, which leads to the rationalization of the hidden economic ethics of “putting hands into others’ pockets”. State-owned assets with the absent subject of ownership become the object of plunder by power class; once people have the “qualification” and ability to participate in the partition, they will reach into the pocket of “state-owned assets” without hesitation. Over the years, in the race of accumulating wealth in China, the gainers are mainly some people who master the allocation of resources in government departments; these people do not have clear awareness of the so-called “public” and “private” because What they think in their minds is how to put their hands in the pocket of “public property” and use a variety of means to possess “public property”. There is even an existing mentality of “taking ‘public money or materials’ as granted”. Most people hold a “self-preservation” attitude like “This belongs to country instead of my own”, although the common people know what these people are doing; that is why there are few prosecutors. Even if there are some prosecutors, the reason for doing this by some of them could be the damage of their benefits instead of driving by a sense of justice. In fact, morality’s role in maintaining the economic development of a normal society is fundamental no matter how people ignore the existence of morality, while other adjustment methods, including laws and religions, must regard the corresponding morality as a prerequisite. Adam Smith is both a great economist and a great ethicist; his “The Wealth of Nations” and “Theory of Moral Sentiment” deeply reflect the closely related nature between the economy and morality under the conditions of a capitalist market economy. The goal of socialist production is to realize the growing material and cultural needs of the people; the realization of this goal

420

7 An Analysis of the Causes of Disorders …

should embody both the socialist material civilization and the socialist political and spiritual civilization. Therefore, the current value pursuit of our country should also regard economic goals and spiritual civilization with ideology and morality as the core as the internal value targets of socialism, and morality and economy become a relationship of dialectical unity. That is, morality should provide a guarantee for economic development; one of the aims of economic development is to create material conditions for raising people’s moral awareness and improving the morality of the whole society.

7.7 Summary A reasonable explanation for China’s income distribution disorder can be obtained from six aspects, that is, government function transition, ownership structure adjustment, changes in the relationship between central and local governments, reform of the distribution principle, restrictions on factor mobility and the lack of incentive and restraint mechanism for people. These six aspects are the root causes of the current unreasonable labor-capital relationship in China, the widespread hidden income, the administrative power’s interference in the economy and corruption. There are a large number of “offside”, “absence” and “mismatch” phenomena in the process of China’s economic transition due to the insufficient government function transition, which leads to the deterioration of the labor-capital relationship, the increasingly prevalent power rent-seeking and corruption, and the widespread hidden economy. In the handling of the labor-capital relationship, the absence and mismatch of government functions and roles have further exacerbated labor disputes in intervening in the labor-capital relationship and placed laborers in a more unfavorable social situation. Excessive administrative power, excessive administrative power interference in the economy and “turning a blind eye” behaviors of government lead to the generation of problems such as “rent-setting” and “rent-seeking”, and various hidden economies and hidden incomes such as other unreasonable underground economies and illegal economies. In the process of ownership structure adjustment, capital dominates the laborcapital relationship; workers’ legitimate rights and interests are often damaged, especially peasant workers, who are in an absolutely weak position in the labor-capital relationship because of immature subjects of labor-capital relationships and deviations in the concepts of enterprise managers. The development of private enterprises is in a difficult situation with the intensification of the “nationalization” wave, while it inevitably leads to an abnormal wealth distribution pattern of “wealth is concentrated in the government and real agencies” under the “land-house” dual monopoly model. By changing from unitary public ownership to the structure of ownership of “taking public ownership as main body, and coexisting various economic sectors”, public resources have become an important source of private hidden income, resulting in great loss of state-owned assets and capital in land transfer, and sharp

7.7 Summary

421

increase in hidden economic activities and hidden economies such as unlicensed business activities of enterprises, companies and individual businesses, and tax evasion activities. Changes in intergovernmental relations directly cause economic gaps and income gaps between regions under the fiscal decentralization and GDP-centric performance evaluation system. With the intensification of competition among local governments, the capital advantages possessed by business owners are increasingly obvious, and “strong capital, weak labor” has varying degrees of performance among local governments. Under political tournaments, the interference of administrative power in the market and the constant participation of local administrative power in income distribution lead to the primary distribution of the entire society leading to local governments and enterprises favored and supported by local governments. Severe tax loss and prosperous hidden economies such as smuggling and counterfeiting are influenced by the fiscal decentralization model and local protectionism. China’s distribution model of “deduction first and distribution second, high deduction and low distribution” has led to the final distribution pattern of national income “inclining to the government and enterprises”; labor income and residents’ income is too low. Capital’s advantages are obvious under the principle of “efficiency in priority and fairness in consideration”, and the “distribution preference” of attaching importance to efficiency and neglecting individuals and labor dominated by capital has caused intense labor conflicts. The extensive and excessive interference of administrative power in microeconomics and the allocation of public power cannot reflect the principle of “decentralization and balances” but is excessively concentrated in the hands of a certain person, work unit or department, which distorts the exchange activities of the market to some extent and causes some government officials to have much room for rent-seeking in manipulating the prices of factors, thus forming power corruption. Part of GDP will become people’s income through abnormal channels under the stimulation of various economic benefits if the income of laborers in the primary distribution is too low, and the income of laborers is not supplemented through redistribution and the third distribution, thereby causing the widespread of hidden economies and underground economies such as various subsidies, nonsystem distribution and power-for-money deals. China lacks a unified and unrestricted factor market; in the context of a household registration system of urban rural segregation, local protectionism and global “strong capital and weak labor”, many enterprises lower labor force costs to improve competitiveness through means of low wages, resulting in increasing strong capital and a constant decline in laborers’ status; and the employment of workers and the growth of labor income are affected. The formation of various factor prices leads to institutional divisions and extremely uneven development because administrative power interferes with the market, government power affects the allocation of capital among different groups, and the prices of most natural resource elements are still controlled by the government. Disordered extra wage income and nonmonetary benefits, prominent illegal income and gray income, and extremely rampant hidden economic activities are caused by the lagging development of China’s factor market,

422

7 An Analysis of the Causes of Disorders …

the significant lag of marketization in the central and western regions compared with the eastern region, and the hindrance of local protectionism for factor mobility. The lack of incentive and restraint mechanisms and the friction and contradiction between the old and new systems inevitably lead to disorder and chaos in income distribution in the process of China’s transition from a planned economic system to a market economic system. The normal rights of enterprises expand into an uncontrolled privilege because of the lack of effective institutional and ethical constraints, which leads to prominent labor disputes, constant labor conflict and strained laborcapital relationship, and provides a breeding ground for power corruption, resulting in the abuse of public power, abuse of power for personal gain, and rampant power rentseeking and corruption; various kinds of gray income and black income are produced by illegal means such as tax evasion, smuggling, manufacturing and selling of counterfeit goods; and various kinds of hidden income and non-standardized income rapidly expand.

References Buchanan, Musgrave, translated by Cheng Chengyu: Public Finance and Public Choice: Two Different Views of the State, China Finance and Economic Press, 2000, p. 162. Cai Fang, Du Yang, Wang Meiyan, “The Household Registration System and Labor Market Protection”, Economic Research, No. 12, 2001. Chen Yufeng and Chen Guoying, The Function and Role of the Government in Building Harmonious Private Labor-Management Relations, Business Economics and Management, No. 12, 2009. Chen Yefeng, Zhou Ye’an, and Song Zifeng, “Are People Concerned with Distributive Motives or Distributive Outcomes?” (p. 4). --an examination of two views of fairness under the perspective of the ultimatum experiment”, Economic Research, No. 6, 2011 Chen Zongsheng, Zhou Libo, The Impact and Economic Explanation of Illegal and Abnormal Income on the Residents’ Income Difference, Economic Research, No. 4, 2001. Failiao Xiong, Constructing a New Identity: labor control in state-owned enterprises during market transition, Social Science Literature Press, 2007, p. 97. GuoTaihui: “The Change of the Relationship between Labor and Capital: An Explanation of the Reform Course in China”, Lingnan Journal, No. 4, 2006, p. 12. Liu Hong: The Economic Analysis of Local Government’s Market Behavior in Ten Lands, Reform and Strategy, No. 1, 2009. Wang Shan: Analysis of the Interest Relationship between the Government and Enterprises, Journal of Zhengzhou Aviation Industry Management College, No. 12, 2009. Wu Jinglian: “Macro-Control” Produces Huge Power Rent-Seeking Scale, China’s Next 30 Years, Central Edition and Translation Publishing House, 2011, Page 93. Xiang Yunzhang, Li Xiaodan: Wang Xiaolu: Cross-Validation for Recessive Income Political Reform for Solving the Problem, Economic Observer, October 9, 2010, http://business.sohu. com/20101009/n275485496.shtml. Yang Canming, Guo Huifang, and Sun Qunli, On Expanding Domestic Consumption Demand and Regulating Income Distribution Order, Fiscal Studies, No. 3, 2010. Yang Canming, Guo Huifang, and Zhao Ying, “On Economic Development Mode and Income Distribution Order”, Finance and Trade Economics, No. 5, 2010. Yan Changtao, Zhu Mingxi: Huge Tax Loopholes Caused by Recessive Economy, http://blog.sina. com.cn/s/blog_6bfdfccd01010ebh.html.

References

423

Zhou Li’an: Local Government in Transition: Official Motivation and Governance, Gezhi Press, 2008, p. 238. Zhou Xiaochuan’s speech at the Global Think Tank Summit: Only when Americans save more and Chinese spend more will there be hope for the world economy, Wuhan Evening News, July 6, 2009, http://news.163.com/09/0706/01/5DGL2823000120GR.html.

Chapter 8

International Experience in Regulating the Income Distribution Order

Income distribution is a worldwide issue. Both developed and developing countries are facing the task of narrowing the distribution gap and regulating the income distribution order. On the basis of their own economic, social, and cultural characteristics, various countries have adopted various methods to regulate the income distribution order. Many good practices among them throw light on the relevant work in China.

8.1 Handling of Labor Relations Since the industrial revolution, labor relations in Western market economies have nearly adapted to the development of modern productivity, changing from conflicts of interest to coordination of interests and from laissez-faire to legalization. Western market economy countries have gradually formed a relatively perfect legal system and have accumulated rich practical experience and theoretical achievements.

8.1.1 The Evolution of Labor Relations in Western Countries 8.1.1.1

The Historical Process of Labor Relations in Western Market Economies

The historical development of labor relations and their trends in Western market economies can be broadly divided into four stages.

© Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_8

425

426

8 International Experience in Regulating …

Labor Relations from the Beginning of the Industrial Revolution to the First Half of the Nineteenth Century Although the mid-eighteenth century industrial revolution boosted production and social progress, the working and living conditions of workers deteriorated dramatically. In the early nineteenth century, workers’ resistance broke out in Western Europe for improvements in wages and working conditions. Most of these spontaneous labor movements failed, making some initial workers’ organizations emerge successively for joint operations. However, the state’s adjustment of industrial relations was based on an apparent laissez-faire policy, in essence, on a policy of indulgence of employers and suppression of labor. As a result, labor relations were fraught with fierce class confrontation. In summary, this phase of labor relations in the West has the following features. First, labor contradictions were often manifested in fierce confrontation and conflict, causing labor relations to be unstable. Second, labor contradictions focused on improvements in wages and working conditions. Third, the labor movement was generally scattered. Fourth, the state adopted a laissez-faire policy for the adjustment of labor relations, but behind the apparent freedom, legislation and policy were clearly tilted toward the employer side.

Labor Relations from the Second Half of the Nineteenth Century to the Beginning of the Twentieth Century This period saw the transition from free competition to monopoly in the West and a shift from laissez-faire to state intervention in the regulation of labor relations. Strike struggles intensified, and trade union organizations became widespread, putting strong pressure on employers and governments. Some employers have begun to make concessions, trying to deal with fiercely confronting labor relations in a more peaceful way. The collective bargaining system has gradually been identified by national laws and employers and has become a new effective way to resolve labor conflicts. The government began to adopt constructive intervention policies. At the end of the nineteenth century and the beginning of the twentieth century, a large number of laws, such as factory legislation and labor protection legislation, were promulgated in Western countries, which led to corresponding improvements in the working conditions and living standards of workers. The adjustment of labor-management relations has begun to move toward ordering and legalization.

8.1 Handling of Labor Relations

427

Labor Relations from the Beginning of the Twentieth Century to the Second World War This phase saw two world wars and the worst economic crisis in history. After the end of the First World War, the working class in all countries demanded better working and living conditions and participated in the management of production and state administration. At the end of the 1920s, a severe economic crisis in the capitalist world led to renewed tensions between employers and employees, forcing governments to start macro interventions in the labor market. After the economy was restarted, the movement toward industrial democratization began to emerge, and as a result, the working class gradually became involved in business management. At the same time, since the advent of collective bargaining legislation in New Zealand in 1904, the principle of tripartite consultation among employers, employees and the government began to emerge. All aspects of employment conditions were determined by organized collective bargaining and collective agreements between employers and employees, with the government providing mediation, arbitration and other services. In addition, workers’ representatives also became involved in labor legislation. On the whole, the manner and content of industrial relations coordination were enriched during this period.

Labor Relations after the Second World War After the Second World War, the overall trend in industrial relations was to seek cooperation and win–win solutions. Western governments have further intensified their intervention in labor relations, the legislative system for regulating industrial relations has become more complete, and the level of social security and welfare has gradually increased. The system of collective bargaining has become a basic form of the trade union movement in all countries and an important means of managing industrial relations in all countries. At the same time, the principle of tripartism has been widely implemented in various countries and has truly become the main operating mechanism for labor relations in market economy countries. Generally, at this stage, the development of labor relations tends to be stable and coordinated, and the ways of resolving labor conflicts tend to be legalized.

8.1.1.2

Trends in the Evolution of the Labor Force in Developed Countries

Due to changes in the political and economic environment, labor power, which is a key factor in labor relations, has mainly tended to weaken in various countries.

428

8 International Experience in Regulating …

Fig. 8.1 Union Density in the United States (1900–1968) (Source [U.S.] Morgan [1984])

Decline in Union Density Taking the USA as an example, the change in union density1 between the beginning of the twentieth century and 1968 was a tortuous process of rising and then falling. Figure 8.1 reflects changes in union density in the US in terms of two indicators, union density I and union density II. At the end of the 1960s, in developed European and American countries, massive social and workers’ movements broke out, leading the bourgeoisie and its regimes to launch a counterattack against labor, resulting in an attack by capital and the “silence or concession of labor”. Jeremy Rifkind pointed out, “During the 1981– 1982 recession, unions were the first to make a concession. In 1982 alone, more than 49 percent of unionized workers accepted wage freezes or cuts after collective bargaining. By 1985, a third of workers had agreed to wage freezes or reductions under new labor agreements.” The acceleration of economic globalization in the 1990s and the weakening of the bargaining power of trade unions in various countries led to a steady decline in the number and density of trade unions, and these problems were exacerbated by an increase in unemployment, as shown in Table 8.1, which shows a steady decline in union density in both the USA and Germany.

1

There are two ways to measure union density: one is to look at union membership as a percentage of the total workforce, which can be called union density I; the other is to compare the number of union members with the number of all nonagricultural employees, which is called union density II. The latter criterion is generally considered more reasonable because the vast majority of farm employees are unlikely to be union members. In addition, this criterion excludes military personnel, the unemployed, farm owners and farm managers, who are also unlikely to be unionized.

2 19.5

1 18088.6

2 17717.4

16,739.8

16,568.4

16,390.3

16,598.1

16,740.3

16,359.6

1970

1980

1990

1991

1992

1993

1994

1995

8153.6

9334.8

9709.5

10,264.9

11,083.1

11,969.4

8013.8

29.2

30.4

31.8

33.9

36.0

31.2

34.9

32.0

Union density

2003

2002

2001

2000

1999

1998

1997

1996

Years

Note Data in 1 for 1973, data in 2 from 1983 Source Compiled from U.S. Department of Labor. Monthly Labor Review, January 2006.

14.3

14.9

15.1

15.1

15.5

15.5

1 23.5

Number of people 6965.6

Germany Number of people

Union density

USA

Years

15,776.0

15,978.7

16,288.8

16,258.2

16,476.7

16,211.4

16,109.9

16,269.4

Number of people

USA

12.4

12.6

12.8

12.8

13.4

13.4

13.6

14.0

Union density

Table 8.1 Union membership (in thousands) and union density (%) in the United States and Germany, 1970–2003

7120.0

7433.9

7601.8

8067.0

8218.3

8326.9

8538.0

8826.5

Number of people

Germany

22.6

23.2

23.5

25.0

25.6

25.9

27.0

27.8

Union density

8.1 Handling of Labor Relations 429

430

8 International Experience in Regulating …

Table 8.2 Trade union density in major European countries, 1990–2000 Countries

Union density (%)

Annual average rate of change in union density (%)

1990

1995

2000

1990–1995

1995–2000

United Kingdom

38

32

29

−3.4

1.7

France

9

9

N/A

−1.3

N/A

Netherlands

22

22

22

+0.1

−0.1

Italy

39

38

37

−0.5

−0.8

Austria

45

39

35

−2.8

−2.1

Norway

57

56

54

−0.3

−0.8

Portugal

40

N/A

30

−2.7

−2.7

Spain

9

13

13

+7.2

+0.4

Belgium

57

60

58

+1.1

−0.6

Denmark

81

86

82

+1.2

−0.9

Sweden

80

83

82

+0.7

−0.3

Finland

73

80

79

+1.9

−0.2

Since the 1980s, there has been a similar decline in trade unions in other European developed countries. As Table 8.2 shows, trade union density has been on a downward trend in most European countries in the 1990s, especially since 1995. Many countries’ trade union density started to decline from its historical high in the 1980s. The all-time high for trade union density was statistically 44% in Italy in 1980, 58% in Austria in 1955, 55% in the UK in 1979 and 35% in Germany in 1960. In comparison, the trade union movement has declined the most in the UK. Over the same period, trade union power in Japan was greatly reduced. Trade union density in Japan fell from 35.4% in 1970 to 19.6% in 2003.

Decrease in Strike Intensity As the labor movement is in a downturn, strikes are no longer the main means of workers’ struggle, and strike intensity is declining. According to the US Bureau of Labor Statistics on strikes (Fig. 8.2), strikes are becoming increasingly rare in the USA, indicating the weakness of the US labor movement. In short, employers and employees are always changing their strategies in response to changing circumstances to be as well positioned as possible to the labor market, which constantly changes the pattern of the income distribution.

8.1 Handling of Labor Relations

431

Fig. 8.2 Strike trends in the United States between 1960 and 2004 (Source Statistical Abstract of the United States: 2006, Table 646, 435)

8.1.2 Market-oriented Economic Powerhouse—USA 8.1.2.1

Guarantees of the Legal System

The American Labor Law can be mainly divided into two parts based on the content: the first is the Labor Relations Act, which regulates the procedures for employee association and collective bargaining; the second is the Substantive Labor Law, with sectoral orientation in legislative intervention changing frequently. In addition, the content of the legislative regulation has been modified from easy to difficult.

8.1.2.2

Strong Trade Union Organization

Trade unions, which play an important role in labor relations in the United States, are also very characteristic. First, US trade unions have greater responsibility for the individual rights of employees in the workplace. Second, American unions are uniquely representative. An established group of workers has and can only be represented by one union, and employers cannot deal with other unions, nor can other unions intervene and interfere in the bargaining relationship. This organizing principle reduces tensions between unions and protects them from division. Third, collective bargaining is decentralized and is usually conducted between national or local trade unions and employers.

432

8 International Experience in Regulating …

Fourth, the number of trade unions is relatively high. There are approximately 110 national trade unions in the United States, compared to only 17 in Germany during the same period.2

8.1.2.3

Collective Bargaining System under the Leadership of Trade Unions

Characteristics of Collective Bargaining and Contracts Many elements closely related to labor relations must be determined by collective bargaining in the form of mutual agreement between employers and employees. In the USA, collective bargaining and collective contracts have the following main features. (i)

Standardization of Negotiations

In the United States, a comprehensive set of bargaining procedures and rules has been developed, where labor legislation regulates the behavior of both parties. Both parties are equipped with a large number of professionals to conduct collective bargaining following the relevant regulations and try to resolve disputes that arise in the course of negotiations themselves. (ii)

Diversification of Contract Duration

The traditional collective contract is for three years, but in recent years, there have been many contracts of different lengths, as both parties believe that collective bargaining is too frequent and can lead to resource waste. Long-term contracts, on the other hand, can reduce the frequency of negotiations and ease the pressure on both parties. (iii)

More Comprehensive Contract Content

Whereas the original collective agreement focused only on wages and working conditions, the focus is now shifting to improving quality, for example, by focusing on annuities, conditions for the dissolution of labor relations and dispute procedures.

Government Support In America, the widespread development of collective bargaining and the collective contract system is due not only to labor and management factors but also to the active promotion of the government. Government support is mainly provided in the following ways. First, the government provides substantial funding for industrial relations, such as carrying out effective training to improve the quality of the negotiators. The Federal 2

Xiaohong (2001).

8.1 Handling of Labor Relations

433

Mediation and Conciliation Service invests a significant amount of money each year to facilitate collective bargaining in business and industry, depending on the project being negotiated. Second, the government regularly releases information to help negotiating parties understand the situation and facilitate negotiations. Third, the government is actively involved in the negotiation process. The mediators of the Federal Mediation and Conciliation Service are in constant contact with enterprises and trade unions to keep abreast of collective bargaining.

8.1.2.4

Diversified Systems for Handling Labor Disputes

The US has gradually established a multichannel dispute resolution system for complicated labor disputes in a market economy.

Give Full Play to the Autonomy of both Parties and Pay Attention to Resolving Disputes at the Grassroots Level There are clear provisions on the institutions, procedures and methods of dispute resolution within the enterprise in US collective agreements.

Different Approaches to Different Types of Labor Disputes In America, labor dispute bodies set up their own procedures to handle labor disputes in a practical way.

Use of both Administrative and Legal Means In America, government administration plays a very important and even decisive role in labor disputes.

8.1.3 Western European Countries with Stable Industrial Relations—Germany 8.1.3.1

German’s Two Main Social Equilibrium Systems

Germany is a welfare and industrialized country. After the Second World War, Germany established two major social equilibrium systems to narrow the interest differences between labor and management, thus easing the conflicts between them.

434

8 International Experience in Regulating …

A Social Equilibrium System in Terms of Economic Benefits The German Federal Government has adopted progressive tax rates and social security systems to narrow the extremely wide gap between owners of capital and workers to some extent.

A Social Equilibrium System in Terms of Economic Rights (i)

Implementation of Wage Autonomy

Labor and wage agreements are concluded autonomously by trade unions and employers’ associations. The labor agreement provides for various benefits. Wage agreements stipulate the rights and obligations of employers and employees, the conclusion and termination of labor contracts, and the conditions necessary for the organization of the enterprise’s production activities. (ii)

Implementation of the Salary Co-Determination Model

This model means that employees and employers, represented in equal numbers, form the board of supervisors, the highest supervisory authority of the company, which jointly determines the company’s policy and has an influence on production and personnel. (iii)

Implementation of People’s Shares

The company sells shares to employees and encourages them to participate in corporate investments to maintain an economic relationship in which employees and the company share a common destiny.

8.1.3.2

Labor Relations Adjustment After World War II

After the Second World War, Germany established a labor-management cooperation codetermination model, which acts in an exemplary manner and forms unique methods of labor relations adjustment.

Partners for Consultation and Dialog The German government believes that organization-to-organization dialog helps to solve problems and facilitates the smooth development of society and the economy. Under the guidance of this idea, Germany has actively promoted the organization of both employers and employees, forming employer interest organizations and employee interest organizations at the national, industrial and enterprise levels.

8.1 Handling of Labor Relations

435

The Government Remains Neutral in Labor Relations It is unconstitutional for the state to directly intervene in labor disputes, i.e., the state can only set competition rules, empower the courts to ensure that these rules are observed and play a guarantee and arbitration role through special services and officials according to German law.

A Comprehensive Employee Protection System Germany developed a well-developed employee protection system by legislation and administrative interventions after World War II. In summary, the traditional German labor relations adjustment model has perfectly protected the rights and interests of employees and contributed to the harmonization of labor relations and social stability in Germany after World War II. However, this long-developed model has led to high production costs and difficulties in production and operation. For example, labor costs in Hungary were ten times lower than those in Germany, Poland and the Czech Republic. They were even twelve times lower. As a result, German companies have to move their production abroad if they want to stay afloat, thus causing a steady deterioration in employment in Germany.

8.1.3.3

Changes After the 1990s

Faced with the worsening unemployment since the 1990s, the traditional German relations adjustment has fallen into trouble, and the new labor market requires changes in the labor relations adjustment.

Changes in the Attitude of Trade Unions Toward the Protection of Rights The labor laws in Germany during this period were formulated in consultation with both trade unions and employers, taking into account the interests of both employers and employees so that labor interests and labor relations could be harmonized at a high level. In addition, German trade unions gradually adopted flexible approaches to defending their rights to address the root causes of employment problems.

Transfer of Collective Bargaining Between the Industrial and Enterprise Levels Due to the acceleration of enterprises’ privatization, the scale and operation state of enterprises vary greatly, which greatly reduces the traditional German collective wage bargaining and collective contract performance rates that focus on the industry level. In response to this problem, German trade unions have set out to consolidate

436

8 International Experience in Regulating …

collective bargaining and collective agreements at the industrial level while shifting the focus of negotiations and contracting to the enterprise level.

Changes of the Role of Government Facing the serious employment situation, the German government plays an active role in promoting employment, mainly in the form of legislative regulation and information provision rather than a completely neutral role in labor relations. With the change in German labor relations adjustment, the employment situation began to improve. After 2006, the unemployment rate in Germany finally eliminated the previous continuous upward trend and began to fall continuously for three consecutive years.

8.1.3.4

Political Reasons for the Stability of German Labor Relations

Compared with the loose relationship between American labor unions and political parties, German labor unions and the Social Democratic Party of Germany (SPD) have closer ties. Taking the ninth Bundestag as an example, out of a total of 228 SPD members, 218 were trade unionists in July 1981, accounting for 95.6%. During the same period, 82% of the upper-level union cadres of The German Trade Union Confederation were SPD members. The SPD got the German trade union movement off to a good start, providing a programmatic and organizational guarantee for the German trade union movement and fostering the growth of the German trade union movement. The Act on Collective Agreements of 1949 states that German trade unions are not allowed to contribute funds directly to any political party and must be independent of political and religious organizations. However, most of the trade union leaders were members of the SPD, and the trade unions had the right to appoint government officials to government committees and agencies such as the Ministry of Social Security, the Labor Court, the Railway Commission and the Post Office to participate in politics. As a result, trade unions and the Social Democratic Party remain inextricably linked. Furthermore, trade unions achieve their main social goals more often through political means than through collective bargaining, which reduces the conflicts that arise in collective bargaining between employers and employees. At the same time, the government has played a supervisory and arbitration role in labor relations and has achieved the purpose of regulating the behavior of labor and management by revising and improving the legal system.

8.1 Handling of Labor Relations

437

8.1.4 The Nordic Countries with High Welfare—Sweden 8.1.4.1

Overview of Labor Relations in Sweden

The Swedish working class is highly organized, with a workforce of 4.22 million, which is approximately half of the total population. There are three main trade union organizations: Sweden’s Lands organizationen (LO), The Swedish Confederation of Professional Employees (TCO), and The Swedish Confederation of Professional Associations (SACO), in which 80% of the working population is represented. The largest of these unions, LO, is mainly for workers in the industrial manufacturing, commercial trade and transport sectors, representing the interests of low- and middleincome workers, and plays a pivotal role in the structure of Swedish labor relations. The Confederation of Swedish Enterprises (SN), the largest Swedish employer organization, has a membership of nearly 540,000 private companies employing over 1.5 million people in private industry, commerce, transport and other service industries, ranging from small workshops to large monopolies. Furthermore, employers’ associations are usually active supporters of the Conservative Party, Centerpartiet and Liberalera. The Sweden Social Democratic Party, the ruling party, places great emphasis on labor-management cooperation and supports both parties in jointly resolving labor disputes, managing the labor market system, and deciding major corporate issues.

8.1.4.2

The Swedish Labor Employment System

A Sound System of Labor Regulations Swedish labor law, like the Swedish legal system, consists of EU law and the relevant provisions of the Swedish Constitution, laws, administrative regulations (issued independently by the government) and implementing regulations issued by government agencies (affiliated departments). It mainly includes the following aspects: (i)

European Union Law

Sweden is a member of the European Union, and one of the sources of its labor law is European Union law; therefore, European Union law applies to all member states. (ii)

Swedish Statutory Law

It is enacted by the Swedish Parliament. The relevant legal provisions are either mandatory or discretionary, and some are semi-compulsory. (iii)

Collective Agreements

In practice, collective agreements often not only bind the disputing parties to the collective agreement but also the terms of national collective agreements are often ‘borrowed’ by nonparties.

438

(iv)

8 International Experience in Regulating …

Individual Employment Contracts

Influenced by the concept of “contract is law”, the individual employment contract has an important influence on the regulation of labor relations in Sweden. (v)

Employer’s Unilateral Rules

The employer’s unilateral rules are determined by the employer, but employees must be informed through the employer’s publicity brochures, etc., and employees can learn about the relevant content when applying for the job. (vi)

Case Law

Prior to the establishment of the Labor Court in 1928, there was no case law, and after its establishment, the Court created its own case law and guided subsequent cases. In Sweden, customs are the source of case law, and judgments are made based on customs to form precedents. The Swedish labor “employment” system is a very important legal institution in Swedish labor law. However, “there is no law in Sweden which is essentially a universal code regulating the relationship between employers and employees”.

Characteristics of the Labor Employment System (i)

The Determination of “Employment” Based on Facts

The concept of ‘employment’ is not clearly defined in Swedish law, and the determination of ‘employment’ and its related concepts must be based on an overall assessment in each case. When determining the existence of an employment relationship, Swedish law generally uses a “multifactor” test, which weighs all the factors that support or deny the existence of an employment contract, to determine whether the worker is “1performing work for his own reasons”. (ii)

The Completed Anti-Discrimination Regulations in the Swedish Labor Employment System

Swedish discrimination law emerged in the 1970s, and three anti-discrimination laws were introduced in Sweden in 1999. The Swedish discrimination law system is thus composed of the discrimination provisions of European Union law, Swedish discrimination special law and case law. The special law generally consists of “positive measures”, “prohibitive provisions” and “supervision systems”. (iii)

Strict Dismissal System and No Urban–Rural Differences in Treatment Being Applied to Maintain Job Security

In Sweden, both the employer and the employee have the right to terminate the employment agreement. However, as the employee is considered to be the weaker party, the law places more emphasis on controlling the employer’s rights. Differing from the long-established “urban–rural dual structure” in China, Sweden, one of the European countries with a large proportion of agricultural workers today, attaches

8.1 Handling of Labor Relations

439

importance to the “equal employment outlook”, relaxing farmers to work and settle in cities and establishing an equal employment system for urban and rural workers.

8.1.4.3

Labor-Management Cooperation Mechanism Based on Collective Bargaining

Overview of Collective Bargaining Collective bargaining in Sweden is the most important means of regulating labor relations. The government supports the desire that both parties resolve their disputes and reach a consensus on working conditions autonomously, encouraging them to reach collective agreements through collective bargaining. In 1936, Sweden’s Landsorganizationen (LO) and the Swedish Employers’ Confederation (SAF), two central-level organizations, agreed to negotiate without government intervention. Two years later, the parties signed the “Saltsjobaden Agreement”. Since the agreement, Swedish trade unions have cooperated so extensively with employers and labor that they have been able to come to an agreement by collective bargaining, which is the main means of resolving labor conflicts in Swedish industries.

The Three Levels of Collective Bargaining (i)

Central Level

The trade union federations and the employers’ associations conduct negotiations at the central level and propose framework agreements. (ii)

Branch Level

The trade unions and the employees’ associations conduct negotiations at the branch level, known as national negotiations, specifying the proposed agreement through national agreements. (iii)

Local or Company Level

This level of negotiation is conducted between local unions and individual employers, with local agreements and further refinement of branch agreements.

Three Types of Collective Bargaining (i)

Consultative Negotiation

Only the parties are there to negotiate over employment conditions without the government’s intervention. Both parties are free to take corresponding actions if the negotiation fails, with the government and the courts remaining neutral.

440

(ii)

8 International Experience in Regulating …

Dispute Resolution Negotiations

The parties must first initiate a negotiation process, which can be taken to labor law if negotiations fail in the event of a dispute over the interpretation of the law or collective agreement terms. Individual members may not be the initiators of disputes, but the law does not completely exclude individuals. Nonunion members can take disputes to ordinary courts, and if they are not satisfied, they can appeal to the Labor Court. (iii)

Collaborative Negotiations

It is also known as codetermination bargaining. The employer should initiate a negotiation procedure with the local union to influence the employer’s decision in the event of a significant change in the employer’s activities or working conditions of employees while a collective agreement is in force. Negotiation does not require an agreement to be reached, and the employer has the final say on matters of negotiation. At the same time, trade unions cannot resort to labor courts.

8.1.4.4

The Relationship between Trade Unions and the Government

Strategic Trade Unionism In Sweden, long-ruling Social Democrats have been actively leading the struggle of the Swedish working class for political rights and improving economic conditions since inception and have formed a sympathetic partnership with Swedish trade unions, a relationship known as strategic trade unionism. The trade unions were to go beyond the narrow industrial relations to a macro level, while the government was to improve the balance of power between the working class and the bourgeoisie through the regime.

Solidarity Wage and Active Labor Market Policy After the Social Democrats came to power, the Swedish government expanded the scope of the solidarity wage, using the wage levels of Swedish export industries as a standard, requiring the permanent pursuit of the goal of equal pay for equal work in different industries, in different regions and among different enterprises, resulting in the closure of a large number of small and medium-sized enterprises and the “exclusion” of a large number of workers from lagging enterprises. To solve the unemployment problem, the Swedish government has implemented the active labor market policy, which emphasizes “employment first” rather than “unemployment benefits first” and has set up special institutions to train unemployed individuals and to achieve “jobs for all” through labor mobility and job placement.

8.2 Supervision and Restriction of Public Power in Different Countries

441

Social Welfare System In the 1920s, Yalmar Branding pointed out that “the society we want to build is not modeled on any theoretical model, but on the basis of experience, on the basis of the lessons of life itself”. The subsequent paths of improvement of the Social Democrats were explored along this line. The construction of social welfare security in Sweden had an early start in the international community, with the establishment of a health insurance system in 1891. A relatively complete social welfare protection system has been established based on the four major blocks of welfare protection: national social insurance, family welfare, social services and healthcare after more than a century of continuous supplementations, regulations and modifications. This system covers all people with high welfare benefits, which are paid by the government.

8.2 Supervision and Restriction of Public Power in Different Countries 8.2.1 Supervision and Restriction of Public Power in Western Countries 8.2.1.1

Supervision and Restriction Mechanism of Public Power in Contemporary Western Countries

Moral Restriction on Public Power “The decline or even the collapse of the social morals invariably means the beginning of corruption.” Therefore, Western countries attach great importance to the moral restriction on public power. They believe that the most effective way to prevent the abuse of public power is to strengthen the professional ethics of government officials.

8.2.1.2

Right Restriction on Public Power

The theory of the Social Contract has been widely applied in Western countries’ power supervision and restriction. First, citizens play an effective role in supervising the exercise of public power, which is mainly reflected in the universal suffrage system in Western countries. Since every citizen holds a sacred vote, those in power, to remain in power, must take into account the will of the majority of citizens and ensure the proper function of public power. In addition, citizens also enjoy the rights to complain, report and so on, which also supervises public power. Second, civil organizations in Western countries have played a critical anticorruption role. In addition, interest groups also hold an attentional position. They

442

8 International Experience in Regulating …

each protect their own special interests so that the public power loses the opportunity to abuse the power, as the interests of all parties need to be considered. Finally, news supervision makes a big difference. In Western capitalist countries, the Constitution stipulates that freedom of speech and publication is part of the basic rights of citizens. Many countries have enacted related laws, which make specific provisions for it.

8.2.1.3

Power Restriction on Public Power

Montesquieu said, “It is an immutable rule that all those who have power are prone to abuse power. People with power do not stop using it until they meet the end.” The “Separation of Powers” system is a prominent manifestation of restriction on public power in the West. In addition, restrictions can also be found between powers in the same system, such as the balance of branch powers within the legislative, judicial and executive power systems. Germany, for example, has effectively supervised and restricted the operation of power thanks to its pluralistic anti-corruption body, which consists of a police force with a certain anti-corruption role in the executive branch and a disciplinary court and procuratorial organs within the judiciary.

8.2.1.4

Accountability Restriction on Public Power

The public accountability mechanisms of Western governments present different characteristics due to differences in economic systems, governance concepts, social values, and political systems. The first is the period of traditional public administration (TPA). The TPA was formed in the late 19th and early twentieth centuries, which emphasized public responsibility mainly political and bureaucratic ends, to the electorate and to superiors. The second is the period of the New Public Administration (NPA). The NPA emerged after World War II with the basic idea that administrators should increase their responsibility for social justice and direct accountability to citizens. Third, the period of new public management (NPM), which began in the 1970s, required public servants to take personal responsibility for their actions and the results. The Fourth is the period of the New Public Service Theory. Ushering into the twenty-first century, this theory emphasizes that public servants should be concerned with and accountable to statutes and constitutions, community values, political norms, professional standards, and civic interests.

8.2 Supervision and Restriction of Public Power in Different Countries

8.2.1.5

443

Legal Restriction on Public Power

Western countries tend to supervise and restrict public power through sound legal terms, thus ensuring the good operation of public power. For example, as early as 1906, the United Kingdom enacted the Prevention of Corruption Act. In France, the Transparency of Funds for Politicians Act was passed in 1998 to strictly regulate the property declaration of public officials. Japan has enacted not only the National Public Officials Law, Local Public Officials Law and other special laws on public officials but also a series of laws and regulations aimed at severe punishment of public officials for their misconduct. Western countries have focused not only on legislation but also on law enforcement. Perfect legislation and strict law enforcement constitute a sound legal system that plays a role in supervising and restricting public power.

8.2.2 Characteristics of Supervision and Restriction of Public Power in Western Countries First, there is a relationship of mutual checks and balances between the supervisor and the supervisee who also enjoy an equal and parallel status. Following the basic principle of “division of functions, mutual checks and balances”, authorities with different functions supervise and restrict each other. Second, the supervisor and the supervisee’s authority are clearly delineated, and they cannot replace each other. In terms of supervision means, special procedures are applied to correct the behavior of the supervisee. People pay great attention to the design of supervision procedures in this model of supervision. Finally, models of oversight with mutual oversight and checks and balances tend to focus on a horizontal division of power so that there is no need for more high-level supervisors to exercise incremental oversight; the vertical hierarchy of the regime is relatively simple, and the separation of power at any level does not create an ultimate power that is free from any oversight.

444

8 International Experience in Regulating …

8.2.3 A Country Practicing the Separation of Powers—America 8.2.3.1

The Institutional and Cultural Backdrop of America’s Mechanism of Supervising and Restricting Public Power

Institutional Background The United States is a federal state with a presidential system of government, running a political system that combines the separation of powers with checks and balances. The legislature, executive, and judiciary powers of government are separated and exercised by different departments or different people, with the powers of each branch roughly balanced and mutually restricted. Under this political system, national institutions have their own powers and functions, and they keep each other in check, forming an effective internal oversight mechanism to control public power and prevent government power abuse. In addition, the U.S. has established a public opinion monitoring system to ensure the free flow of information since Americans are historically entitled to freely publicize and express themselves. Economic independence of the mass media plus the full freedom of speech and press of citizens enable everyone to expose illegal activities of government agencies and officials, thus forming an effective external oversight mechanism of public power.

Cultural Background The United States has had a written constitution with bourgeois democracy as its matrix since its founding. The spirit of constitutionalism is born after years of gestation, becoming an innate factor that is deposited in the mind of those in power. It constrains the actions of those in power upward and influences the beliefs and thinking of citizens downward. Consequently, the public especially respects the law, which defends the U.S. Constitution and effectively restrains the abuse of public power. In addition, the United States has spent more than 300 years establishing a perfect legal system. After a long period of penetration, various legal provisions were gradually internalized into people’s conscious behavior and helped form a culture of legal supremacy, which laid the foundation of the American legal integrity culture and became an important guarantee for the supervision and restriction of public power in the United States.

8.2 Supervision and Restriction of Public Power in Different Countries

8.2.3.2

445

The Content of This Mechanism

Internal Oversight Mechanisms to Constrain Authority by Authority (i)

Effective Control of Legislative Power over Executive Power

According to the U.S. Constitution, Congress also has the power of purse, the power to appoint and ratify the power to ratify treaties, the power of investigation, and the power of impeachment in addition to its legislative power, which creates a severe constraint on the executive power of the president. The president has executive power, but Congress can impeach him; the president can make many decisions, but he cannot do anything without the money that Congress approves to allocate to him. Congressional oversight to the president’s appointment and removal power is a further effective control of executive power. (ii)

Effective Supervision of Judicial Power over Executive Power

In the United States, if a government official is found to commit a crime, a prosecutor with independent powers will be appointed immediately to investigate until judicial prosecution is brought. The United States has established a unique system of judicial review after Marbury v. Madison, in which the federal Supreme Court is entitled to review the constitutionality of congressional legislation and the president’s executive actions. Given that, it has become an important weapon in the federal courts as checks on Congress and the President. (iii)

Control of the Executive Power over the Legislative and Judicial Powers

The President of the United States, as head of state, is the chief executive officer of the government, supreme commander of the land, sea, and air services, and has the power to govern the entire country’s internal and external affairs. Although the U.S. Congress can legislate, its bills must be approved by the president to take effect, or they can be declared unconstitutional by the courts and rendered null and void. The courts may appear to be above the legislative and executive branches, but judges are appointed by the President with the consent of the Senate and can be impeached by it.

External Oversight Mechanisms to Constrain Power by Rights To further improve the constraints on public power, the United States has also established a set of external oversight mechanisms that restrict power by rights, and an important component of these mechanisms is public opinion monitoring, whose key features are democracy and freedom. In the U.S., the press, as the executive of public opinion monitoring, plays the role of the “fourth branch of government”.

446

8 International Experience in Regulating …

Effective Anticorruption Strategies for Constraining and Monitoring Public Power. (i)

Anti-Corruption Agencies with Strong Independence and Authority

The United States has established numerous anti-corruption agencies in the legislative, judicial, and executive branches. For example, the Senate has Select Committee on Ethics, the House of Representatives has Committee on Ethics, the judicial system has Judicial Conference of the United States, and the executive system has the U.S. Office of Government Ethics. In addition, there are a number of crosssystem anti-corruption agencies and positions that functionally focus on the prevention of corruption, such as the U.S. Office of Government Ethics and the Office of the Attorney General, and on the punishment of corruption, such as independent counsel and the Federal Bureau of Investigation. These anti-corruption agencies tend to be more independent. For example, an independent counsel is a special position dedicated to investigating criminal violations in the U.S. government, with the power to independently investigate and prosecute government officials, and no one has the right to remove an independent prosecutor as long as he or she is not obviously guilty of gross negligence. In addition, many U.S. anti-corruption agencies are highly authoritative. The functions, powers, and procedures of the anti-corruption agencies are clearly defined in law, and they are high-level and broad in scope. The Federal Bureau of Investigation (FBI), for example, is an agency that specializes in investigating threats to national security and the public interest, and its scope of the investigation is extremely broad and not geographically limited. (ii)

Systematic Anti-Corruption Measures

The U.S. focuses on the use of economic, administrative, legal, institutional and other means to comprehensively deal with corruption, forming a systematic anticorruption. The first is to focus on anti-corruption culture education to raise awareness of integrity in public service. The U.S. Anti-corruption agencies attach great importance to anti-corruption education. When each civil servant enters the government sector, he or she has to receive at least one hour of required training from departmental integrity officers. Its content includes anti-corruption regulations, relevant information, measures and advice based on different industries, units and positions. Second, it strengthens supervision and restriction, focusing on the combination of punishment and prevention. On the one hand, severe punishment for corruption should be ensured. The United States has a number of federal law enforcement agencies, each assuming responsibility for the implementation of certain types of public corruption investigations under the law and imposing strict supervision of corruption. The United States has enacted a series of laws to monitor, such as the most famous “Government Sunshine Act”, which requires that, except under special circumstances, meetings of executive branches be public. In addition, the introduction

8.2 Supervision and Restriction of Public Power in Different Countries

447

of the Freedom of Information Act and the Anti-Corruption Reform Act further improves the financial disclosure system for government officials. Third, the legal system should be strengthened to effectively prevent corruption. The U.S. has a sound system of anti-corruption laws and regulations, including the Government Sunshine Act designed to regulate administrative conduct and the daily behavior of civil servants, the Federal Anti-Corruption Practices Act to punish corruption, and the Independent Counsel Act governing the functions and powers of anti-corruption agencies. (iii)

Having Clear Rules Governing those Who Exercise Authority

American political scientist Gary Wasserman once said, “People don’t generally seek power in power its own right. They want power for the other values it can bring them - reputation, wealth, even emotion. Power, like money, is a means to other ends”. Thus, the key to curbing corruption is to constrain the behavior of those who exercise power. In the United States, the Code of Ethics for Civil Servants has been introduced, which imposes restrictions on executive branch workers in a number of ways. First, in the handling of gifts, the guidelines make it clear that civil servants cannot accept gifts from entities that have conflicts of interest with their official activities. Superiors cannot accept gifts from subordinate civil servants, and in special cases, public employees may accept a gift valued less than $20 and accept no more than $50 in gifts, in the aggregate, in a calendar year. Second, there are also a number of restrictions in terms of various conflicts of interest, such as taking part-time jobs, working with relatives, and changing careers. Third, the exercise of power is restricted in three aspects: first, no free use of public offices; and second, no use of nonpublic information. It is unlawful for a public official to disclose information, whether through advice or referral or through knowingly unauthorized disclosure; and third, using government property and spending work time at will are unacceptable.

Rigorous Government Performance Management System In 1993, Congress passed the Government Performance and Results Act (GPRA), which provides the legal basis for the management of government performance in all departments of the U.S. federal government. In 2002, the Program Assessing Rating Tool (PART) was introduced into the federal government, forming a crossdepartmental comparison of program performance within the government, thus improving the overall performance of federal programs. When the Obama administration took office, the original performance management model was readjusted. First, three strategies were proposed to improve government performance management: the government needs to use performance information to lead, learn, and improve results and drive organizations to achieve their ultimate goals; the federal government needs to engage in transparent, continuous and concise performance communications with the public so that departments enhance their ability to learn from experience to

448

8 International Experience in Regulating …

achieve better results; and problem-solving networks should be enhanced. Second, the procedure for departmental performance management was reset, including setting 3–8 high-priority goals per department; identifying leaders responsible for each goal; developing plans; quarterly updates; data-driven performance reviews; and a public and timely undated performance portal.

8.2.4 A Country with High Welfare—Netherland 8.2.4.1

Legal Provisions for the Supervision and Control of Public Power in the Netherlands

First, in the Netherlands, the constitution has made clear provisions on the relationship of checks and balances among the various institutions in the government. It gives the government and the parliament an autonomous and independent legal status, laying a foundation for the supervision and control of public power. Second, the Dutch Constitution has clearly defined the legal status of ministers and parliament. The constitution stipulates that members of parliament cannot be ministers at the same time, and they can only resign from one office before they take up another. Members of the Council of State, the chief inspector and judicial officers also cannot assume the office of ministers at the same time. The Constitution allows ministers to hold one or several public or private offices except a few special cases. Ministers are independent and autonomous, but they cannot achieve their political mission completely isolated from party politics. Finally, the Dutch constitution also provides ministers and members of parliament with two immunities. One is congressional immunity. That is, ministers and members of parliament cannot be prosecuted by law or persecuted for any opinion in a parliamentary committee meeting or in parliament, whether in writing or in words; second, if a minister or member of parliament commits a crime during his or her term of office, which needs to be dealt with under special criminal law proceedings.

8.2.4.2

The Dutch System of Control and Supervision of Public Power

Ministerial Responsibility System Under the ministerial responsibility system, ministers have responsibilities mainly in the following four aspects. The first is civil law responsibility. That is, ministers should be responsible for their own activities and omissions when they perform corporate duties on behalf of the state institutions. The second is financial responsibility. The Government Accounting Act stipulates that ministers may only use financial resources authorized by the government. In the event of overspending, the minister shall be liable. The third is criminal responsibility. The king cannot issue any royal decree without

8.2 Supervision and Restriction of Public Power in Different Countries

449

the cooperation of ministers, since the latter is responsible for the government decree. And the fourth is political responsibility. Ministers are obliged to provide written or oral information to both houses of parliament at the request of its members, provided that such information does not harm the national interest. Ministers must answer questions from both houses of parliament.

Rule of Confidence The rule of confidence is a punishment system for the government’s actions. If the parliament passes a motion of no confidence, this rule can force ministers or all cabinet members to submit their resignations to the king. The unwritten rules of trust, which are dynamic, leave enough room for the development of mutual relations between the government and the parliament. The separation of powers between the government and the parliament makes it necessary for them to maintain close ties and friendly cooperation with each other. Meanwhile, the close cooperation between the two powers would produce a sound political balance. The rule of confidence itself functions like an invisible pressure device promoting cooperation between the two. It can declare a decision unacceptable or threaten with a vote of no confidence, forcing a cooperative attitude between the cabinet and the parliament, thus binding the government to act within the limits of the law and avoiding abuses of power.

Right to Dissolve the Parliament An important measure of the Dutch government to regulate the parliament is the right to dissolve the parliament. The constitution clearly stipulates that the king has the right to dissolve both houses of the parliament by royal decree. A general election must be held for a new parliament within 3 months after dissolution. There are two options to solve the problem between the government and the parliament: either the cabinet resigns, which is desired by the parliament, or the cabinet uses the right to dissolve the parliament based on its conflict with the house. In the latter case, the government will stand firm in its policies and maintain power. The government will call on voters’ suspicion and distrust of the parliament. The government must obtain the support of a majority of voters during the dissolution of the parliament and elect a chamber composition that favors the incumbent cabinet. The government and the parliament are in conflict, interacting, and restraining each other, limiting the development and functions of the government to a particular range.

450

8.2.4.3

8 International Experience in Regulating …

Auxiliary Measures to Restrict and Supervise Public Power in the Netherlands—Official Supervision

The Council of State In the Netherlands, both the Constitution and the Council of State Act grant advisory and supervisory powers to the Council of State. The Constitution provides that the Council of State or its subordinate bodies must be consulted on bills, draft on general administrative regulations, and treaties on preventing abuse of power in the Dutch political system proposed for parliamentary approval. The Council of State also has the duty to investigate legal disputes settled by royal decrees (royal proceedings) and make suggestions for the government again. The government may disregard the opinion of the Council, but in most cases, the Council’s decisive opinion will be respected by the government. When the government decides to use the power to revoke the bill in question, it must hear opinions of the committee.

The Court of Auditors The Court of Auditors is the body responsible for auditing the revenue and expenditure of the Kingdom of the Netherlands, and it can effectively monitor and advise the state administrative organization and governmental functions. Specifically, it has the following important functions. First, it monitors the flow of funds of the state and audits the cash flow in public services. Second, it monitors the state’s revenues and expenditures, including investigating the legality of the investment process of funds in relevant sectors and reporting the consistency of state expenditures and financial advances. Third, it directly monitors the effectiveness of the central government’s fiscal management. The Court of Auditors participates in the annual reports held by the government and the parliament after each fiscal year to monitor and investigate the use of funds by the relevant departments within the government and prevent and control appropriate by government departments.

8.2.4.4

Guarantee Mechanism for Supervision and Control of Public Power in the Netherlands

From the initiatives of the Netherlands to restrain and supervise public power and prevent abuse of power, it is clear that the Netherlands attaches importance to constructing a strong restraining mechanism based on its political system. As one of the countries with the highest social welfare benefits in the world, the perfectly high welfare system of the Netherlands creates a good environment for the effective operation of the mechanism of supervision and control of public power.

8.2 Supervision and Restriction of Public Power in Different Countries

451

8.2.5 A Fast-growing Latin American Country—Brazil 8.2.5.1

Overview of Public Power Supervision and Control in Brazil

In Brazil, corruption has existed for a long time. Since the restoration of constitutional democracy in 1985, a series of political corruption cases have occurred in Brazil, making it once rank low globally in terms of government integrity and considered one of the most corrupt countries in Latin America. Since the 1990s, Brazil began to find ways to monitor and control power and has made certain achievements in preventing corruption and the abuse of public power. However, corruption in Brazil has remained serious in recent years, and the number of cases remains high. The reason behind it has a lot to do with the defects in Brazil’s public power supervision and control mechanism. First, there is a lack of effective coordination and cooperation among anti-corruption agencies, with anti-corruption agencies such as supervision, investigation and disciplinary agencies being disconnected from each other; second, excessive independence and abuse of discretionary power are prone to judicial opacity and inefficiency; in addition, Brazil also lacks a national inspection department for unified inspection.

8.2.5.2

Historical and Cultural Background of Supervision and Control of Public Power in Brazil

A long time of inefficient control of public power and severe corruption in Brazil is inseparable from its profound historical and cultural background. On the one hand, long-standing military rule has had a great impact on Brazil. Under the oppressive rule of the military government, a lack of transparency in public administration has given rise to a large number of corruption problems and restricted public freedom of opinion and thought, and the latter helps to cover misconduct. On the other hand, Brazilians focus on “relationships” and “favors” and consider them lubricants to solve problems not as corruption. In Brazil, corruption of power is often considered a moral issue and not sanctioned by law. In such a culture, it is difficult for public power to be effectively monitored and controlled.

8.2.5.3

Initiatives to Check and Supervise Public Power in Brazil

Formulate Tough and Detailed Laws and Regulations Montesquieu said, “When a man has absolute power, he first wants to simplify the law. In such a state, he pays first attention to individual inconveniences, not to the freedom of the citizens. In addition, the freedom of citizens is ignored.” Thus, “the dictatorship loves simple laws.” After 1992, Brazil increased the checks and oversight of public power by enacting a series of tough, detailed laws and regulations, such

452

8 International Experience in Regulating …

as the Government Misconduct Act, the Law on Property Declarations by Senior Officials in the Executive, Legislative, and Judicial Branches, the Public Officials Ethics Law, and the Anti-Money Laundering Law, and in 2000, the Code of Conduct for Senior Federal Executive Officials, which specifically states that senior officials who appear to have a change in property, he or she must report it to the Ethics Commission.

Strengthening the Construction of Anti-corruption Institutions The First is the Federal Prosecutor’s Office. The Federal Public Prosecutor’s Office has broad powers and is independent of the executive, judicial and legislative branches of government and is known as the “fourth power” in Brazil. Brazil has also established a Public Transparency and Anti-Corruption Commission under the Federal Public Prosecutor’s Office, which is responsible for discussing and proposing strategic measures to combat corruption and increase the transparency of anti-corruption efforts. The second is the Congressional Commission of Inquiry. A Congressional Commission of Inquiry is an important anti-corruption body attached to the legislative branch, and the Constitution provides that either house of Congress may jointly or separately establish a Congressional Commission of Inquiry to monitor and investigate cases of major importance. The Third is the Federal Court of Auditors. The Federal Court of Audit is the supreme audit institution that assists the Congress in monitoring, with strong independence and supervisory powers, and its main function is to prevent and stop the misuse of national public funds, such as auditing the expenditure of the accounts of the President of the Republic and the property accounts of the legislative, judicial and executive bodies and all state-owned enterprises. In addition, there are audit courts in all states of the Federation. Fourth, there is the Federal Police. It is subordinate to the Ministry of Justice and can independently investigate all kinds of criminal cases and plays an important role in the fight against corruption, as it is responsible for “investigating criminal violations of the political and social order, or of the virtues, services and interests of the federal government”.

Make Full Use of Modern Information Technology to Promote Information Disclosure First, government services and information portals should be established. It can reduce the opportunities for bribery from public services and improve the efficiency of public services by providing relevant public services to the public online. Second, establish a transparency portal. The law requires the federal government to set up a transparent website, and the federal government’s allocations to states and municipalities, as well as the investment and use of major projects and programs,

8.2 Supervision and Restriction of Public Power in Different Countries

453

must be published online. At the same time, all government ministries are required to set up their own transparent websites to make budget execution, procurement and bidding, and administrative expenses public. Third, an online reporting system was established. The online e-reporting system is located under the website of the Federal Court of Auditors, and whistleblowers can submit information and evidence about the accused instantly and obtain confirmation information quickly, which is one of the important channels to open up public participation in anticorruption. The Fourth is the implementation of the e-procurement system. The e-procurement system has improved the integrity of government bidding and tendering, enhanced the transparency of government procurement, and played a good role in monitoring and checking public power.

8.2.6 An Emerging Industrial Country in Asia—Singapore 8.2.6.1

The Political Foundation and Cultural Background of Singapore’s Supervision and Restriction of Public Power

Political Foundation The Singaporean government puts great emphasis on political democratization, which is reflected in its “unique democratic system”. First, the politics in Singapore have been dominated by the People’s Action Party (PAP), even though in theory, there exists a multiparty system. The adoption of a democratic electoral system to maintain political authority not only maintains political stability and administrative efficiency but also provides a certain degree of checks and balances on the ruling party with the opposition parties. Second, the People’s Action Party (PAP) keeps close contact with the people through communication in various forms, making the public have efficient supervision of the government. Finally, the PAP created a political system and economic development model with its own characteristics based on its national facts, which not only meets the requirements of political democratization but also makes the ruling status of the PAP legal.

Cultural Background First, Singapore has developed its own political ideology by drawing on the fine part of both Western and Eastern culture and then combining it with its own constitutional system. Historically, Singapore was a colony of England, influenced deeply by its political culture. Furthermore, Confucius’ philosophy counts in its modern political values since immigrants from China take a large part in Singapore’s total population. In this context, leaders of Singapore did and do stand firm in cracking down on the abuse of public power.

454

8 International Experience in Regulating …

Second, there is an elitist hierarchy in this country. In Singapore, the elite status of public servants is widely recognized, which provides a social and cultural basis for the application of public servants’ high salaries for a clean government and limits the abuse of power.

8.2.6.2

Institutional Construction of Singapore’s Supervision and Restriction of Public Power

The Selection and Appointment of Civil Servant Before an official appointment, candidates must be inspected from education, financial status and criminal records to family and social backgrounds. Once hired, they need to be further examined in ethics, working ability and potential. Only by passing all these tests can they gain a promotion. In addition, the Singaporean government regulates their term of office to improve the mobility of official groups and help young officials be promoted, thus maintaining the vigor of civil servants.

Salary of Civil Servants The Singaporean government tends to offer high salaries to officials for a clean government. The salary of Singapore’s civil servants is world-renowned for its highness and market-linked nature. Every five years, the government would evaluate the income standards, which would be accorded to adjust. Moreover, it has a sound Central Provident Fund in its anti-corruption system featuring the concept of a high salary for a clean government, forming its own unique social security system. Consequently, public servants would take no risk to receive bribes considering their handsome salary and reliable pension.

8.2.6.3

The Legal Construction of Singapore’s Supervision and Restriction of Public Power

Sound Legal Regulations Singapore enacts a series of laws and regulations to ensure public officials use power in compliance with the law. For instance, the country passed the Prevention of Corruption Act in 1960 and complemented it with public service (disciplinary procedures) regulations to include anti-corruption content in the legal framework. In 1988, Corruption (Confiscation of Benefits) Bill, a procedural law specializing in corruption punishment, was introduced to supplement and revise criminal procedure law. In addition, it also published a number of laws and regulations, including Public Service (Disciplinary Proceedings) Regulations and A Guidebook for Civil Servant.

8.3 Prevention and Management of Hidden Economy

455

Tough Law Enforcement Mechanism Singapore also has a strict law enforcement mechanism, in addition to its sound legal framework. Any civil servant who violates the provisions of the Prevention of Corruption Act and A Guidebook for Civil Servant is held legally responsible. Furthermore, whoever is dismissed from the public service for illegal activities such as bribery will have all his or her provident fund accumulated during his or her service canceled? Meanwhile, Singapore establishes a multitier and all-directional supervision system to ensure tough law enforcement, which means that there is an extremely high risk for civil servants to abuse public power.

8.2.6.4

The Fostering of a Moral Culture Singapore’s Supervision and Restriction of Public Power

First, Singapore attaches great importance to integrity education, and its content varies from conduct to sense of political integrity, covering the whole society with distinctive content at different levels and classes. In addition, the government often concludes some disciplines and regulations into concise aphorisms, charts or even funny cartoons, printing them into guidebooks and distributing them among public servants. Second, this country takes teenagers’ education seriously, setting political integrity courses in most middle schools. Teenagers are taught that “Corruption like bribery is a gross crime equivalent to gangland and drug trafficking in society”. Finally, Singapore develops a systematic project on honesty, making it part of civil education, employee training and working systems, since the fostering of an honesty culture is valued a lot in this country. The government applies various forms to publicize it, such as lectures, discussions, exhibitions, newspapers and television, creating a political culture and public opinion centering integrity.

8.3 Prevention and Management of Hidden Economy 8.3.1 The Background of Management of Hidden Economy in Foreign Countries 8.3.1.1

The Scale of Hidden Economy in Foreign Countries

The hidden economy spreads all over the world and accounts for a certain proportion of the economic life of various countries. In 2000, F. Schneider conducted a survey on the scale of the hidden economy in GDP in different countries, and found that the scale of the hidden economy in developing countries was approximately 35–44% of GDP, the scale of the hidden economy in transition countries was approximately 21–30%

456

8 International Experience in Regulating …

of GDP, and the hidden economic scale of OECD countries accounted for 14–16% of GDP. In developing countries, hidden economies are prominent, posing threats to political, economic, and social securities. In developed countries, although the scale of the hidden economy is relatively low, in recent decades, the hidden economy has shown a trend of growth, and the income distribution gap is also gradually expanding. The hidden economy has become a global problem.

8.3.1.2

Causes of Hidden Economy in Foreign Countries

Causes of Hidden Economy in Developing Countries First, the economy in many developing countries is regulated. For example, Thailand and India, with serious hidden economies, have a very low degree of economic liberalization. The high degree of regulation by the government has forced many small and medium-sized enterprises to go underground, which has led to the widespread of hidden economies. Second, government corruption in developing countries during the transitional period is rampant, and the prevalence of the hidden economy has a strong correlation with the level of government integrity. For example, the Singaporean government attaches great importance to building a clean government, so the scale of the hidden economy is much lower than that of neighboring countries. In Russia being in the transition period of the economic system, power-for-money transactions and corruption are prevalent, spawning a large number of hidden economies because of its imperfect political system. Finally, in developing countries, the cost of defining property rights is relatively high. Many people are willing to operate legally, but they have turned to hidden economic activities due to cumbersome economic procedures and many loopholes in the laws and systems in developing countries.

Causes of Hidden Economy in Developing Countries First, the enterprise subcontracting system is an important reason for the prevalence of hidden economies. Labor union organizations in developed countries are relatively sound and complete. To weaken the control of workers by labor unions, enterprises will subcontract certain production tasks to small and medium-sized enterprises and private organizations. Government departments cannot monitor the economic activities of these enterprises and organizations in hidden production, which has aggravated the hidden economy. Second, in many developed countries, there are a large number of immigrants and stowaways who are engaged in work that cannot be counted by government departments, thus creating a large amount of hidden economy. For example, most of the labor force in hidden economic sectors in the United States is made up of immigrants. At the same time, Spain and Italy also have a large number of Eastern

8.3 Prevention and Management of Hidden Economy

457

European immigrants or stowaways. Due to language and cultural differences, they can only engage in hidden economic activities in some underground small businesses, thus prospering the hidden economy. Finally, developed countries have shortcomings in the collection and management of personal income tax, which causes personal income tax leakage. Compared with developing countries, the evasion of corporate turnover taxes and income taxes in developed countries is less serious due to their sound social systems, relatively complete tax systems, and sound monitoring mechanisms. However, some highincome individuals in developed countries always do everything possible to conceal their income due to the existence of a large number of hidden jobs and loopholes in personal tax collection. Faced with the fact that the hidden economy is constantly growing on a large scale, countries around the world have begun to explore new ways to manage the hidden economy in accordance with their own conditions.

8.3.2 Global Economic Power—The United States 8.3.2.1

The System and Culture Supports for the Management of the Hidden Economy in the United States

The United States has a complete taxation system, and the IRS (Internal Revenue Service) verifies taxation through various channels. People charged with tax evasion in the US will be fined an amount of money and forced to pay much interest. The United States also has a highly sophisticated credit system and ethical standards for taxation management. Individuals in the United States attach great importance to their personal credit records. Once they have a tax evasion record, business partners will be alert, loans from banks will become difficult, and relevant departments will monitor them frequently, so the cost of all economic and social activities will be increased, which thereby inhibits hidden economy. In addition, paying taxes has become a moral culture in America that most people respect. Filing and paying taxes are not only legal issues but also moral issues, so it is right and proper to file and pay taxes, which is a part of life. The United States is also a country with a relatively sound legal system where tax law is regarded by most American citizens as a golden rule that must be observed. Through the precipitation of history and culture, awareness of paying taxes has been internalized as a natural habit of people, creating conditions for the governance of the hidden economy in the United States.

458

8.3.2.2

8 International Experience in Regulating …

The Specific Measures Taken by the U.S. to Govern the Hidden Economy.

Tax Reform to Effectively Restrain the Hidden Economy Gradually Reducing the Tax Rate The heavy tax burden can lead to the transfer of many production and business activities from “above ground” to “underground”, breeding tax evasion, illegal business and other hidden economies. Therefore, the US Congress adopted a minimum tax system and implemented a tax optimization system with a wide tax base and low tax rate. For example, the U.S. Congress passed the tax reduction bill in May 2001, reducing the minimum personal income tax rate from 15 to 10% in that year; the maximum tax rate was reduced from 39.6 to 35% by 2006; the three grades of tax rate of 36, 31 and 28% are reduced by 3 percentage points, respectively; the exemption of inheritance tax increased from US$675,000 before tax reduction to US$1 million in 2002 and US$3.5 million in 2009, and the highest marginal tax rate has been reduced from 55 to 45% year by year; the inheritance tax was abolished and only the grant tax was retained in 2010. Increasing Penalties To make the tax law deterrent, the United States had increased penalties for taxrelated cases and strengthened efforts in the recovery of tax payments in tax reform. In addition, the United States adopted tax reform measures such as filling tax loopholes, optimizing the tax structure, improving tax flexibility, strengthening budget management, and accelerating tax and fee reforms. To a certain extent, the development of the hidden economy had been restrained, and the loss of tax revenues had been reduced.

Building a Complete Anti-money Laundering Mechanism Establishing a Sound Anti-money Laundering Legal System Since 1970, the US Congress has been committed to making anti-money laundering laws and promulgated a series of laws and regulations, such as the Bank Secrecy Act, Money Laundering Control Act, Annunzio-Wylie Anti-Money Laundering Act, Anti-Money Laundering Act of 1999, Patriot Act, Bank Secrecy Regulations, etc. The traditional bank secrecy guidelines had been reformed, requiring financial institutions to report and record cash transactions; Patriot Act passed in 2001 put forward new requirements for anti-terrorism financing and the construction of financial crime information networks and increased civil and criminal liabilities of money laundering. In addition, according to their respective responsibilities,

8.3 Prevention and Management of Hidden Economy

459

different regulatory agencies in the United States have combined the anti-money laundering work of financial institutions with business compliance issues and issued antimoney laundering-related industry rules to guide financial institutions’ anti-money laundering and business supervision. Increasing Penalties for Anti-Money Laundering The United States has dealt with money laundering crimes seriously and strictly, and did it with speed. Among criminal offenses, money laundering is classified as a federal felony, and offenders will be subject to severe criminal penalties once the money laundering offense is convicted; in civil penalties, loose judicial interpretations of money laundering crimes are implemented, and severe penalties are given to offenders. For example, the “Patriot Act” promulgated in 2001 imposes a fine of more than twice the transaction amount but not more than 1 million US dollars on institutions suspected of participating in terrorist financial activities. The anti-money laundering punishment mechanism established by the United States on the basis of corresponding laws and regulations imposes great penalties.

Improving the Tax Collection and Management to Combat Tax Evasion Implementing a Personal Income Declaration System The United States adopted a self-declaration payment method. According to the federal, state and local tax laws, taxpayers, including the president, are expected to fill out an annual income tax return and report their taxable income and payable tax. It is also stipulated that anyone who receives a large amount of gift money should regard it as part of their income and must declare and pay income tax according to the regulations; otherwise, he will be accused of tax evasion; officials who receive valuable gifts must also declare the tax. Once the tax bureau determines, those who ignore the tax laws and have not made any declaration will face the repayment of tax and heavy fines. Adopting Unique and Effective Audit Measures In one way, the IRS has financial detectives who specialize in auditing the income and expenditure of the wealthy and are extremely experienced in discovering the hidden wealth of some wealthy businessmen. Large and medium-sized companies often face on-the-spot checks and audits by the IRS, which uses a variety of techniques to conduct financial audits on small companies. In addition, the United States set up special financial supervision agencies. To pay for large items in cash, the purchaser needs to fill out a form and send it to this financial supervision agency for a special investigation that examines the legality of the purchaser’s cash source. Only in this way can tax evasion be effectively prevented.

460

8 International Experience in Regulating …

Strengthening Tax Source Monitoring In the United States, it is required by the law that transactions must be transferred through bank accounts except for small transactions. To open an account in a US bank, you must have a legal identity proven by a social security number for authentication and authorization, and the social security number is also used as a tax code by the taxation department. Due to the common features of the codes, the taxation department can easily exchange information with other departments and use computers for centralized processing to accurately grasp the taxpayer’s taxable income status and effectively supervise it. In addition, taxpayers’ tax penalties will be recorded by the tax authorities. A taxpayer’s personal credit can be examined by checking his credit history. Strengthening the Construction of Tax Information System The United States focuses on strengthening the taxation information system, with the construction of 3 tax collection service centers and 1 tax information processing headquarters. The computer network for tax collection and management has run through the entire process of tax collection and management and combined it with photoelectric technology and automation technology. As a result, it accelerated the efficiency and quality of tax collection and management and promoted the prevention and governance of the hidden economy. In the United States, taxpayers can pay taxes in any government administrative service center, banks, or online platforms. In terms of tax inspection, the taxpayer’s production and business information and related tax data can be easily obtained only by entering into the computer the taxpayer’s personal national security number and the corporate code of the legal person.

8.3.3 Italy—An Example in Western Europe 8.3.3.1

The Background of Mechanism of Prevention and Governance of Hidden Economy in Italy

The Historical Background of Italy’s Hidden Economy In Italy, the hidden economy is often called the “underground economy.” Italy is an established capitalist country with a long-term and large-scale hidden economy. For a long time, Italy has been generally called “a poor country full of rich people.” Historically, Italy has suffered severe inflation and unemployment. However, the huge hidden economic income has brought Italians comfortable lives. As an Italian scholar Mattillo said, “The so-called underground economy in Italy is a genius masterpiece of my compatriots, and the second miracle that saved Italy from economic collapse.” The economic miracle in Italy after World War II was established under the support of the hidden economy.

8.3 Prevention and Management of Hidden Economy

461

The Institutional Background of the Hidden Economy in Italy A huge hidden economy in Italy is caused by an extremely imperfect legal system and Italians’ contempt for the legal system in history. In Italy, quite a few people ignore the law and secretly engage in illegal occupations. In addition, Italy’s taxation system is complex, and the tax rate is high. The government’s lack of supervision over tax evasion has caused many economic activities to be out of government statistics, forming a large-scale hidden economy.

The Status Quo of Italy’s Hidden Economy The hidden economy is still one of the pillars of the Italian economy with common tax evasion, which has seriously affected the market order and caused unfair distribution and disparity between the rich and the poor. This status quo has also made more people take risks to engage in hidden economy and illegal activities. Those who can evade taxes and make opportunistic tricks can obtain many illegal benefits, while those who rely on their skills to earn wages suffer greatly. There is an inversion of income between law-abiding and law-breakers, causing more serious social injustice.

8.3.3.2

Italy’s Prevention and Governance Measures Against the Hidden Economy

Strengthening Tax Collection and Management of Hidden Economy First, the Italian Ministry of Finance has a financial guard armed with more than 20,000 people, the tax police. The tax police are responsible for the investigation of tax evasion, the inspection and collection of customs duties, and the maintenance of taxation order. Second, Italy has a sound tax reporting and accounting visa system. For those who intend to evade taxes, the tax authority would publish their names and the income they declared, which will lead the whole society to supervise and punish tax evaders. Third, in Italy, most enterprises and even individuals would ask accountants to build accounts and fill out declaration forms on their behalf. Accountants need to keep track of all government decrees and laws approved by the parliament or otherwise they will be punished heavily once they are found by the financial police to make a mistake like deliberately or unintentionally choosing the wrong tax form.

Improving Citizens’ Awareness of Paying Taxes According to Law The Italian government pays attention to raising citizens’ taxation awareness, and the National Treasury Management Administration has played an important role in this regard. The administration has made many efforts to strengthen the communication between the government and taxpayers, which has strengthened citizens’

462

8 International Experience in Regulating …

trust in taxation. The National Treasury Management Administration has set up a consultation telephone and a special website so that citizens can keep abreast of the country’s latest tax policies and related tax information without leaving their homes. At the same time, taxpaying is promoted by publishing free publications, holding activities regularly in various places, etc.

Adjusting Tax Policies and Improving Tax Management The core content of the Italian government’s tax policy adjustment is to simplify tax procedures. The Italian government emphasizes that simplifying taxation procedures can reduce the intermediate links of citizens’ tax payments, improve the efficiency of tax authorities, and achieve the purpose of effectively preventing the hidden economy. An important measure taken by Italy to improve tax management is the trial of “agreement-based early taxation”. Italy’s tax system is quite complex, with a wide variety of tax categories. To avoid fraud in the tax collection process, the government tried an “agreement-based early tax collection” method; that is, taxpayers or enterprises made a comprehensive estimate of taxable income in the next two years and declared the tax payable to the tax authorities in advance. The tax department will give these individuals or companies preferential tax rates. The government hopes this action can greatly reduce the chance of taxpayers evading taxes.

8.3.4 India—A Major Asian Country Carrying out Economic System Reform 8.3.4.1

The Background of India’s Prevention and Governance of the Hidden Economy

The Status Quo of India’s Hidden Economy India’s hidden economy is large-scaled and covers a wide range of fields. In India, tax evasion exists in almost all economic fields. According to statistics from the taxation department, the taxpaying population in India is less than 3% of the total population. Moreover, in India, the hidden economy also exists in some legal economic activities. For example, doctors, judges and teachers, although engaged in a legal economy, may also obtain legal but nontaxable income through their medical treatments, legal consultation, and off-campus teaching. Hidden economic activities related to the Indian economy are not uncommon abroad. If the hidden economic activities that occurred outside India are also included, the scale is likely to be equivalent to 70% of the official data. The well-known Indian business magazine Business World believes that the hidden economy that prevailed in India in the 1970s is now becoming more prosperous.

8.3 Prevention and Management of Hidden Economy

463

The Consequences of India’s Hidden Economy First, the hidden economy has severely damaged the country’s macrocontrol system. Former Indian President Reddy said, “The underground economy has become a serious threat to national economy. It has frustrated the entire economic process and failed many economic policies.” India’s hidden economy has distorted the national economic system and interfered with government statistics. At the same time, erroneous social indicators are prone to affect the implementation of macroeconomic regulation, resulting in the failure of public policies to achieve the expected results. Second, the proliferation of India’s hidden economy has severely damaged the country’s distribution system and mechanism, causing unfair social income distribution. Most of the hidden economy in India is distributed in urban areas with fast economic growth where the income of the high-income population mainly comes from hidden income, and there is a large consumption gap between classes. Arun Kumar’s research shows that, regardless of the hidden income factor, the gap between the per capita income of the lowest 40% of the population and the highest 3% of the population in India from 1995 to 1996 is 1 to 11.5. If hidden income is included, the gap between them is 1:57. Finally, the hidden economy increases the difficulty of government economic management. In one way, the hidden economy destroys the rational allocation of resources, leading to the use of violence by evil forces to occupy a large number of social resources; in another, the hidden economy destroys fair market competition and causes confusion in market objects. At the same time, the integration of the hidden economy with corruption and power rent-seeking has further weakened the government’s ability to manage the economy.

8.3.4.2

An Analysis of the Causes of Difficulties in Managing India’s Hidden Economy

Although the Indian government has been constantly launching “cleanup” against the hidden economy, the hidden economy still accompanies the development of the Indian economy like a ghost. There are two main reasons why India’s hidden economy is in a difficult position to manage.

Systemic Transition The Indian model has gone through two major stages. The first stage was from India’s independence to the end of the 1980s, when the economic system was referred to as the Nehru mixed economic system. Under this model, the public economy as the backbone of the national economy and the private economy coexisted and played their respective roles under the unified plan of the federal government. While encouraging the development of the private economy, the Indian government has also adopted many restrictive measures, such as the implementation of monopoly

464

8 International Experience in Regulating …

and trade conduct laws and an industrial license system. The scale of the hidden economy in India continues to grow due to strict government control and the shortage of various materials. The second stage was the transition to a free-market economy model after the 1990s, when the “substantial reform” of India’s economic policies and management was launched. However, there are still many defects in the market economy after the transition. The first is the lack of an economic supervision mechanism that effectively regulates and restricts the order of the market economy; the second is the imperfect market system that does not cover various commodity and factor markets; and the third is the unregulated labor market and the prominent dual employment structure. People working in government agencies, universities, large state-owned enterprises, and private companies only account for 5% of the total labor force. The remaining 95% of the labor force is concentrated in small-scale organizations with relatively low wages and basically no taxes. The fourth is the impropriate relationship between the government and the market. There are too few laws restricting the power of the government. As a result, too much government power interferes with the economy and the market. The various deficiencies of the market system under the transitional economic model have led to the large-scale breeding of hidden economies and increased the difficulty of governance.

Systemic Development Incomplete Taxation System In India, there are multiple types of taxes with an endless list and complicated taxation procedures with a system of central, federal, and local layers. The heavy tax burden, multiple types of tax and complicated procedures have led to poor taxation effects and serious and common tax evasions. Especially before the reform in 1991, many high-income earners resorted to concealing or even not reporting their income due to the relatively high personal income tax rate. Departments of economic activities that create high incomes often adopt methods of overreporting costs and underreporting income, making many economic activities exist in a hidden manner. In addition, India lacks relevant systems to effectively raise the awareness of taxpayers. The imperfection of the taxation system has also caused tax evasion ideas to take root in people’s minds. Unsound Social Security System Establishing and perfecting the social security system plays an important role in social and economic development and the prevention of hidden economic growth and reproduction. India’s current social security system is dominated by an old-age pension, combined with a public health care system, an unemployment insurance system provided by employers, and a poverty alleviation plan for the elderly. However, the existing social security system has many shortcomings. First, the coverage rate

8.4 Construction of Income Monitoring System

465

of old-age pensions is too low. Second, the management of social security funds is problematic. There is no citizen ID system and an old-age pension information management system, so it is difficult to grasp the basic situation of pensioners, and thus, the problem of false claims of pensions is prominent. Third, government fiscal expenditure is under pressure. Fourth, there is a deficit crisis in the defined-paying workers’ annuity plan. In addition, as a typical agricultural country with a large population, India is also under great employment pressure. The shortcomings of the social security system make it difficult for unemployed individuals to secure their lives and thus for the hidden economy to be eliminated.

8.4 Construction of Income Monitoring System The construction of an income monitoring system is a prerequisite and guarantee for a standardized income distribution order that supports the stable development of the national economy. Developed countries have made dramatic progress in the construction of income monitoring systems, which is of guiding significance to the construction and improvement of China’s income monitoring system.

8.4.1 Income Monitoring System of Developed World Developed countries have implemented a series of policies to build income monitoring systems, which are mainly divided into two categories: national income monitoring and partial income monitoring. National income monitoring includes financial real-name systems, cash management, personal credit systems, and tax inspections. Partial income monitoring covers a property declaration system and press supervision. The financial real-name system stipulates that anyone who engages in financial activities through a financial institution must adopt a real name and show a valid certificate for the institution to confirm his identity before transactions and its records. This system plays an important role in cracking down on tax evasion, money laundering and corruption to realize social justice. The financial real-name system is a financial management system that has long been implemented in Western developed countries, and it is also necessary when a country’s economic development reaches a certain stage. In theory, the scope of cash transactions and payments should be narrowed, and the amount of use should be reduced with the improvement of bank settlement methods. However, this is not the case in the actual situation. Therefore, the United States and other developed countries have also taken measures to strengthen cash management to promote the standardization of income distribution order.

466

8 International Experience in Regulating …

Third-party personal credit activities have improved consumer credit operations and raised national awareness of credit. The United States adopts a market-oriented personal credit system and has established a sound and effective legal system and appropriate government supervision; Europe uses a public credit system focusing on protecting personal privacy, although personal credit information can be collected compulsorily by law or resolution; Japan adopts a membership-based model that emphasizes information sharing between members. In addition, tax authorities in developed countries generally attach great importance to check work. In one way, they invest human, material and financial resources in inspection departments with the assistance of the technology and law. In addition, they strengthen the information management of tax inspection cases to improve the quality and efficiency of the check work. The Properties Declaration System, known as the Sunshine Act in the West, requires that detailed information about personal property owned by public officials be made available to specific organizations to prove that all economic income is legal during their service. In 1883, the British Parliament passed the Anti-Corruption and Clean Elections Bill, which was the world’s first law on property declaration. Since then, many countries have followed suit to establish their own property declaration systems and make corresponding institutional arrangements in legal form (Table 8.4). At present, Sweden, the United States, Germany and other countries have established a press supervision system, which is an important guarantee for a country to ensure the proper exercise of public power. The press supervision is to reveal and criticize undesirable behaviors to restrict violation of laws, minimize evil and Table 8.4 Legislation of property declaration in some countries and regions Country (Region)

Name of act

Time of legislation

Pakistan

Regulations on Conduct of Government Officials

1964

United States

Government Ethics Act

1978

South Korea

Public Officials’ Ethics Act

1981

Thailand

Royal Decree on Declaration of Assets and Liabilities 1981 by State Officials

France

Law on Transparency of Political Life Property

1988

Philippines

Public Officials and Employees’ Ethical Standards Act

1989

Taiwan Region

Public Officials’ Properties Declaration Law

1993

Mexico

Civil Servants Duties Act

1994

Canada

Conflict of Interest and Postemployment Behavior of Public Officials Act

1994

Kazakhstan

Anti-Corruption Law of the Republic of Kazakhstan

1998

Macao

Macao Properties Declaration Law

2003

Source Huang (2007)

8.4 Construction of Income Monitoring System

467

publicize virtues. Despite having no enforcing power, press supervision is extremely influential, so it is very helpful to standardize the income distribution system.

8.4.2 World Economic Power—The United States 8.4.2.1

Strengthening Cash Management

Controlling Cash Flow Some people obtain their loans that can be withdrawn from banks to bypass bank accounts, and then they do not need to worry that their money will be frozen and deducted by tax authorities or courts, fueling tax evasion and debt evasion. Therefore, the United States took some relevant measures early to control the flow of cash. For example, American law restricts carrying large amounts of cash. Anyone who fails to report amounts of US$10,000 or more is a lawbreaker. In addition, American people need to fill out tax returns in duplicate that are submitted to tax authorities by employers and employees when they receive extra income out of salaries. As a result, it is difficult for gray income to exist in the United States.

Standardizing Cash Transactions The United States pays attention to the use of market economy measures to guide and standardize cash transactions. The three most important means are listed below: (i) The economic and financial order, especially the credit order, has been effectively rectified and standardized, rebuilding social credit. (ii) With the increase in the electronic construct in the financial sector, electronic financial instruments, including multifunctional ATM cards and credit cards, have been actively launched and promoted, making settle payments more convenient and efficient. In this way, enterprises and individuals are encouraged to voluntarily choose the bank transfer settlement, thus reducing the use of cash. (iii) The United States has also increased the cost of using cash by charging or taxing every cash transaction to guide enterprises and individuals to reduce the use of cash. Large cash transactions are taxed to compensate for the loss of tax evasion potentially caused by cash transactions.

8.4.2.2

Establishing an Individual Credit Reporting System

The U.S. credit reporting system adopts a market-oriented model, which means nationwide credit files are under the management of commercial service companies called credit bureaus. Credit bureaus collect individual financial information, based on which credit reports are created. The commercial management of credit files by credit companies is determined by the following conditions.

468

8 International Experience in Regulating …

First, America has a good market environment as well as a sound legal system. In terms of consumer credit, there are laws such as Truth in Lending Act, Fair Credit Reporting Act, Equal Credit Opportunity Act and Fair Debt Collection Practices Act. Second, consumer credits are fully fledged in the United States. Specifically, credit bureaus use advanced credit rating technology and scientific credit risk models to provide comprehensive, accurate and timely evaluations of consumers and to help credit providers make fast and scientific credit decisions. Third, consumer credit records are complete. Banks and credit bureaus have access to comprehensive credit information more easily with the popularity of the Internet and digital money. Fourth, there is a high level of social credit awareness and a mature “credit philosophy” in America. The Freedom of Information Act in 1966, the Federal Advisory Committee Act in 1972 and the Government in the Sunshine Act in 1976 all require that governments disclose reasonable personal credit information, but no law requires the private sectors to provide information for credit companies. In reality, however, information providers often provide data voluntarily and free of charge for the creation or updating of credit files. Meanwhile, they do not enjoy any preferential treatment while using credit files.

8.4.2.3

Strengthening the Management of Tax Audit

Making Use of Advanced Technology At present, the U.S. tax authorities have a series of tasks performed by computer systems, including tax forecasting, tax declaration, tax registration, data storage and tax auditing. For example, the Internal Revenue Service (IRS) uses the National Research Program (NRP) to rate taxpayers’ declarations. The higher the score is, the more likely the taxpayer is to be audited. At the same time, the IRS compares the taxpayer’s declarations with data from third parties so that it can audit declarations with differences. In addition, the IRS generally implements the Taxpayer Compliance Measurement Program (TCMP) every three years.

8.4.2.4

Classification of Audit and Management of Audit Team

In terms of tax audit methods, the U.S. tax auditors have classified different industries with different focuses, with training manuals especially prepared for 40 industries such as real estate and aviation. Additionally, the U.S. has made a detailed division and analysis of tax audit cases according to tax types and causes to make further improvements. In terms of audit team management, the U.S. strictly stipulates that one must have a university degree or a bachelor’s degree in business to become a tax auditor. Furthermore, there is a grading system for tax auditors so that only auditors who

8.4 Construction of Income Monitoring System

469

have reached the level are qualified to conduct audits on enterprises. As such, the high quality of the audit team ensures the completion of audit work.

Strengthen Cross-Regional and Cross-Departmental Communication and Cooperation The United States, as a country with the federal tax system, often finds it hard to coordinate information under the framework of the federal, state (provincial) and local taxation systems. For this reason, it has taken following measures. First, it pays attention to the coordination of audit information between departments. Second, it strengthens the communication between audit information systems. The US Internal Revenue Service and state tax bureaus have liaison officers to ensure open communication and collaboration between them.

8.4.3 High-Welfare Country—Sweden 8.4.3.1

Strengthening Press Supervision

The press has the right to know and report, and no government may interfere with news reporting, according to Swedish law. There are two main aspects of Swedish law’s impact on public opinion monitoring. On the one hand, the freedom of public opinion is guaranteed by law without being interrupted by the outside world to ensure accurate and powerful reporting. Swedish society attaches great importance to the fundamental and central roles of freedom of expression, freedom of the press and freedom of information. For example, the Freedom of the Press Act, in defining the freedom of the press, places special emphasis on the fact that legal liability arising from the content of publications can only be prosecuted through the courts. On the other hand, public opinion supervision is standardized in accordance with law and guided to develop in the right direction. Swedish law protects the freedom of public opinion supervision and constrains public opinion. For instance, the publication of newspapers and other periodicals must be approved by the government under Sect. 5 of the Freedom of the Press Act. Only in this way can public opinion supervision become scientific and effective.

8.4.3.2

Setting up Watchdog Organizations

Sweden’s watchdog organizations are scientifically set up and well managed. The Swedish press has set up various organizations to safeguard common interests and coordinate the interests of different media outlets, among which there are two main organizations called the Press Council and the Office of the Press Ombudsman.

470

8 International Experience in Regulating …

The Press Council was founded in 1916 by the National Publishers Club, the Swedish Union of Journalists and the Swedish Media Publishers’ Association. It is responsible for reviewing the conduct of the press and making decisions on whether it violates the code of ethics. Any handling of complaints of journalistic ethics violations is a final judgment. These functions serve two purposes. First, it ensures the organization of public opinion monitoring because public opinion media are monitored by internal organizations while monitoring external affairs. Second, it combines various types of public opinion media together, substantially increasing public opinion monitoring. The Office of the Press Ombudsman is a mechanism of rights protection and legal oversight. It is a nongovernmental body, although it belongs to public authorities. The Office of the Press Ombudsman has introduced the national supervisor system into the field of press self-regulation, so it not only defends freedom of press and expression but also safeguards professional ethics and addresses complaints from the public.

8.4.3.3

Making Full Use of Information Technology

With the highest Internet penetration rate of Sweden, the Swedish government proposed establishing an e-government focused on citizen requirements after recognizing the importance of it from the very beginning. E-government can improve the efficiency of government work, reduce administrative costs, enhance the transparency and accountability of government administration and provide instant access to feedback from public citizens. Additionally, the Swedish government regards e-government as an important means of accelerating democracy construction. With journalism shifting their reporting positions to the Internet, Sweden’s emphasis on people’s freedom of expression has provided a new way for public citizens to monitor the Party and the government.

8.4.4 Newly Industrialized Country in Asia—Korea 8.4.4.1

Properties Declaration System in Korea

Applicable Personnel Scope of Declaration The applicable personnel scope of the Properties Declaration System currently in Korea is as follows: (i) (ii)

President, Prime Minister, State Councilor, and other public officials in national government positions. Diplomatic civil servants at the fourth level or higher and civil servants in the layout department of national security.

8.4 Construction of Income Monitoring System

(iii) (iv) (v) (vi) (vii)

(viii)

(ix) (x)

471

Judges and prosecutors. National and local civil servants holding general positions above fourth grade and civil servants who receive equivalent remuneration in other positions. Heads of local governments and members of local councils. Police civil servants above chief police officer. Presidents, vice presidents and permanent supervisors of government-funded organizations and organizations receiving government donations and subsidies, presidents, vice presidents and supervisors of the Bank of Korea, chief prosecutors of banks and presidents and permanent supervisors of the Central Association of Agricultural Cooperatives, the Central Association of Aquaculture Cooperatives and the Central Association of Animal Industry Cooperatives. The presidents, vice presidents, deans of colleges, deans of graduate schools and deans of specialized colleges in the education civil service as well as directors, heads and commissioners of education in Seoul, municipalities and provinces. Officers above the rank of colonel and equivalent military service officers. Appointees in the following organizations and groups: organizations funded by the government, organizations and groups that receive donations and subsidies from the government and organizations and groups that are entrusted to execute government operations, institutions and organizations that are required to be recognized or selected by the head of the central administration and the head of the local governments at all levels as well as local communities and local corporations established under the Local Industrial Enterprise Act, agencies and groups that receive donations and subsidies from local governments at all levels and agencies and groups that are entrusted to execute local government operations.

Filing Time and the Scope of Property to Be Registered Public officials are required to file a declaration within one month of assuming office, a regular declaration in January of each year, and a declaration of retirement from office must be filed within one month of retirement from office, according to Korean Properties Declaration System. The objects of registration in Korea include oneself, one’s spouse, and one’s immediate family (except for daughters who have been married). The properties they are required to register explicitly include: ownership of real estate, mineral rights, land use and resale rights, fishing rights and other rights which are determined by the regarding real estate regulations as well as movable property, debts, marketable securities, debts and intangible property rights such as cash (including checks) in a total amount of $1000 or more, deposits of over $10 million, gold and platinum of $5 million or more held by the owner, etc.

472

8 International Experience in Regulating …

Property Registration Authority There are thirteen types of statutory registration authorities in Korea, including the National Assembly Service for members of the National Assembly and civil servants affiliated with the National Assembly, the Court Administration Service for judges and civil servants affiliated with the courts and the relevant local governments for civil servants affiliated with the local governments. Korea has established the Public Officials Ethics Commission to review property registration, which is responsible for examining and dealing with property registration matters.

8.4.4.2

The Real Name Financial System

The Method, Content and Effect of Implementing the Real Name Financial System The enactment of legal provisions needs to be discussed and passed by the National Assembly according to the general legislative procedure. However, the Korean government has adopted the mandatory approach of a presidential emergency order for the Real Name Financial System to avoid unnecessary side effects caused by the delay. Its implementation covers all financial institutions and financial assets to prevent the transfer of funds and maintain a balance. However, in terms of comprehensive taxation of financial assets, both individuals and legal entities were required to use “real names” for transactions with financial institutions on August 12, 1993 due to equipment problems. One of the purposes of the Real Name Financial System is to know the owners and flow of financial assets, rather than making it a priority to hold people accountable for past mistakes and liabilities. To minimize social shock, a more lenient treatment of past pseudonymous assets has been adopted.

Confidentiality Measures of the Real Name Financial System Korea has enacted laws to protect the Real Name Financial System to comfort uneasy citizens with the increasing clarity of financial transactions and tax revenue. The conditions and procedures for accessing financial information for public interest purposes are very strict, and the authorities eligible for access are limited to the courts, tax authorities, the Ministry of Finance, the Korea Bank Supervisory Service, the Securities Supervisory Service and the Insurance Supervisory Service. Severe penalties have been established for violators of the Real Name Financial System, including fines of up to 5 million won for employees of financial institutions, imprisonment of up to three years or fines of up to 20 million won for those who violate the confidentiality rules and penalties for those responsible personnel.

8.5 Reference from International Experience

473

8.5 Reference from International Experience 8.5.1 International Experience in Handling Labor-Capital Relations At different stages and levels of economic development, countries around the world attach distinct importance to labor relations and handle them. In 1955, Kuznets proposed through the analysis of historical data of Britain, the United States, Germany and other countries that, with economic development, the income distribution inequality in these countries experienced a process of first widening and then narrowing; that is, the income gap and economic development level presented an inverted U curve, which was later known as the “Kuznets curve. The evolution of labor relations in developed countries has in fact shown the inverted U curve. Therefore, for developing countries, it is necessary to have a profound reflection and take measures to narrow the income gap.

8.5.1.1

A Sound System of Labor Laws and Regulations

As two interest groups, labor and capital develop into two opposing forces when they have different opinions and their interests are irreconcilable. Law plays an important role in the evolution of labor relations and the settlement of labor conflicts. Reviewing the handling mechanisms for labor relations in developed countries, we found that these labor laws and regulations are relatively complete. For example, although the United States is a common law country, it has not only case law-based legislation but also a series of statute laws. For diverse labor matters, the United States has different legislation, and these legal provisions are clear, with strong operability. The relatively well-developed system of labor laws fully protects the rights and interests of workers. The German labor law system is very complex but comprehensive. It aims to protect the legitimate rights and interests of employees while taking into account the interests of employees, employers and the unemployed. Due to the practice of the codetermination system between employers and employees in Germany, its relevant labor legislation also shows this characteristic. Although Germany does not have a labor code, it has relatively complete individual provisions.

8.5.1.2

A Strong Labor Union System

In addition to the mandatory provisions of the law, the full game between labor and management is also an important way to ease labor relations. Workers need collective strength to back up their dialog with employers. Therefore, as a rights protection organization for workers, labor unions should play a role in this regard. Countries with developed market economies have strong trade union systems, which promote

474

8 International Experience in Regulating …

the coordinated development of labor relations in these countries. Labor unions in Western developed countries are spontaneous mass organizations composed of laborers and their leaders. The trade union is independent of any other organization or institution and only represents the interests of laborers. Labor union puts labor in a relatively balanced position in the negotiation with the management, thus changing the situation in which individual workers are at a distinct disadvantage in labor-management relations and playing a powerful role in fighting for the interests of labor. The main objective of labor unions is to raise wages and increase the employment of union members through collective bargaining between labor unions and employers. Collective bargaining should use a set of rules agreed upon by the two parties or society to restrain wages and employment relations. Labor union also plays an important role in social and political life, preventing the promulgation of policies and laws that are unfavorable to labor.

8.5.1.3

Collective Bargaining System and Related Support Measures

Collective bargaining, the core of the labor relations system in market economies, is used to negotiate labor relations and resolve labor disputes. Through bargaining, labor and management communicate with each other and finally form a collective agreement. The auxiliary negotiation measures for collective bargaining mainly include conciliation, mediation, and arbitration. If employee representatives are unable to resolve their differences with the employer through meetings and collective bargaining, they may seek the assistance of a third party. In addition to strikes, arbitration, or arbitration of dispute, is an important means of resolving labor-management bargaining disputes.

8.5.1.4

The Government (Public Sector) Assumes Responsibility for Protecting the Interests of Labor

The governments of developed market economies play an important role in the tripartite mechanism of coordinating labor-management relations and are committed to taking responsibility for protecting the interests of laborers. In general, relatively harmonious and stable labor-management relations and regulated labor markets in developed market economies depend on government regulation in terms of laws, labor inspections, collective bargaining, and handling of labor disputes. Law is the regulator of social relations. In developed market economies, government legislation on labor-management relations is mainly concerned with two aspects: legislation on collective rights and legislation on the legal rights of individual workers. The legislation on collective rights mainly regulates the right of workers to form labor unions and participate in collective action, as well as some provisions on collective bargaining. These laws, while protecting workers’ right to engage in collective action, also restrict other collective actions of workers. The legislation on individual legal rights is the basic law applicable to all employees and includes the Labor Standards

8.5 Reference from International Experience

475

Law, the Labor Safety and Health Law, the Minimum Wage Law, and the Workmen’s Compensation Insurance Law. These laws establish minimum labor standards and protect the legal rights of individuals. Developed market economies have labor inspection agencies that are subordinate to the government’s labor department and are staffed by full-time inspectors to supervise the implementation of labor laws and other behaviors related to labor relations. In addition, the role of government in collective bargaining varies greatly from country to country. In general, however, the government has been an advocate for encouraging free bargaining between labor and management. Finally, in labor-management conflicts, timely and appropriate government intervention is necessary when labor and management cannot solve the problem through self-negotiation. In industrial relations in developed market economies, the government will provide mediation and arbitration services on a voluntary basis if management has the advantage; in contrast, the government will adopt compulsory mediation and arbitration measures to balance the conflicts of interest between employers and employees if labor unions are dominant.

8.5.2 International Experience in the Supervision and Restriction of Public Power Countries around the world have adopted a series of measures to restrict public power. These measures have achieved certain anti-corruption and anti-monopoly results, preventing excessive interference of public power in private power, which are worthy of our country’s reference.

8.5.2.1

Struggle with Corruption

A Sound Legal System Summarizing the mature practices of countries around the world, special laws against corruption include, at a minimum, the Freedom of Information Act, which guarantees transparent administration and strengthens government accountability; the Law on the Declaration of the Assets of Public Officials, which enables public officials to reject improper income and reduce trading power for money; the Law on Anti-Money Laundering, which includes the proceeds of public corruption in the scope of criminal law; and the Law on the Ethics of Public Officials, which comprehensively regulates the use of authority by public officials. Many countries have enacted moral laws and regulations and anti-corruption clauses, which effectively restrict the breeding of corruption of public power through law enforcement to regulate the order of income distribution.

476

8 International Experience in Regulating …

Specialized Anti-Corruption Agencies Internationally, many countries have established specialized anti-corruption agencies, such as the Central Bureau of Investigation (CBI) in India, the Bureau of AntiCorruption Investigation (BACI) in Singapore, the Independent Public Prosecutor (IPA) in the United States, and the National Economic Crime Agency (NECA) in Sweden. These anti-corruption agencies, with special legal protection, have been so effective in the fight against corruption that they are widely used around the world. These anti-corruption agencies mainly include the following three characteristics. First, these agencies have clear responsibilities and have greater authority to handle cases independently. Second, they are more able to enforce the law impartially and easily gain public trust compared to other agencies. Third, they have strict regulations and a complete institutional system and are subject to special inspection and supervision.

Give Full Play to the Role of Supervision by Public Opinion The first is news supervision. For a long time, news has been called the “fourth power” in the West in addition to legislative, judicial, and administrative power. In the United States, Sweden, Canada and other countries, the government can provide the Press with “insider” information about the government and parliament, as long as it does not reveal national defense or diplomatic secrets. The second is public supervision. Western countries regard public opinion supervision as an important means to improve government governance and prevent corruption in government agencies and public servants. In Finland, for example, ordinary citizens have the right to file a direct complaint against the Supreme Attorney General bypassing immediate leadership. The regularity of public scrutiny deters the government and public officials from doing anything wrong, thus effectively limiting the abuse of public power, although public scrutiny has little real power.

Strict Management System for Civil Servants The strict civil service system effectively ensures the integrity and self-discipline of public servants and inhibits corruption and embezzlement. In summary, it mainly includes the following aspects. One is the public examination system, which is one of the important principles of the civil service system. Outstanding talents are selected through examinations for admission and are promoted through assessment; the second is the training and education system. Those who are about to be civil servants are trained before taking up their jobs. Integrity education is a compulsory part of their training; third, the system of recusal. For example, the Austrian Officials Act and the U.S. Conflict of Interest Prevention Act have clear provisions on this, effectively preventing corruption due to conflicts of interest; fourth, the job rotation system. A rotation system is implemented especially in some important positions with

8.5 Reference from International Experience

477

real power to prevent civil servants from forming an improper relationship network; fifth, the living security system. Many countries offer high salaries for civil servants to enable civil servants to have better living conditions and devote themselves to serving the country. For example, in Singapore, one of the most corruption-free countries in Asia, the “high pay for integrity” policy plays an important role in preventing the corruption of power and the privatization of public authority.

8.5.2.2

Break Administrative Monopoly

Administrative Monopoly Regulation Reform In Western countries, various factors have prompted the state to reform administrative monopoly. The focus of administrative monopoly reform is on market deregulation. Western countries have increasingly deregulated natural monopoly industries and public industries and encouraged the introduction of competition, which has gradually transformed the original natural monopoly industries into competitive industries. By the 1980s, deregulation had reached its peak in a growing number of fields and countries. The saying “The market and competition are the main regulation” has become a popular slogan in Western countries.

Legislation to Restrain Administrative Monopoly The first step against monopoly in Western countries is legislation. The United Kingdom has long established effective competition through industry legislation, such as the Telecommunications Act, the Electricity Act, and the Water Supply Act. Developed Western countries require governments and relevant departments to use competition and antitrust laws while regulating economic monopolies to meet the international requirements of fair competition. For example, in the late 1970s, the United States established the principle of “equal treatment” in its anti-monopoly law, stipulating that government administrative agencies are also subject to the adjustment of the monopoly law when they implement monopolies to restrict competition.

Marketization of Public Goods and Services Since the 1980s, Western countries have aroused a wave of administrative reforms. In this reform, the traditional monopoly mode of public service is gradually replaced by a market-based mode of supply. Establish a diversified production and supply model based on different public goods and services to accelerate the marketization of public services and completely break the administrative monopoly.

478

8.5.2.3

8 International Experience in Regulating …

Strengthening Government Performance Management

The widespread use of performance evaluation techniques in the public sector has made them an important tool for driving government reform and management innovation. Government performance management models in Western countries are highly specific and diverse. First, in terms of assessment subjects, the performance management of governments in developed countries emphasizes the pluralism of assessment subjects and the extensive participation of citizens. From the selection of evaluation items to the selection and determination of evaluation content, indicators, and criteria, to the monitoring of the project implementation process, to the disclosure of performance reports, all of these reflect the wide range of participation. Second, in terms of evaluation indicators, the government emphasizes a “resultsoriented” performance evaluation index system, which means that the measurement of government performance should be oriented to the ultimate service effect and social benefit. The design of government performance evaluation index systems in developed countries, such as the United States and the United Kingdom, is concerned with the final effect of government organizations in performing their duties. Third, in terms of evaluation management institutions, developed countries attach importance to the establishment of special evaluation organizations so that the evaluation results are reliable and authoritative. For example, in the United States, the National Performance Review (NPR) has been established within the federal government, and the General Accounting Office (GAO, renamed the Government Accountability Office in 2004) has been established within the federal Congress to manage the assessment of government performance at the congressional level.

8.5.3 International Experience in the Governance of the Hidden Economy 8.5.3.1

Carrying out Tax Reform and Improving the Ability of Tax Collection and Management

One of the main reasons for the prevalence of the hidden economy in the world is tax evasion and avoidance. Many countries around the world have attached great importance to tackling this problem and have carried out various degrees of tax reform. First, simplify the tax system. Many developed countries have reduced their personal income tax brackets and eliminated some unnecessary tax breaks and exemptions. The tax database of the Organization for Economic Co-operation and Development (OCED) shows that 16 of its member countries reduced their tax brackets in the late 1980s, from more than 10 to less than 6 on average. In the case of the central government personal income tax, from 1986 to 1995, the number

8.5 Reference from International Experience

479

of tax brackets in Canada was reduced from 10 to 1. In addition, developing countries are actively pursuing tax simplification reforms, such as tax consolidation. In Central America, 20 of 25 taxes have merged, and the returns have been reduced from 125 to one. Second, the tax rate should be lowered to reduce the tax burden. Currently, many developed countries are reforming their tax systems to reduce the tax burden. In the United States, for example, income tax rates were as high as 52 percent before 1964, fell to 48 percent in 1964 and 39.3 percent in 2000; the average top corporate income tax rate in OECD countries fell from 42.2% in 1985 to 28.4% in 2006. Third, tax collection and management should be improved to prevent and combat tax evasion. In tax reform, developed countries are committed to establishing strict tax registration systems, diversifying tax returns, strengthening tax audits, and promoting informatization of tax administration. Among them, the informatization of tax collection and management plays an increasingly important role in preventing and combating tax evasion and in governing the hidden economy.

8.5.3.2

Reasonable Management of the Hidden Economy

The continuous expansion of hidden economies in Western countries has brought about increasingly serious social problems. The stability of the macroeconomic system is seriously threatened by tax evasion, trafficking in prohibited goods, and counterfeiting by workers in some sectors of the economy. In this regard, Western countries have embarked on an aggressive campaign against the hidden economy, squeezing its living space by making the best use of the situation to eliminate the negative consequences of this economy. The main measure to combat the hidden economy in various countries is to strengthen the regulation of SMEs. Many countries in the West have supported and encouraged the development of SMEs with policies, loans, taxes, personnel training, and market access to guide the hidden economy toward formalization. For example, in countries such as Mexico, businesses and individuals engaged in hidden economic activities have been granted permission to take up with legitimate production and labor, allowing them to be the subject of tax policies and health regulations.

8.5.3.3

Improve the Social Security Mechanism

A sound social security system plays an important role in preventing the growth and proliferation of the hidden economy. First, as a specific regulator, the social security mechanism can automatically regulate socioeconomic operations and balance the total social supply and demand, thus promoting the smooth development of the national economy. Second, it can effectively prevent unemployed and laid-off people from engaging in hidden economic activities when their basic livelihood is difficult to guarantee, thus establishing a good economic order and maintaining social stability

480

8 International Experience in Regulating …

and unity. Finally, a sound social security system can eliminate the worries of those in the workforce and motivate workers to give up their hidden economic activities.

8.5.3.4

Strengthen International Cooperation

To effectively control the hidden economy, many countries are now focusing on combating drugs, smuggling, and money laundering through international cooperation, including the following measures: The first is unilateral declarations. For example, the British government allows foreign countries to recover the proceeds of corruption and criminal profits deposited in British banks from all of their leaders, and it also prevents companies from bribing foreign officials through legislation. The second is bilateral cooperation. For example, the United Nations and the Government of Turkey have decided to cooperate because most of the heroin smuggled from Afghanistan to Europe is transported through Turkey, in addition to the United States and Colombia working together to combat the drug trade, The third is regional cooperation. The Group of Eight issued a report on money laundering, calling on all financial centers around the world to actively cooperate in the fight against money laundering. The fourth is international institutional cooperation. The United Nations has signed the United Nations Convention against Transnational Organized Crime to strengthen judicial and police cooperation among countries to combat money laundering, bribery and other economic crimes.

8.5.4 International Experience of Income Monitoring System Construction 8.5.4.1

A Sound Legal System

The legal system in developed countries has always been relatively complete. The United States, South Korea, and many other developed countries have ensured the establishment of property declaration systems in various forms of legislation. Laws such as the U.S. Ethics in the Government Act, Korea’s Ethics in Public Officials Act, and Canada’s Conflict of Interest and PostService Conduct for Public Officials Act strongly support the implementation of the Properties Declaration System. In terms of public opinion monitoring, countries such as Sweden and Germany have also enacted different laws that guarantee freedom of opinion and make the press and media play a role in supervision. For example, the Swedish Freedom of the Press Act of 1766, which has been amended and supplemented several times together with the Fundamental Law on Freedom of Expression, fully guarantees the independence, effectiveness and scientific nature of its supervision by public opinion.

8.5 Reference from International Experience

481

In addition, the United States, Japan and some European countries represented by France have well-developed legislation on personal credit systems. For example, the Equal Credit Opportunity Act in the U.S., the Credit Information Disclosure Act in Japan, and many other laws ensure a good market environment and help the implementation of personal credit systems.

8.5.4.2

Complete Personal Credit System

The personal credit economy in Europe, the United States and Japan is more developed. After more than 150 years of development, they have established a relatively perfect personal credit system and mature operation mechanism, which strongly protect and promote the personal credit economy. The establishment of personal credit systems in developed countries has accelerated the rapid development of consumer credit in various countries. Currently, personal consumer credit accounts for more than 30% of credit in Western developed countries. Personal credit is a prerequisite for receiving consumer loans and installment payments and can be called a “passport” for one’s survival in society. In the United States, every person involved in economic activities has a social security number and a corresponding account, which records personal financial transactions. After accepting a customer’s loan application, the bank inquiries about his or her credit situation through a unified network of dedicated networks and decides whether to lend, whether to grant concessions, whether to pay close attention to his or her economic credit situation, and even to take preventive measures. The personal credit system guarantees the integrity of both parties to the transaction, thus contributing to the efficiency and effectiveness of cooperation and promoting the development of personal consumer credit.

8.5.4.3

Make Full Use of Modern Technology

Western countries are more advanced in science and technology, which provides support to improve the income monitoring system. For example, the United States has made full use of network technology to promote the use of digital financial instruments, such as electronic bills, electronic wallets, and credit cards. Brazil’s e-procurement program has played a major role in the fight against corruption by making full use of modern technology, which not only effectively integrates government resources, improves government efficiency and transparency but also reduces the cost of both supply and demand. In addition, countries need strong support from modern technology in cash management. For example, the U.S. uses web-based technology to establish a National Treasury Management Information System to reflect cash flow in a timely manner. The system facilitates the office of financial services to have first-hand information on cash and debt management, thus improving management efficiency,

482

8 International Experience in Regulating …

and the budget office to prepare budgets based on relevant information and supervises budget implementation. At the same time, relevant supervisory agencies can also obtain information through the open platform of the system to conduct related performance audits and project evaluations, thereby improving the transparency of government administration.

8.6 Summary Learning from the advanced experiences of countries around the world will be beneficial for regulating the order of income distribution in China. By analyzing the specific mechanisms of dealing with labor-management relations, the system of supervision and control of public power, the measures of hidden economic governance and the construction of income monitoring systems in some countries, we mainly obtain the following experiences: To begin with, the following are worth learning in the handling of labormanagement relations. First, developed countries coordinate labor-management relations with the fundamental goal of pursuing fairness to be generally accepted by both labor and management. Second, they are committed to establishing a complete system of labor regulations. In addition to the mandatory provisions of the law, labor unions, as workers’ rights organizations, also play an important role in the process of coordinating labor-management relations. Furthermore, they focus on introducing a large number of collective bargaining systems and related auxiliary measures to establish a comprehensive mechanism for handling labor disputes. Finally, the government should take the responsibility to protect the interests of workers and play its role in the tripartite coordination mechanism of labor-management relations. Second, in terms of supervision and control of public power, developed countries have first established a set of perfect systems from the perspective of how to prevent public power from being abused, including judicial, civil official and high welfare systems. Second, developed countries have established internal supervision mechanisms from multiple directions, such as legal supervision, moral restraint and performance management mechanisms. Finally, they have also established the third line of defense—civil society, which places government power under the all-round supervision of binding subjects. Third, in terms of governance of the hidden economy, developed countries have successively implemented tax reforms, including simplifying the tax system, reducing the tax burden and improving tax collection and management. Second, by strengthening the management of SMEs, the hidden economy has been reasonably diverted and curbed. Finally, it is also important to promote international cooperation and social security mechanisms to govern the hidden economy in developed countries. Fourth, developed countries have also taken various measures in terms of income monitoring systems. First, the legal system concerning income monitoring is relatively well developed, such as the legislation of the property declaration and the

References

483

personal credit system. Second, developed countries have unique cultural deposits, which improve the social culture of universal monitoring, thus promoting the social monitoring system. Finally, developed countries improve their personal credit system, which not only promotes consumer credit but also establishes a good social credit environment throughout society. In addition, they have made full use of modern technology, which plays an important anti-corruption role.

References C. A. Morgan, editor, Labor Economics, Beijing: Workers Press, 1984: 379. Huang Jing, Terminal Anti-Corruption—A Discussion on Properties Declaration System of Public Officials. Theory Horizon, 2007(1). Xu Xiaohong, Characteristics of Labor-Management Relations and Union Operations in the U.S., Corps of Engineers, No. 6, 2001.

Chapter 9

Policy Recommendations for Regulating the Order of Income Distribution

It is urgent for the government to take effective measures to regulate distribution order in view of the chaotic order of income distribution in China. Otherwise, any specific policy measures aimed at narrowing the gap between the rich and the poor will be much less effective in practice. At present, income distribution in China is largely in a state of non-standardization. It won’t quite work for the government to control the income distribution process by conventional methods, such as personal income tax. This chapter will propose countermeasures to regulate the order of income distribution in China based on the analysis of the key issues that need to be addressed in regulating the order of income distribution in the previous section and by taking into account the useful experiences of some international countries in dealing with labor relations, regulating public power and governing the hidden economy.

9.1 Correctly Addressing the Relationship Between Labor and Capital Among social relations, one of the most important relations is labor relations, which is the basis for building a harmonious society. The government must intervene at the right time to maintain justice in the enterprises’ distribution and effectively protect the legitimate rights and interests of both employers and employees based on market failure and new changes during the transition period in China. However, the government needs to adopt reasonable measures in industrial relations intervention. This section explains that the government should play a strong role in improving labor laws and regulations, improving the wage system of enterprises, building a coordination mechanism for labor–management relations and improving the social security system for workers.

© Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5_9

485

486

9 Policy Recommendations for Regulating the Order …

9.1.1 Improving the Labor Legal System It is particularly important to further improve the relevant laws and regulations to regulate labor relations. In the practice of labor relations in China, there are still many labor protection laws that have not been effectively implemented. Without relevant legal protection, it will be even more difficult to ensure the rights and interests of workers, who are already in a vulnerable position in income distribution. The income that should be enjoyed by workers may be eroded by capital, although China has established a number of laws and regulations on the protection of workers’ rights and interests.

9.1.1.1

Improving Labor Legislation

Government legislation on labor relations in developed market economies mainly covers the individual legal rights of workers, which is the basic legal right applicable to all employees; collective rights, which are mainly concerned with the right of workers to form trade unions and to participate in collective action; and some provisions on collective bargaining. Although China has established a number of laws and regulations on the protection of workers’ rights and interests, a considerable number of labor protection acts have not been effectively implemented in practice. Thus, it is particularly important to further improve the relevant laws and regulations to regulate labor relations.

Improving the Employment Contract Law The Employment Contract Law, the most fundamental law regulating labor relations, still has many shortcomings. First, applicable range is narrow. Some provisions exclude a large number of workers from the applicable range of the law, such as construction workers, as the subject does not meet the requirements for the application of labor law. If a dispute arises between the two parties to employment, only ordinary civil law can be applied to resolve it. Second, formal elements are strict. In view of the Employment Contracts Law, if the formal element is lacking, it will not be included in the applicable range of employment law. Third, policy factors are complicated. Some local governments have implemented the Work Permits system, resulting in migrant workers being unable to apply for such permits. In most cases, even if they sign employment contracts with employers, when they encounter disputes, they are ruled by the courts as having illegal labor relations, and the rights of employees are not protected.

9.1 Correctly Addressing the Relationship …

487

Fourth, there is still a misunderstanding of the theory. It holds that there can be no dual labor relations and that even if they exist, only one of them can be dominant, leaving the other unprotected. In the future, a number of provisions relating to the Labor Contract Law should be implemented, which will further improve basic labor standards such as working hours, rest and leave, the minimum wage system and labor quotas. At the same time, fully implementing the labor contract system can increase the rate of signing labor contracts for small enterprises and migrant workers and expand the coverage of collective contracts. Furthermore, we should regulate the use of labor dispatch and layoffs by enterprises, promote the implementation of the labor employment record system and strengthen dynamic supervision.

Amending and Improving Relevant Legal Provisions China should also take the Labor Law as the basis to improve the system of labor laws and regulations to solve the problems of legal adjustment of labor relations. In terms of specific provisions, the most effective way to protect workers’ rights and interests is to allow workers to use collective power to protect their legitimate interests in an appropriate manner. Speeding up the pace of labor law legislation will surely further promote labor relations. At the same time, the government should step up publicity efforts of labor laws and regulations so that all parties in society are familiar with it, including operators and workers understand what rights and responsibilities they have, are able to protect their rights and interests according to the law and consciously fulfill their obligations, thus reducing conflicts in labor relations.

Concerned About the Convergence with International Labor Standards For example, whether social provisions are included in international trade agreements has been an outstanding issue in WTO negotiations; in this case, many multinational companies promote international labor standards by industry codes. The most typical is SA8000, the product of developed countries to link international labor standards with international trade, which covers almost all core international labor standards. China, as a large foreign exporting country, should attach great importance to the fact that some multinational companies cancel orders if they do not meet the standard, which has a great impact on Chinese overseas processing enterprises and amends the law gradually to narrow the gap with China’s ratified international labor standards, paying attention to convergence with international labor standards in labor legislation.

488

9.1.1.2

9 Policy Recommendations for Regulating the Order …

Improving the Labor Inspection System

Countries with developed market economies have labor inspection agencies, which can protect workers’ rights and interests and are often subordinate to the government’s labor department and staffed with full-time inspectors to monitor the enforcement of labor laws and other labor relations issues. The government should enhance the labor law enforcement and strengthen the labor supervision of enterprises for insufficient investment in labor inspection and weak supervision, although the Chinese labor management department has changed from direct allocation of labor resources to strengthening labor inspection in the process of market economy transformation. In addition, a tripartite management mechanism of occupational safety and health should be established. China’s occupational safety and health supervision is the responsibility of the production safety and the health department. At present, China is facing the contradiction between economic development and safe production, weak law enforcement and a lack of professionals. To strengthen labor safety supervision, a tripartite management mechanism for safety supervision should be established through legislation, drawing on foreign experience, establishing joint labor safety and health committees within enterprises or appointing representatives by labor unions, ensuring the right of labor unions to participate actively in safety supervision, mobilizing the power of the masses of workers, and combining state supervision, enterprise responsibility and labor union supervision to form a perfect supervision system.

9.1.2 Improving Enterprise Wage System 9.1.2.1

Improving the Enterprise Wage Decision Mechanism

The wages of workers determined by enterprises are the result of a multifactor process. To improve the wage determination mechanism, the key is to establish harmonious labor–management relations, which is both a qualitative and a quantitative issue. The government needs to take into account the actual situation in China and learn from the experience of Western countries, provide enterprises with a platform for all stakeholders to express wishes and exercise their power, and assist enterprises in establishing the rules of the game for wage determination, which include all stakeholders and truly reflect the interests of all parties in a reasonable manner. First, the government should guide enterprises to deepen the reform of the internal distribution system, implementing the Labor Law and Labor Contract Law, which can break the identity boundaries of the internal distribution of enterprises and reasonably determine the internal wage distribution relationship, thus effectively solving the problem of low wages for migrant workers, temporary workers, labor dispatch workers and different pay for the same work. Second, we should reform the total wage

9.1 Correctly Addressing the Relationship …

489

management methods of state-owned enterprises, try to combine the trial implementation of a wage cost budget management system with the effective implementation of collective wage negotiation, and clearly stipulate that the promotion of wage growth for ordinary employees should be the main content of collective wage negotiation in state-owned enterprises. Furthermore, the wage distribution of monopolies should be strictly controlled, and their wage standards need to be managed by the relevant government authorities with reference to the wage levels of employees of competitive enterprises and their growth.

9.1.2.2

Establishing Enterprise Wage Increase Mechanism

It is important to set up a mechanism for stable growth in labor remuneration for the reform of the income distribution system and raise the share of labor, which can promote the contribution of consumption to economic growth in the long run. On the one hand, since the growth of labor remuneration depends on economic growth, we should not only ensure the economic growth rate but also pay more attention to the quality of economic growth, shifting economic growth from relying on the “demographic dividend” to relying on the “institutional dividend”. In the report at the 18th Party Congress, it is pointed out that there is great potential to increase the labor share while maintaining the competitiveness of our products and maintaining faster economic growth while reducing the investment rate by technological innovation and institutional innovation to achieve economic growth targets and increase the labor share, although our technological and institutional resources are still at a disadvantage compared to developed countries. On the other hand, the problem should be solved at the practical level by improving the wage negotiation system and establishing a normal wage increase mechanism. In the “Employment Promotion Plan (2011–2015)”, it is proposed that during the “12th Five-Year Plan” period, China will form a normal wage increase mechanism, maintaining reasonable growth in the wage income level of employees, increasing the minimum wage standard by more than 13% per year on average, and the minimum wage standard in most regions will reach more than 40% of the average wage of local urban employees. The government needs to implement tax incentives to promote employment to achieve this goal. At present, we should establish a wage distribution system that is “regulated by market mechanisms, independently distributed by enterprises, equally negotiated and jointly decided, and monitored and guided by the government”, which effectively raises the wage level of general workers and coordinates the growth of workers’ wages with the increase of enterprises’ efficiency. Among them, the key for the government is to establish a sustainable and effective mechanism for enterprise wage increases that reduces the tax burden of labor-intensive enterprises and combines the improvement of labor productivity with the implementation of collective wage bargaining. Furthermore, the government should improve the tax policy system to promote the development of the service industry and small and micro enterprises, accelerate industrial structure adjustment, improve the tax policy for the

490

9 Policy Recommendations for Regulating the Order …

employment of key people and promote groups such as college graduates, people with employment difficulties and migrant workers to be able to find employment successfully.

9.1.2.3

Improving Wage Payment Guarantee Mechanism

First, the government should improve the laws and regulations on wage payments, urging enterprises to establish their own wage system and regulate wage payment behavior. We should clearly define the conviction of wage arrears, which reflects workers’ will and the state’s protection for ordinary workers and plays an important role in safeguarding the legitimate rights and interests of workers, curbing some enterprises from violating the legitimate rights and interests of workers and building harmonious and stable labor relations. Second, we should establish a wage payment monitoring and wage deposit system to emphatically monitor the industries and enterprises prone to wage defaults, especially enterprises that have to postpone the payment of wages due to operational difficulties, which must obtain the consent of the enterprise’s labor union or employee representatives and report to the local labor security department and labor union organizations. Labor security departments and labor unions at all levels should strictly supervise the enterprises to repay the wages of employees on time and order enterprises with outstanding problems of delinquency and withholding of wages from employees to pay a certain percentage of the wage deposit in designated banks to ensure that wages are paid in full and on time. Third, it explores the system of protection of wage arrears, which is used to advance wages to employees when the company is on the verge of bankruptcy. The employer is unable to pay wages or escapes to ensure that employees’ labor compensation rights can be realized under special circumstances.

9.1.3 Establishing Labor–Management Relations Coordination Mechanism It is a major matter of internal governance for enterprises to establish an effective consultation mechanism through the content and procedures of labor–management consultation. Enterprises should improve mechanisms for the coordination of interests, expression of demands, mediation of conflicts and protection of rights and interests around the establishment, operation, supervision and regulation of labor relations mechanisms, providing institutional guarantees for harmonious labor relations in enterprises.

9.1 Correctly Addressing the Relationship …

9.1.3.1

491

Clarifying the Position of the Government in the Coordination Mechanism of Labor–Management Relations

The government plays an important role in the coordination mechanism of labor– management relations. “The government is the regulator of social relations, i.e., it restores the imbalanced social relations to the original equilibrium by redistributing or regulating the interests among the subjects of the relations”, and the government has an incumbent responsibility in building labor–management relations. Generally, the government should play five roles in labor relations coordination, namely, the protector of workers’ basic rights, the facilitator of collective bargaining, the mediator of labor disputes, the planner of employment security and the supervisor of rule enforcement, thus performing its duties effectively to provide legal and economic bases for labor relations coordination.

9.1.3.2

Giving Full Play to the Role of Trade Unions

Enterprise trade unions directly represent workers’ interests, bearing the heavy responsibility of defending workers’ interests and reflecting the mass organizations of workers’ wishes, which is conducive to achieving consistency in the fundamental interests of capital owners and human capital owners in general and to building harmonious labor–management relations. Practices have proven that the staff representative assembly is the basic form of democratic management of enterprises recognized by both business managers and employees and is an effective way to guarantee the right of democratic participation and supervision of employees and to safeguard their legitimate rights and interests at source. Therefore, it is necessary to strengthen the participation and supervision of trade union organizations in the operation of enterprises. China’s nonpublic enterprises, especially private enterprises, generally have problems such as the small scale of operation, the small number of workers, the high mobility of migrant workers, and the weak role of trade unions in defending workers’ rights, in which interest-driven mechanisms are needed to attract hired workers to join trade union organizations. The government’s efforts should be focused on guiding and nurturing the collective bargaining capacity and efficiency of trade unions, as well as the training of union cadres, to play an important role of trade union organizations in defending workers’ rights and interests.

9.1.3.3

Improving Collective Bargaining and Negotiation Systems Within Enterprises

Within the enterprise, a collective bargaining and negotiation system between labor and management should be established to achieve effective communication between labor and management.

492

9 Policy Recommendations for Regulating the Order …

First, the negotiation and consultation of collective contracts should be considered the most central mechanism for the protection of rights. Trade union organizations should focus on improving the collective contract system and carry out internal legislation of the organization in the procedure of collective contract formulation, adhering to collective bargaining system, which requires that we should adopt the contract text through the workers’ congress, and form a standardized procedural system within the enterprise for the negotiation mechanism. Second, we should strengthen equal consultation. Enterprise labor union and management are parallel organizations, which require us to adhere to the principle of equal consultation to prevent bias of either side. Third, we must adhere to scientific negotiations and consultations. If not, negotiations will turn into pointless bickering. Fourth, collective consultation on wages and labor insurance policies should be the focus of equal consultation. Fifth, we should enhance the effectiveness and operability by highlighting the standard and focus in the specific content of the collective contract.

9.1.3.4

Improving the Tripartite Consultation Mechanism

It is necessary to establish a coordination mechanism of “tripartite consultation” to deal with major labor–management conflicts when only internal union representatives and enterprise representatives are not competent enough. The “tripartite consultation” system, including labor, management and government, is an effective means often used by mature market economies to regulate labor–management relations. Among them, the government is a symbol of fairness, which plays a role in balancing the power of both sides, especially for important issues with strong policies and influence; thus, the participation of government departments with professional standards in coordination becomes a key factor for successful negotiation. Government departments, especially those in charge of state-owned enterprises, should facilitate the tripartite consultation system, which requires the government to strengthen the responsibilities of judicial and law enforcement departments, professional associations labor security departments, and intermediaries to assist state-owned enterprises in resolving labor–management conflicts.

9.1.4 Improving Social Security System On February 5, 2013, the State Council approved the Opinions on Deepening the Reform of Income Distribution System formulated by the National Development and Reform Commission, the Ministry of Finance and the Ministry of Human Resources and Social Security, which called for the improvement of the basic pension insurance system, the full implementation of the provincial-level coordination of basic pension insurance for urban workers, and the realization of the basic pension by the end of

9.1 Correctly Addressing the Relationship …

493

the 12th Five-Year Plan period. It is imperative to improve China’s social security system because the government will speed up promoting the national medical insurance system, raising the level of funding and treatment for urban residents’ basic medical insurance and new rural cooperative medical care, and integrating the basic medical insurance system for urban and rural residents, thus making steady efforts to integrate employee medical insurance, urban residents’ medical insurance and new rural cooperative medical care.

9.1.4.1

Building a Unified Social Security System

Social insurance includes five types: pension, medical, unemployment, work injury and maternity insurance, but at present, there is no connection between different types of insurance, leading to serious duplication of social insurance agencies; there are differences in minimum living security system for urban residents and for rural residents, which not only increases the administrative cost of social security work but also creates obstacles to the sustainable development of the system; the residents’ status changes frequently under the conditions of market economy, which also brings many inconvenience to the residents. Therefore, it is necessary to establish a unified social security system covering urban and rural residents. First, it is necessary to balance urban and rural development, formulate a reform plan of the household registration system suitable for China, and change the method of population management to bring all social workers into a unified national social security system and fundamentally protect the social security rights of workers. Second, it is necessary to establish an interconnected social security system by interfacing the social insurance, assistance and welfare system through legislation as well as effectively bringing the convergence between the basic national social security system and the social and commercial security system into play so that workers can receive reasonable social assistance whether they are unemployed or in employment or when they encounter various social risks to ensure that the social security rights and interests of all workers can be realized.

9.1.4.2

Expanding Social Security Coverage

The main targets of employment in the 12th Five-Year Plan period are set as follows: 45 million new urban jobs, 40 million jobs for surplus agricultural laborers, urban registered unemployment rate within 5%, social security system covering all workers, and employment stability significantly improved.

9.1.4.3

Improving the Level of Social Security Gradually

The Social Security “12th Five-Year Plan” outline points out that the government should step up overall planning to establish a normal adjustment mechanism for basic

494

9 Policy Recommendations for Regulating the Order …

pensions, promoting the coordination of urban residents’ basic medical insurance and new agricultural cooperative outpatient medical expenses, thus gradually improving the financial assistance standards at all levels to ensure employees, urban residents’ basic medical insurance and new agricultural cooperation policy within the scope of hospitalization costs paid approximately 75%, which can enhance the ability to protect and narrow the gap between urban and rural areas, regions and groups. To increase investment in social security funds, we should improve the public finance system; adjust the structure of fiscal expenditures by increasing the proportion of social security expenditures in total fiscal expenditures, raising wages and pensions, and granting subsidies to residents below the poverty line to improve the living standards of workers. The level of social security fund coordination should also be improved, which is conducive not only to enhancing the risk resistance of social security funds and facilitating the mobility of insured workers but also to giving full play to the advantages of social security work in policy coordination, information system development and maintenance, and integration of social security administrative resources.

9.2 Supervision and Restriction of Public Power in China The capitalization of power and corruption has become the main factor disturbing the order of China’s income distribution for “institutional friction” and “institutional vacuum”. The essence of capitalization of power and corruption is that political power is regarded as a factor in income distribution. It not only greatly influences the initial distribution but also the redistribution of national income. Therefore, the government must take effective measures to speed up the reform of economic marketization and the reform of the political system, cultivating the culture of citizenship.

9.2.1 Accelerating the Reform of a Market-Oriented Economy Since the end of the last century, China has established the basic framework of the market economy system, but market-oriented reform does not come to an end. Many parts of the old system need to transform from the root; the modern market system is still to be improved; the reform of monopolistic industries is still halfway; the functions of government are still to be transformed; therefore, China must stand firm in stepping up the reform of marketization of economy.

9.2 Supervision and Restriction of Public …

9.2.1.1

495

Speeding Up the Construction of a Modern Market Economy System

Unity, openness, competition and order are the basic features of the modern market system, and the establishment of a sound market system is the basis for standardizing the pattern of income distribution. At present, China’s market system is not sound, mainly in the following ways: sectoral division, industry monopoly, regional blockade and other problems occur from time to time; the price mechanism needs completion, the market economic order is relatively chaotic; the market of production factors is crippled, and breach of trust in the market is serious. The imperfect market system has led to the distortion of production factor prices, exacerbated the chaos in the pattern of income distribution and hindered the participation of production factors in income distribution according to their contributions. Therefore, the government should establish a sound modern market system and optimize the development environment by promoting market opening, establishing a price stabilizing mechanism, and establishing a credit system for market-related organizations.

Advancing the Opening Up of Market Since the reform and opening up, the legal system of China’s market has been gradually improved, forming a diversified market pattern that includes tangible and intangible markets, wholesale and retail markets, spot markets and futures markets, urban markets and rural markets. However, with the development of urban and rural markets, regional markets are unbalanced; the traditional mode of operation and consumption still dominates. In this case, a further market opening is a must for reform. Cultivating a sound market system requires integrating the economies of less developed regions into the mainstream economic circle of developed regions coupled with an open and transparent market access system to promote the development of private economic markets; at the same time, the government needs to promote integrated trade, industry and agriculture organizations and provide market access to farmers. In addition, with the development of the social economy, nonessential consumer goods have become the new driving force of market consumption; therefore, it is necessary to cultivate new consumption hotspots and develop a market for nonessential living services.

Establishing a Price Stabilizing System In a market economy, supply and demand determine price changes in the market to allocate resources and achieve superiority and inferiority. Therefore, it can, to a certain extent, ensure the normal operation of the national economy rather than government control, which is also the biggest difference between the market economy and planned economy. In improving the market system, the government needs to

496

9 Policy Recommendations for Regulating the Order …

recognize that the market itself is binding. Therefore, the government must have a certain reserve of important commodities to be put into the market to depress prices in times of emergency rather than directly controlling commodity prices. In other words, the government’s management of prices of various important commodities is mainly to indirectly control the stability of prices with the help of the binding force of the market. The establishment of this mechanism requires governments at all levels to vigorously improve their economic management capabilities.

Setting Credit Systems for Market Related Organizations In the modern market system, organizations such as accountants and law firms, industry associations and chambers of commerce, inspection and certification bodies, notary and arbitration bodies, and asset and credit evaluation agencies play an important role. However, at the early stage of establishing a market system, market-related organizations experienced tortuous development, the most serious problem of which was the loss of impartial position and being driven by the interests of clients to provide false information to the market. Therefore, to maintain a good market environment, it is necessary to strictly regulate and strengthen the self-regulatory mechanism of market-related organizations, establish a long-term credit system, and strengthen the supervision and management of these organizations, thus stopping market profit-making activities that go against the purpose of their existence.

9.2.1.2

Deepening the Institutional Reform of Monopolistic Industries

China has the tradition of reforming first and legislating later in the process of reform and opening up. However, due to the lack of strong legal constraints, chaos often tends to emerge and allows lawless forces to take advantage of it. The reform of the monopoly industry necessarily involves many fields, including political, economic and social development, which is connected with many interested parties. Therefore, it is necessary to establish relevant laws and regulations before deepening the relevant reform to ensure the smooth deepening of the reform of the monopoly industry.

Strengthening the Legal System of Monopoly Industry Reform It is necessary to take legislation as a precursor to deepen the institutional reform of the monopoly industry. According to the relevant experience of developed countries and the facts of China’s socialist market economy, it is necessary to consider the technical and economic characteristics of each monopoly industry, the current management system and the objectives of monopoly industry reform. Then, the National People’s Congress promulgated corresponding laws to establish a legal framework for deepening monopoly industry reform to clarify the objectives, procedures, main contents, law enforcement agencies and their responsibilities and powers,

9.2 Supervision and Restriction of Public …

497

enterprises’ responsibilities and rights, access conditions and other important policy issues of monopoly industry reform. At the same time, the relevant industry authorities and regulatory bodies should formulate specific regulations or rules, on the basis of the basic law, as the implementation details of the basic law of the industry to enhance the feasibility and dynamic adaptability of the law.

Deepening the Reform of Monopoly Industry in Different Ways The monopoly industry includes natural monopoly businesses and nonnatural monopoly businesses. Most scholars believe that natural monopoly businesses refer to fixed network operation businesses, such as line and pipeline transmission network businesses in the electric power, gas and water supply industries, cable communication network businesses in the telecommunication industry and railroad track network businesses in railroad transportation; other businesses are non-natural monopoly businesses. Different reforms are needed for these two different kinds of monopoly businesses. For non-natural monopoly businesses, the government should relax the entry criteria to allow multiple new enterprises to enter the industry to form competition. However, the entry criteria need to be limited to the minimum scale. Meanwhile, the government still needs to pay attention to the number of enterprises entering the non-natural monopoly business field to prevent a low level of excessive competition. In the case of natural monopoly businesses, since these businesses require large investments in fixed assets, a significant portion are sunk costs. The duplication of investments by multiple enterprises would not only waste resources but also prevent the network system of each enterprise from being fully utilized. Therefore, the government needs to establish a control system that is compatible with the market economy to control the business areas of new enterprises by improving the raw efficiency and universal service level. Drawing on the experience of developed countries, the regulatory system is mainly composed of three elements: a sound legal system, an efficient regulatory body and an effective social supervision mechanism. Among them, the legal system is the basic basis for governmental control; the regulatory body is the organizational guarantee for effective control; and the social supervision mechanism is an important external force for the regulatory body to implement fair, open and impartial control oriented to the public interest.

9.2.1.3

Weakening the Government’s Intervention in Microeconomic Activities

When our government carries out macro-control, economists in Europe and the United States often criticize that certain regulatory measures of our government are not macro-control but micro-control, i.e., government intervention in the microeconomy. Government intervention in microeconomic activities often causes incentive distortion of economic agents, making it difficult for economic agents to form

498

9 Policy Recommendations for Regulating the Order …

stable expectation arrangements, leading to short-term behavior of economic agents and distorted allocation of social resources. At the same time, it will also reduce the credibility of the government. China needs to transform government functions, implement public management and reduce government intervention in microeconomic activities in the new era of market system reform. Public management means that the government does not provide private goods but mainly public goods and public services; the government does not interfere with the activities in the private sector but mainly adjusts the market order and regulates public policies with macro means; and the government does not use administrative means to interfere with the market operation but is mainly responsible for the necessary social control and economic control. To achieve effective public management of the government’s overall socioeconomic activities, it is necessary to accelerate the construction of a government based on the rule of law and a service-oriented government, making government services more standardized and orderly, fair and open.

9.2.2 Promoting Political System Reform Political reform matters greatly for the regulation of income distribution patterns. Without the reform, the results of regulating the pattern of income distribution will not be sustainable. Traditionally, citizens’ participation is passive, which makes citizens’ institutional participation extra-institutional. As a result, violent politics, group events and other resistance politics gradually became the first choice of citizens. The reform of our political system is to ensure the freedoms and rights granted to the people by the constitution and laws, fully mobilize the people’s enthusiasm and creative spirit, create a relaxed political environment, and establish a democratic and rule-of-law state.

9.2.2.1

Promoting the Construction of Democratic Politics

Promoting the construction of democratic politics is an important part of the reduction of public power. The essence and the core principle of the socialist democratic political system is that the people are the masters of the country. Its essence is to safeguard and guarantee the various democratic rights of the people and realize social justice, while the pursuit of social justice is the eternal theme of social development. The important ways to promote the construction of socialist democracy in China are as follows.

9.2 Supervision and Restriction of Public …

499

Adhering to and Improving the System of People’s Congresses In our country, the most fundamental and important way and form for the people to be the masters of their own country is to hold state power and exercise state power through the people’s congresses. Therefore, the system of people’s congresses is the fundamental political system of China and is an important content, an important institutional vehicle for constructing socialist democratic politics. To improve the specific institutions and institutional innovations that can fully play the role of the people’s congress system, the focus is on the construction of “procedural democracy” in the people’s congress system, which mainly includes: first, the electoral system, that is, to effectively guarantee the right of voters and representatives to vote and to be elected, making all aspects and stages of the election be in line with the requirements of socialist democracy; second, the organizational system. To strengthen organizational construction, we should optimize and standardize the establishment and composition of the NPC, NPC Standing Committee, special committees and working committees, optimize the structure of the NPC deputies and the composition of the Standing Committee, standardize the establishment of the special committees and working committees of the NPC at the county level and above; third, the exercise of powers. To fully implement the constitutional provisions on the system of people’s congresses, it is necessary to ensure that the people’s congress and its standing committee act with law to see the effects of the NPC. The fourth is the meeting system and rules of the procedure. Improving the sessional system and meeting system of the congresses and standing committees, the procedures and rules of procedure, and the efficiency and level of the meetings of the NPC and its standing committees are a must; fifth is its own construction. Since NPC deputies are the main body of the people’s congresses, full play of their roles is an important guarantee for the NPC to do a good job. The NPC and its Standing Committee should not only exercise its powers in strict accordance with law but also constantly explore and learn new methods of work based on the different economic and social development situations in various historical periods.

Refining Mechanism of Division and Restraint Between Powers In China, people’s congresses at all levels are the organs of power for people to exercise state power in a unified manner. On the premise that the people’s congresses exercise state power, it is an important feature of the people’s congress system to clearly divide the administrative, judicial and procuratorial powers of the state so that each national organ can work independently and responsibly within the scope of its respective duties as stipulated in the Constitution and laws. In the past, according to the law, the procuratorial organs only exercised the state’s public prosecution power in criminal cases. However, in recent years, the procuratorates in Hunan and Guangdong have taken the administrative “plaintiff’s seat,” indicating that the procuratorial

500

9 Policy Recommendations for Regulating the Order …

organs’ public prosecutorial power can be developed into the administrative field. At the same time, the state should also improve the supervision mechanism of the exercise of public power in discipline inspection and supervision, audit, administrative review and litigation so that the supervision of the right to form an effective check between the power and a positive interaction between the power and the power. Through the division of power and mutual checks, it can do something to reduce public power in these two aspects. First, it can limit the exercise of power. It could ensure that any power is a law-abiding, there is no special status beyond the law. Second, the limits of the power of state organs should be determined. Thus, it is certain that any power is limited, with their limits of scope and external constraints, preventing centralization and tyranny.

Strengthening and Improving the Mechanism of Power Supervision Improving the supervision mechanism of public power is an important aspect of promoting the construction of democratic politics and one of the essential requirements of building a state under the rule of law. Strengthening and improving the supervision mechanism of power includes the following three aspects. First, strengthen the supervision function of powers. In our country, we must strengthen the mechanism of power constraints and supervision and establish a sound power operation mechanism in promoting the construction of democratic political civilization to ensure that the NPC and its Standing Committee perform their functions in accordance with the law and that the power given by the people is truly used for the benefit of the people. Second, the supervision within the party should be strengthened. We need to strengthen the internal supervision of the leading team. Major matters, appointment and removal of important cadres must be decided in strict accordance with the procedures; we must improve the specific system of democratic centralism and strengthen the standardized assessment of the construction of an integrity party; we need to establish and improve the responsibility system for the selection and appointment of officials, including the recommendation responsibility system, the inspection responsibility system and the accountability system for misconduct in the appointment of personnel, etc. Finally, social supervision and public opinion supervision should be strengthened. The supervision of social opinion, citizens and social groups is currently the main form of public supervision and control mechanism in China. From a certain point of view, the supervision of supervisory organs often relies on public supervision. Practices have proven that the supervision of public power by citizens and social groups is extremely effective.

9.2 Supervision and Restriction of Public …

9.2.2.2

501

Giving Severe Punishment to Corruption

At present, China’s corruption is prone to occur in departments with centralized administrative power and areas with centralized management of funds and resources. In addition, social institutions, state-owned enterprises and other areas see rising cases of corruption. In addition, it is still prominent among leading cadres. Practices have proven that there is great harm in power corruption, which has become an obstacle to reform, development and stability. It is necessary to further strengthen the construction of a clean government along with scientific and effective measures to combat corruption to regulate the order of income distribution.

Streamlining to Establish a Scientific and Reasonable Administrative System It requires us to divide the government’s accountabilities and powers reasonably. First, after years of reform of the political and economic systems, a market economy is being gradually established, and a market mechanism is gradually taking shape. Strengthening macro-control and providing services for society are the main responsibilities of the government. The powers of enterprises should be returned to them to realize the separation of government and enterprises in the true sense. Enterprises should be given the status of independent legal persons so that they truly become the main body of the market economy. In addition, we need to cut some professional management departments, merge some departments with the same or similar functions, and reduce the hand reaching enterprises from the institutional setup. In addition, it is necessary to separate the government from other social organizations and institutions. Some social organizations and institutions should not be subordinate departments of the government so that those who are able can truly enjoy the status of independent legal persons and gradually enter the market.

Strengthening the Institutional Construction of Corruption Control From a macro point of view, it means that the legislature should raise the ideas of political parties or the will of the people to the will of the state through legal procedures. In addition, a set of supervisory institutions and institutional mechanisms should be established and improved, and public power should be restricted to the legal system; from a micro point of view, legal responsibilities corresponding to public power should be established to restrain the possible expansion or abuse of public power in the process of diversion and make the public power of public officials bound within a certain limit. Public power in the hands of public officials is bounded within certain limits. To strengthen the anti-corruption system, it is necessary to expand the areas of work to prevent and control corruption from its roots, especially “we must adhere to democratic centralism and promote democracy within the Party”; strengthen legal propaganda and actively promote administration according to the law; and improve the legal system and formulate severe punitive measures.

502

9 Policy Recommendations for Regulating the Order …

In addition to increasing punishment, there is an effective way to raise the cost of corruption to fundamentally curb corruption, including direct cost, opportunity cost and punishment cost, so that the cost of their misconduct is far greater than their economic, political and psychological gains, while increasing the probability of being punished for illegal behavior.

Stepping Up the Institutional Construction of Integrity Mechanism Preventing corruption needs to start from the source. Fighting power corruption should be strict. The government must strengthen the Party’s integrity, such as establishing a sound mechanism for hiring, assessment, supervision and promotion and developing a complete, specific and practical system for government civil servants. Given that, state public officials do not dare to be corrupt, cannot be corrupt, do not be willing to be corrupt, do not need to be corrupt, using their power and services for society and the public from their hearts. In terms of the employment mechanism, we must adhere to the principle of openness, fairness meritocracy, and no backroom operations. The promotion of related households, cronyism, sale of officials, and setting a price for a post are intolerant. We never allow non-principles, the promise of fame and position to make others work for you or the opportunity to use the selection and appointment for personal gain. In the cadre assessment mechanism and promotion mechanism, we should not only look at the performance but also assess whether the cadres truly do things for the masses. In the supervision mechanism, we should strengthen supervision, make government affairs open, and strictly prevent the abuse of public power.

9.2.2.3

Building an Administrative Performance Evaluation System

Government performance evaluation is an effective tool and basic means of government management and has gradually formed a worldwide trend. It has continuously penetrated various fields of public management in the form of a normal way and basic means of administrative management. For historical reasons, the current government performance evaluation system in China is mainly based on the way that the higherlevel governments listen to the reports of the lower-level governments and analyze the relevant information provided by them, then listen to the opinions of some people, and finally draw conclusions, which has a strong government-led color. As a result, local governments only focus on high GDP growth but neglect distribution equity, which eventually leads to a series of problems such as chaotic distribution order. Therefore, it is necessary to optimize the performance evaluation criteria of cadres and change the single economic performance indicator evaluation of local governments to place more emphasis on indicators that are conducive to building a harmonious society. At the same time, the structure of the main body of administrative performance evaluation should be improved so that each performance evaluation main body can cooperate and check each other to ensure objectivity and fairness. In

9.3 Preventing and Managing Hidden Economy

503

addition, multiple evaluation mechanisms can be established to compensate for the shortage of internal government evaluations. To this end, it is usually necessary to establish a comprehensive administrative performance evaluation system including service recipients, specialized evaluation agencies, organizational departments of the Party, and organs of the National People’s Congress, nongovernmental evaluation organizations, the press and media, the internal organs of this organ, relevant experts, etc.

9.3 Preventing and Managing Hidden Economy The regulation of the income distribution order is mainly in solving the illegal irrational and unfair problems of income. As mentioned above, the income distribution disorder in China is mainly attributed to the exploitative economy, power economy and hidden economy. Gray, black, and hidden incomes, which are illegal and abnormal, have a major impact on the pattern of income distribution in China, causing unfairness and disorder of income distribution, destruction of social harmony and intensification of social contradictions. The multiplier effect caused by the hidden economy has extended from its own scope and the economic field to other aspects of social life. If the main problems are unsolved and few efforts are made in managing the hidden economy and banning illegal income, it will be difficult to make achievements in regulating income distribution order, narrowing the gap between the rich and the poor, resolving social conflicts, and building a harmonious society. Therefore, in the income distribution reform, various types of income should be scientifically defined, and a standardized and transparent system should be established for the different sources of hidden economy to “prescribe the right medicine” for prevention and governance of hidden economy in a classified manner.

9.3.1 Managing Hidden Economy in a Classified Way On February 5, 2013, several opinions on Deepening the Reform of the Income Distribution System were made by the Development and Reform Commission, Ministry of Finance, Department of Human Resources and Social Security and approved by the State Council. It pointed out that the government should crack down on illegal income, strengthen the supervision and management in some key areas such as stateowned enterprise restructuring, land transfer, mineral development, and engineering construction, and plug the loopholes in obtaining illegal income; besides, the government should strictly regulate nontax income, continue to promote the tax-for-fees reform, clean up and rectify various administrative fees and government funds, resolutely abolish illegal and unreasonable fees and fund items and appropriately lower the charging standards.

504

9.3.1.1

9 Policy Recommendations for Regulating the Order …

Banning Illegal Income

Now, the general public has complaints about the excessive income gap and chaotic distribution order. They are strongly dissatisfied with the income gap caused by the people obtaining huge wealth through illegal activities. We must resolutely ban the illegal and malignant hidden economy, plug loopholes in the restructuring of state-owned enterprises, land transfer, and resource development.

Creating a Fair and Open Market Environment for Competition The government should give full play to the fundamental role of the market in the allocation of resources and establish and improve effective mechanisms to prevent commercial bribery and other illegal and criminal acts. In addition, the government should also improve the market system, standardize the market order, and accelerate the legalization of the market. The state needs to make laws for market entry and exit rules, competition rules, and transaction rules; at the same time, political marketization and power capitalization should be eliminated, which indicates that the government should be withdrawn from excessive intervention to give the market more freedom.

Severely Cracking Down on Illegal and Criminal Activities Such as Counterfeiting Crimes related to counterfeiting and inferior products have seriously affected healthy economic and social development. The reason why criminals dare to take risks is that their expected benefits exceed the costs. In addition to improving market order and intensifying crackdowns, the best way to fundamentally curb counterfeit sales is to crack down on related economic crimes, including manufacturing, selling and smuggling of counterfeits, fraudulent loans and fraudulent foreign exchange, insider illegal trading, tax evasion, and stock market manipulation, as well as to cut off illegal income channels, increase their illegal costs, including direct costs, opportunity costs and penalty costs, and impose severe penalties on illegal wealth.

Improving Land-Related Laws and Regulations According to the research report of the Development Research Center of the State Council, in some places, the net income from land transfer accounting for more than 60% of the government’s extra-budgetary income has actually become the “second fiscal.” The root cause is the unfair sharing of land benefits, and behind it is the “dual-track system” of land ownership that leads to the inequality of national land benefits distribution, the virtualization of state and collective land ownership, and a lack of strong legal protection of land use rights for farmers and urban residents.

9.3 Preventing and Managing Hidden Economy

505

Improving the laws and regulations of the land system is the fundamental way to solve problems in land finance. The laws include Land Management Law, Urban Real Estate Management Law, etc. The government should effectively implement the relevant laws and regulations of land development, severely crack down on land hoarding, curb excessive investment in the real estate market and change the current situation of relying on land transfer fees and real estate taxes as the main fiscal revenues.

Strengthening the Management of State-Owned Assets State-owned assets are the economic lifeline of our country and the material basis of socialist public ownership. It is necessary to improve the laws and regulations on the standardized management of state-owned assets to plug the black hole of the loss of state-owned assets. The State-owned Assets Supervision and Administration Commission must conscientiously perform the responsibilities as investors, including strict audit and appraisal, asset transfer, property rights transactions, debt handling, and supervision of operation during restructuring. The SASAC should also be more involved in democratic participation and timely verify and investigate cases reported by the masses to prevent the loss of state-owned assets. To improve the laws and regulations on the standardized management of state-owned assets, there are some measures. First, the government should strengthen the standardized construction of asset management, which involves formulating allocation standards for industry and enterprise assets and evaluation systems for the efficiency of asset use, establishing fixed asset allocation and control mechanisms that are compatible with the socialist market economy, and promoting optimal asset allocation. The second is to establish a sound asset management system to regulate the various asset operation behaviors of the enterprise based on regulations to reduce and avoid risks and loopholes in management. The third is to establish a specific agency for asset management. The fourth is to improve the state-owned assets management law and legalize the management of state-owned assets.

9.3.1.2

Regulating Gray Income

One of the priorities of standardizing the income distribution order is to improve the macro-control order in accordance with the goals and requirements of the socialist market economy system to gradually expose and legalize some expectantly legal but still illegal hidden economies. Specifically, the nation should make clear legal limits on income, regulate nonwage income, restrict monopoly income, and promote salary reform for civil servants and administrative institutions.

506

9 Policy Recommendations for Regulating the Order …

Making Clear the Legal Boundaries of Various Labor Incomes For laborers who get rich first through hard work, their legal labor income should be protected in accordance with the law, and necessary adjustments should be made accordingly, which is a necessary requirement for regulating the order of income distribution and promoting fair social distribution. For the hidden economy, it is necessary to make clear law definitions of various labor incomes, especially gray labor income, to legalize those labor incomes that should be protected by law and to illegalize those that should be restricted by law. The law should safeguard the legitimate rights and interests of workers to obtain legal labor income and punish all kinds of illegal acts that infringe on the legal labor income of workers through supervisory agencies.

Regulating Non-salary Income Non-salary income is often made outside of the standardized income channels or obtained by “tacit” or “internal control” means. The nonsalary income of public officials is made in such a way before the standardization of income. At present, the focus of regulating non-salary income is on adopting necessary policy measures to standardize, monetize personal income and make it transparent. First, an effective internal distribution constraint mechanism for the enterprise should be established. To prevent disadvantages caused by short-term corporate behavior, it is necessary for the government to exercise proper control over total wages. It is important to promote the reform of the modern enterprise system, deepen the reform of the property rights system, cultivate the independent economic interests of enterprises, and fundamentally eliminate the excessive growth of the nonsalary income of enterprises. Second, in terms of the sources of nonwage income, the government should improve the ability to conduct effective macro-control over distribution activities and create preferable conditions and environments for the gradual legalization of the quasi-legal hidden economy. The first measure is to establish a complete wage guideline system to guide, adjust and control the overall wage changes; the second is to establish a sound labor market to gradually realize the general adoption of wages; the third is to improve the fiscal and taxation policies that encourage laid-off workers or disadvantaged groups to seek employment by their own labor. The fourth is to take administrative measures to strengthen the supervision and regulation of the market, control unreasonable income growth in the market, and make rational adjustments to it by adjusting personal income tax.

Limiting Monopoly Income Market competition is an important factor affecting people’s income distribution. Unfair competition, especially monopoly competition, is one of the important reasons

9.3 Preventing and Managing Hidden Economy

507

for the excessive income gap among industries and the unfair distribution of wealth. In view of the large income gap between monopolistic industries and general industries, it is necessary to regulate administrative monopoly behavior under the modern concepts of fairness. First, the nation must improve anti-monopoly regulations and form a complete anti-monopoly legal system. Second, the nation should break the regional blockade and establish an open market with free competition. In this way, the relative fairness and equalization of income in different industries are realized, and unreasonable excessive monopoly income is restricted. Finally, through the improvement of the price mechanism, the loopholes in obtaining high monopoly profits are blocked from the source, and thus, the industry differences are narrowed.

Standardizing the Income Distribution System of Civil Servants Given that civil servants have a large amount of hidden income in our country, it is necessary to regulate their income by standardizing the civil servant income system and forming a reasonable income mechanism. First, the nation should increase civil servants’ salaries earned by formal channels and at the same time compress and merge the detailed standards, extend the salary grades, and reflect different elements such as positions, working years, and performance indicated in the salary. Second, the nation should reduce and eliminate cash and in-kind distributions outside the formal channels, reveal the secret accounts, and establish an effective supervision system and a control system to coordinate the distribution of various departments and units. Finally, the nation should implement the reform of public finance budget management, incorporate the income of civil servants into departmental budgets, form the system featured by the separate management of revenue and expenditure, the centralized payment by the treasury, and the supervision throughout the process. In addition, the salaries of civil servants should maintain a certain proportion to those in enterprises to ensure that the salaries of civil servants will not be lower than the social middle-income level to maintain a certain social status of civil servants. Through the establishment of a unified national salary system for civil servants, the government can appropriately widen the salary gap among positions and levels, strengthen the incentive role of salaries and levels in position, properly handle the relationship between fairness and efficiency, and gradually reduce the income gap between regions and departments to a reasonable range.

Reforming the Income Distribution System of Public Institutions First, the government should improve the incentive and restraint mechanism of distribution. The reform of the distribution system of public institutions should focus on improving the incentive and restraint mechanism, enhance the income distribution system that conforms to the features of public institutions, and reflect job performance and requirements of categorized management. The government should also strengthen the standardized management of allowances and subsidies of special posts

508

9 Policy Recommendations for Regulating the Order …

in public institutions, improve the incentive mechanism for high-level talent, the part-time system for staff, and incentive and restraint mechanisms for main leaders in public institutions. Second, performance-related pay should be implemented step by step. The government should first ensure achievements in compulsory educational institutions and public health institutions at a community level before performance-related pay is promoted in other public institutions.

9.3.2 Building an Income Monitoring System Due to the lack of a comprehensive resident income monitoring system, the quasilegal and illegal income data generated by the hidden economy cannot be effectively controlled by the government, so it is difficult for public policy-makers to make scientific decisions based on false and incomplete income data, and it is also difficult to make macro-controls on the widening income distribution gap. At the same time, the lack of an income monitoring system has objectively stimulated the continuous expansion of the income distribution gap. In this context, it is urgent to build a monitoring system for residents’ income in our country, and this has also attracted great attention from the central government and society. At the Fourth Session of the Eleventh National People’s Congress held in 2011, the Government Work Report clearly stated that it is necessary to speed up the establishment of an income distribution monitoring system, reverse the trend of a widening income distribution gap, and strive to make people benefit from the reform and opening up more. On February 5, 2013, several opinions on Deepening the Reform of the Income Distribution System were made by the Development and Reform Commission, Ministry of Finance, Department of Human Resources and Social Security and approved by the State Council. It is required that modern payment and income monitoring systems be improved, monetization and electrification of salary payment be promoted, construction of a modern payment and settlement system be accelerated, real-name system for financial accounts be implemented, card consumption be promoted, and cash management be standardized.

9.3.2.1

Establishing Personal Credit Reporting System

At present, in the financial field, the improvement of personal credit reporting systems helps us to monitor the income of residents through financial institutions so that the hidden economy can be revealed, and the construction of personal credit reporting systems is also conducive to the development of personal consumption credit. Specifically, the government can start from the following aspects.

9.3 Preventing and Managing Hidden Economy

509

Scientifically Selecting the Credit Mode The operation modes of credit reporting systems in developed countries mainly include market-oriented modes, public modes and membership modes. Based on national conditions, the government should also adopt a credit mode consistent with China’s economic operation and social culture. China’s economy has some characteristics. First, the government still plays a very important role in the macrocontrol of economic activities, and the influence of the central government is very large. Second, the economic developments in different regions are uneven. The eastern coastal areas are economically developed and have a high degree of modernization. Commercial credit there has gradually become an important support for economic development. However, the economic development of the central and western regions is relatively backward, and credit has not been fully involved in people’s daily lives. Based on such characteristics, the current mode of China’s personal credit reporting system should be a national public personal credit reporting system under the guidance of the central government. At the same time, the regional market-oriented personal credit reporting system should be established in the eastern coastal economically developed areas as an important supplement to the public personal credit reporting system to meet the actual needs of the development of the local market economy.

Unified Technical Standards for Credit Reporting System The standardized construction of the personal credit reporting system involves the collection, transmission, exchange, processing, utilization and management of credit data and involves data formats, network communications, databases, security, application software and hardware and other related technical fields at the technical level. The key points must be grasped well: first is the formulation of technical standards for the credit reporting system. The government must follow comprehensive, scientific systemic, advanced and forward-looking principles, making the standards scientifically applicable. The second is to determine the personal credit evaluation index system. It is necessary to strengthen the collection of basic personal credit data, including personal education, job title, marriage, bank account opening, housing, income, debt, etc. In addition, it is important to improve the processing procedures of personal basic data. The formation of personal credit products requires classification, comparison, calculation, and editing of the aforementioned information. Then, credit is expected to be rated to provide the market with effective and practical credit products to meet various credit needs.

Promulgating Relevant Laws and Regulations Relevant laws and regulations should be promulgated as soon as possible to provide high-quality credit services while protecting personal privacy. One is to speed up the promulgation of laws directly related to the establishment of the personal credit

510

9 Policy Recommendations for Regulating the Order …

reporting system. It is necessary to accelerate the formal promulgation and implementation of the Regulations on Credit Management to ensure high-quality credit services while protecting personal privacy; the second is to improve existing laws and regulations related to credit. In China, the laws related to credit management include the State Secrecy Act, General Principles of Civil Law, Guarantee Law, Contract Law, Commercial Bank Law, Regulations on the Administration of Savings, and Law on Protection of Consumer Rights and Interests. These laws should be revised in the ways of disclosure, the protection of privacy, and penalties for violation of privacy. In addition, China can learn from the laws established by European and American countries, such as the Data Protection Law and Privacy Protection Law, to define the scope of open data and penalties for violations and determine credit data management, dissemination methods and the scope of confidentiality of credit information sources. At the same time, there should be Law on Credit Card Issuance, House Mortgage Disclosure Act and other laws as supplements, and Law on Government Information Disclosure to ensure that credit bureaus can legally and quickly obtain data from government agencies such as the Administration for Industry and Commerce and the Tax Department.

Improving the Supporting Mechanism of the Credit Reporting System First, banks should further implement the real-name deposit system. Financial institutions need to strictly implement Regulations on the Real-Name System for Personal Deposit Accounts when handling financial products such as debit cards and credit cards for customers to avoid giving money launderers an opportunity due to loose debit card control. At the same time, it is necessary to strengthen the monitoring of the consumption of large funds in the process of bank card consumption. In addition, it is important to speed up the general networking of the nation’s banking system to share information on depositors so that banks can have a comprehensive grasp of the depositors’ property status. Second, the government should vigorously promote the use of electronic financial tools. The current paper bills and cash itself have inherent risks and inconveniences. Instead, electronic financial tools can overcome these shortcomings. For example, electronic bills can flow quickly without geographical restrictions and be traded across regions to make funds available quickly. The advantages of electronic financial tools also facilitate electronic monitoring over residents’ income. Finally, the electronic settlement security system should be improved. The problem with the security of electronic data is the “bottleneck” restricting the development of electronic settlement. Therefore, a legal system for electronic settlement security must be established to clarify the rights, obligations and responsibilities of banks and customers, in addition to stipulating technical security requirements, to protect the legitimate rights and interests of the parties involved.

9.3 Preventing and Managing Hidden Economy

9.3.2.2

511

Strengthening Tax Audit Management

Improving Tax Laws and Strictly Preventing Tax Evasion First, the government should implement a personal property declaration system proven to be effective by foreign countries. In this way, the origin of property can be discovered. The supporting measures are implementing the real-name registration of all personal savings, strengthening the tax collection and management of personal income, and declaring the economic activities of high-income earners. Money can be regarded as illegal income when some people cannot explain the legal source of huge amounts of money. Second, vicious tax planning should be curbed. Responding measures should be taken in a timely manner to curb the spread of vicious tax planning: first, the government should formulate relevant laws, requiring taxpayers and tax intermediaries to disclose vicious tax planning plans in advance; the second is to focus on the supervision and management of tax intermediaries’ production and promotion of vicious tax plans; the third is to establish enhanced relationships with large enterprises, strengthen tax risk management for large enterprises, and reduce the chance of using vicious tax plans by large enterprises; the fourth is to consolidate cooperation with other countries and timely exchange information on vicious tax planning through various platforms.

Stepping Up the Construction of Tax Information With the help of an information network, the tax management model can be innovated comprehensively, including a tax information network and four subsystems of anti-counterfeiting tax control invoice, tax declaration certification, audit, and coinspection. The information system network throughout the country can be gradually improved, finally realizing information sharing for each system and the query and extraction of accurate information at any time. The Golden Tax Project Information System and China Tax Administration Information System (CTAIS) in the tax system have initially established the foundation of a nationwide network information system. The computer system can complete a series of tasks from tax forecasting, tax registration, tax declaration, data storage, tax reporting review, and tax collection and payment of arrears to tax inspection and selection. Relying on information technology, these data can be analyzed, processed, and applied to realize the scientific, refined, and professional management of tax audits. Learning from the experience of developed countries, the government should improve existing financial regulations and establish a nationally unified tax number registration system for taxpayers, requiring units or individuals to open an account with a nationally unified tax identification number, and use the tax identification number in all taxpayers’ income-related activities. Then, tax identification numbers will be collected to taxation departments through a computer network for departments to centrally process and keep abreast of the taxpayer’s income.

512

9 Policy Recommendations for Regulating the Order …

Reinforcing Communication and Cooperation Across Regions and Departments Learning from the practices of developed countries, tax authorities’ information should be shared with other economic departments through a computer network so that tax authorities can easily obtain taxpayer information through multiple channels. All sectors of society (including governments and their departments at all levels) should provide information and data to tax inspection agencies, connecting the tax agency’s information system with other government departments, banks, personal credit agencies, and corporate websites to fully grasp the taxpayer’s economic situation through different channels. Meanwhile, the coordination of information inspection should be enhanced. Within the tax inspection agencies, most specific departments for information processing or information technology support have been set up to make information sources available for audit agencies, providing a sufficient basis for audit decisionmaking and case selection. At present, public management departments in China have established an independent, complete and accurate information management system with many available information sources. Taxation departments at all levels (including inspection agencies for national taxation and local taxation) should strive to improve the information asymmetry between tax collection and tax payment and use information from multiple sources to manage the industry and promote correct tax declarations.

9.3.2.3

Establishing a Property Declaration System for Officials

The property declaration system for officials is an effective means of monitoring the income of government officials. In July 2010, Regulations on Leading Cadres’ Reporting of Personal Matters was jointly issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council. The new regulations cover a wide range of properties to be declared, including income and property (both personal property and family property), and they also clarify the conditions, subjects, and approval procedures for consulting, investigating and verifying report materials. However, the new regulations do not require further disclosure of property. Therefore, the actual effect of monitoring the income of government officials is also greatly reduced. Based on China’s existing experience in establishing an official property declaration system, it is believed that the official property declaration system should be further improved.

Clarifying the Subject of Property Declaration Article 2 of China’s Regulations on Leading Cadres’ Reporting of Personal Matters stipulates that official subjects for property declaration mainly include officials of government agencies and public institutions and leaders of state-owned enterprises.

9.3 Preventing and Managing Hidden Economy

513

With some corruption and bribery cases in recent years, the scope of reporting subjects required by the regulations is too small, which does not conform to the actual situation of China’s public servants. This report believes that the scope of government officials who are supposed to declare properties should be expanded to all managers and public servants holding public power or public resources. Only in this way will the blind spots of power supervision be reduced. In addition, Regulations on Leading Cadres’ Reporting of Personal Matters does not mention property declaration requirements but only states that leading cadres should report their marriage changes and emigration of their spouses and children outside the country (territory). Since the property of government officials can be transferred and relatives can use their influence to obtain illegal benefits, the scope of official property declarations should be gradually extended to their parents, parents-inlaw, wives, children and other family members living with them to make the income monitoring system more effective. Meanwhile, the monitoring of the income of some senior leaders should also be expanded to their immediate and related relatives.

Expanding the Scope of Property Declaration It is believed that the scope of government officials’ property declaration should also be appropriately expanded in view of the income and property composition of government officials in China and the experience in foreign countries. One is hidden welfare income. The hidden benefits of gifts, hospitality, and free travel received by government officials are very large. The food, lodging, transportation, entertainment, various compensations, valuable gifts and other hidden benefits received by government officials and their family members should also be included in official property income for monitoring. Another is inheritance income, incidental income and gift income. Officials and their family members should declare their accidental property and inheritance property as well as the gift money collected in weddings and funerals.

Formulating Property Declaration Time in a Scientific Way To standardize and supervise the property status of government officials comprehensively, the time for property declaration should be further optimized, and relevant content should be supplemented considering the characteristics of our country’s public officials. One is the employment declaration. Government officials should declare their property to the designated agency within a certain period of time after taking office. Once there are questions raised in society about a government official’s personal property acquired in office, their property status before and after taking office will be checked out according to the property registration status they reported before.

514

9 Policy Recommendations for Regulating the Order …

The second is the declaration on the post. It is recommended to adjust the length of the declaration cycle according to different job levels due to the large number of public officials in our country. However, whether for a leading cadre or a general public servant, it can be ordered to make a temporary declaration at any time if there is a major change in their properties. Of course, the reporting frequency of different levels of leading cadres can be formulated in accordance with the actual situation. The third is the resignation declaration. Leading cadres who resign from public offices must declare their personal income when applying for resignation so that some invisible corruption can be exposed. Retired leading cadres must declare all their assets and continue to declare their property status for three consecutive years after their retirement because the influence of power does not disappear immediately due to the retirement of public officials. Therefore, the influence of power should be controlled, and the concealed property should be monitored.

Gradually Disclosing Official Property The disclosure of official property is not only a manifestation of the public’s the Right to Know but also a requirement for the establishment of a government under the rule of law. It is believed that there is a need for further disclosure of official property to the public. In terms of disclosing the property of officials, some local governments have made useful explorations and attempts, having a great social impact. For example, Xinjiang’s “Atel Model” adopted in 2009 is a combination of public and secret declarations. Cixi municipality began to implement the “class-property declaration” system known as the “incorruption publicity system” for leading cadres on February 4, 2009. Once in a year, this system requires leading cadres to fill out forms that are later publicized in the working unit within no less than 3 days. Disclosure of official property will be a weapon to curb power rent-seeking and power corruption. However, the disclosure of official property will be affected by factors such as traditional culture of “not revealing wealth” and social hatred of wealth. It is recommended that certain disclosure principles be followed. First, the degree and scope of disclosure should be different for officials at different levels. Second, the law stipulates that confidential information may not be included in the scope of disclosure, but property information that does not need to be kept secret should be disclosed to the public within a certain period of time and placed in public places for public inquiry. The disclosure can be shown in government publications, press conferences, government websites, and annual NPC and CPPCC meetings.

9.4 Regulation and Development of the Third Sector Since Levitt first introduced the concept of the third sector in the 1970s, the third sector has gradually derived a variety of meanings as it has been used by scholars. The definition from Lester M. Salamon, a leading scholar in the third sector, has been

9.4 Regulation and Development of the Third Sector

515

broadly recognized; that is, the third sector corresponds to the public sector (government) producing public goods and the private sector (market) producing private goods, which includes various nongovernmental and nonprofit voluntary groups, social organizations, civic associations and trade associations. On the scope, the third sector is the collection of all other organizations that do not belong to the first sector (government) and the second sector (market). On the function, the third sector engages in those that government and business do not want to do, cannot do or are inefficient to do. The government, the market and the third sector constitute the three pillars of the modern social structure. Under the conditions of a market economy, the primary distribution, which is dominated by the market and efficiency, is the most basic distribution of social wealth and the source of the latter two distributions. The redistribution dominated by government and equity is the key to curbing the excessive gap between the rich and the poor. The distribution of the third sector, led by civil and social responsibility, is a supplement to the first two distributions, which plays a very important role in regulating the order of income distribution. In recent years, China’s third sector has experienced relatively rapid development, with 447,200 third sectors (including 2243 foundations) according to statistics as of the first quarter of 2011. However, on the whole, China’s third sector faces many problems in development, such as lack of quantity and quality, bureaucratization, inappropriate intervention, lack of independence, lack of funds and weak capacity for self-survival and development. Therefore, not only must the third sector strengthen its own capacity and system building, but the government needs to encourage and guide the healthy development of the third sector.

9.4.1 Improving the Relevant Legal System The system is decisive among the various external factors affecting the development of the third sector, especially the formal system, such as laws and regulations. However, the existing system restricts the development of the third sector to a certain extent because of its regulations on legal status, establishment conditions, development strategies, tax incentives and supervision, which need to be improved.

9.4.1.1

Improving the Relevant Management System

Improving the Registration Management System At present, the third sector in the world is established mainly by registration and filing or making a statement in the newspaper. In China, the establishment of social groups is under a strict licensing system, and the establishment of private nonenterprises under a registration system with restrictions hinders the development of the third sector. Therefore, the licensing system should be gradually abolished, and a

516

9 Policy Recommendations for Regulating the Order …

three-tier registration system of “registration of record, registration of legal persons, registration of public interest legal persons” should be established to guarantee citizens’ freedom of association and ensure the maximum role of the third sector. Then, an institutional environment conducive to the healthy growth of third sector organizations can be created, and the management of third sector organizations will become more legal.

Establishing Laws and Regulations on Philanthropy The government should encourage the establishment of various charitable foundation organizations and lower the threshold for setting up private foundations to promote the development of philanthropy. They need to further clarify in law the nature of charitable organizations, the procedures of charitable activities, the supervision mechanism of charitable activities and the competent department of charitable undertakings and regulate the entry, evaluation, supervision, definition and transfer of public welfare property rights, financing and investment and withdrawal of charitable undertakings, providing a standard regulatory blueprint and management system for the development of charitable public welfare undertakings.

Strengthening External Audit Supervision How to make the use of charity funds open, transparent and standardized to improve the social credibility of charitable organizations is an important issue related to the development of the third sector. The development direction of philanthropy is “transparent charity”, which includes the transparency of the source of wealth, donations and the operation of charitable organizations. Therefore, the external audit supervision of charitable organizations must be further strengthened so that the government and the public can have access to the generation and flow of wealth, which improves the efficiency and transparency of the use of charity funds and eliminates charity corruption.

Improving Supporting Laws and Regulations The country should improve laws and regulations on public welfare and introduce special taxes such as estate taxes and gift taxes. Inheritance taxes have a powerful function of redistributing social wealth, becoming one of the most motivating taxes for charitable donations because of their high tax rate. In the U.S., the social law of “great men’s sons seldom do well” has made many wealthy Americans more willing to give their assets to charity. Although the estate tax has been eliminated in the United States, it did play a very important role in the distribution of wealth in the United States before. Most wealthy people would rather donate to charity than be taxed after weighing the pros and cons carefully, so they can not only avoid taxes

9.4 Regulation and Development of the Third Sector

517

but also give back to society. As such, the introduction of estate tax and gift tax will encourage the high-income class, especially the early wealthy, enterprises and individuals to participate in charity.

9.4.1.2

Improving the Tax Incentive System

Tax incentives are an important stimulus for the development of the third sector and an important initiative of the government to encourage and support the development of the third sector. The current tax incentive system for the third sector in China mainly includes the following two aspects.

Tax Incentive System for the Third Sector First, an independent tax exemption certification system should be implemented. Second, the system of tax returns, collection and management should be improved. Finally, we develop a classified tax incentive system for the third sector.

Tax Incentive System for Donors First, China should improve the proportion of tax deductions for donations and reduce the cost of donations. Second, the government needs to improve the relevant systems and policies for the encouragement and guidance of social donations and implement the full amount of pretax expenditures or deductions on public welfare donations. Finally, differential tax incentives should be designed according to the differences between individual and enterprise donations, in-kind and monetary donations and the expected goals of donations, putting the preferential policies of social donations into practice.

9.4.2 Strengthening the Third Sector The development of the third sector is still closely related to its own construction, although constrained by the external social environment.

9.4.2.1

Improving Its Organizational Development and Governance

Clarifying Goals and Objectives The construction of the third sector should be started with the governance of the organization. Unlike management, the core issue of governance is to address the

518

9 Policy Recommendations for Regulating the Order …

problem of an organization’s policy and organizational identity, i.e., to address the organization’s outlook, mission, future development direction and long-term strategic mission. In China, some nonprofit organizations experience a short period of rapid development at the beginning of their establishment and then gradually shrink until they die out. One of the important reasons is the lack of strategic management of the organization’s purpose and mission. The purpose and mission of an organization can enhance the sense of mission and responsibility of those in charge of the organization, promoting the efficient and clean use of the organization’s funds for public welfare goals.

Improving the Structure and Decision-Making Mechanism Within the Organization The first is to establish and improve the internal management system at the core of the charter. The second is to improve its fundraising ability. Funds are an important resource for the survival of any third sector organization, so the third sector should strive to expand the channels of funding and make reasonable and effective use of the funds raised to guarantee the sustainable development of the organization. The third is to cultivate a democratic management culture to bring into play the working potential of the organization and realize the overall efficiency of the organization in the development.

Strengthening the Building of the Talent Team Human resources are the most important resources for the development of the organization itself, and the achievement of the governance goals, management goals, and efficiency goals of third sector organizations ultimately depends on the composition of the people within their organizations, all of which require attention to building the talent team. An important aspect of the lack of capacity in the third sector is the lack of talented people with innovative capabilities. In China, the third sector is mainly staffed by part-time personnel, and many nonprofit organizations rely mainly on volunteers to organize activities. To attract excellent innovative talent to organizations, it is necessary to break the barriers to the entry of talent, improve the regulations and policies on employment and social security for employees of third sector organizations, raise the salary of full-time employees as much as possible, and provide guarantees for volunteers in terms of insurance and activity expenses to establish a fixed channel for bringing excellent talent and eventually form a new social standard for job selection.

9.4 Regulation and Development of the Third Sector

9.4.2.2

519

Establishing Industry Self-Regulation and Its Own Accountability Mechanism

Establishing a sound organizational responsibility mechanism is the key to the survival and healthy development of third sector organizations. Society demands a higher level of responsibility from them due to the voluntary and public interest characteristics of the third sector, with particular emphasis on altruism and dedication. Any violation in the third sector will not only directly affect the reputation of the whole third sector but also make people doubt the rationality and legitimacy of their existence, dealing a heavy blow to public morality and belief. Although the government has always imposed strict restrictions on the development of the third sector, it has never been able to manage the third sector organizations properly, and the power from social supervision in China is extremely weak, according to the current development status of the third sector in China. Therefore, the third sector should take the initiative to establish a self-regulatory mechanism for the industry, formulate professional ethical standards, codes of conduct and organizational management regulations for the industry, comply with them consciously, and encourage member organizations to supervise and check each other. In addition, the third sector should raise awareness of financial responsibility, establish an effective financial system and an external independent auditing system, make timely assessments of the effectiveness of the operation of funds according to the objectives and rules of organizational activities, and make financial reports on a regular or irregular basis to be monitored and evaluated by funders on the use of their funds. There is also a need for accountability mechanism. “Accountability assessment is an institution to ensure the integrity of nonprofit organizations, and its function is to help nonprofit organizations establish social credibility.” The third sector will face corruption similar to government departments in the absence of accountability mechanisms. Therefore, public interest organizations should strengthen information exchange with society, institutionalize public services within the law, improve transparency, prevent charitable corruption, and severely punish charitable corruption.

9.4.2.3

Improving the Social Credibility of the Third Sector

In China, the lack of social credibility poses a major obstacle to fundraising for nonprofit organizations and makes it difficult to mobilize volunteers to work for the organization. It is necessary to expand the participation of the press and the public in nonprofit organizations to improve the social credibility of nonprofit organizations, forming the interaction between social forces and nonprofit organizations and the supervision of nonprofit organizations by public opinion. Nonprofit organizations must face the news media and the public, obtain funds from social resources to start public welfare activities, and provide services to society effectively. They also need to reach a mutual understanding with news media and the public through interaction during service activities.

520

9 Policy Recommendations for Regulating the Order …

9.4.3 Regulating the Relationship Between the Third Sector and the Government The development of our third sector is influenced by external forces such as government, business, and overseas forces, among which the government is the most powerful controlling factor.

9.4.3.1

Deeply Promoting the Separation of the Administration and Society

It is necessary for the third sector to decouple from the government and the market, becoming an independent public goods provider. The changes of the government’s way of governance are the shift from micromanagement to macromanagement, from control to guidance, from emphasis on “management” to emphasis on service, from reliance on orders to reliance on the legal system. The government has also begun to decentralize in the field of social affairs, and some areas that the government is unable to undertake have been turned into “social affairs socially run”, which provides space for the survival and development of the third sector. Promoting the separation of government and society requires the complete separation of government and third sector organizations in terms of institutions, personnel, assets, and finances. The umbilical cord between the government and its affiliated civil organizations should be severed, and the third sector should be given independent power and capacity so that the third sector can truly become a self-supporting, autonomous and self-governing social organization in terms of personnel, funds and activities, promoting the establishment of a mentoring and partnership relationship between the government and civil organizations.

9.4.3.2

Establishing a Unified and Coordinated Administrative Supervision System

Although China’s existing civil organization management system is nominally united to the civil organization registration and management organs, in fact, considerable powers and responsibilities are scattered to various business units at all levels, making the development of the third sector face multiple supervision and duplication of supervision. The various regulatory departments have scattered and arbitrary regulatory forces and no access to each other’s information with different government orders. The establishment of a unified and coordinated administrative supervision system is a major task facing the management of the third sector in China. On the basis of the existing civil affairs department’s civil organization management system, an independent civil organization regulatory commission can be prepared, and a national civil organization regulatory system can be established to reform the existing dual management system. In one way, China should unify and

9.4 Regulation and Development of the Third Sector

521

coordinate the relationship, authority, responsibility and interests among different government departments on the issue of third sector regulation. In addition, information and decrees must be unified, and all third sectors in China will be placed within the framework of a unified national administrative regulatory system and related policies. In this regard, the experience of the UK Charity Commission is worthy of our reference.

9.4.3.3

Strengthening the Cooperation Between the Government and the Third Sector

Third sector organizations, as an associative force in society, politically constrain government power and essentially play a role in promoting political democratization. The third sector influences and participates in the formulation and implementation of public policies, reflecting the idea of public governance and the idea of social constraints on power. The government should actively seek to establish a joint governance pattern with the third sector; for example, it can invite the third sector to participate in decision-making, and it can also delegate certain special public services to the relevant professional third sector through “empowerment” to meet the diversified needs of the public. The purpose of the third sector in providing social public services is to compensate for the government’s shortcomings in providing public services. The focuses are to provide services for the disadvantaged, alleviate the inequities in the government’s provision of public services, and provide special services for the minority.

9.4.4 Cultivating Philanthropic Thoughts 9.4.4.1

Promoting the Concept of Public Welfare

At present, a considerable number of enterprises and individuals in China have already participated in financing the disadvantaged. However, it is still necessary for the government to further advocate the awareness of charity and the concept of public welfare in the whole society, spread the culture of charity, make the individual compassion of traditional charity culture develop into conscious and organized activities, and widely mobilize all sectors of society to support the development of charity. On the whole, China’s third sector is still in its infancy with a small scale of social giving, a weak foundation and lagging development. The number of charities is small, and there is still great room for people to play a role. The per capita income ratio between China and the United States is 1:38, while the per capita charitable donation ratio is 1:7300, according to estimates. Regarding the source structure of charitable donations, donations from ordinary people account for approximately 80% of the total donations in the year in the United States. Based on the current situation

522

9 Policy Recommendations for Regulating the Order …

of the third sector in China, the government should vigorously advocate the concept of “public welfare for all”, incorporate the construction of a charitable culture of helping the poor and needy, helping each other and contributing to society into the construction of a harmonious socialist society, and encourage society to establish a sense of social responsibility to help the disadvantaged and “pay back to society”.

9.4.4.2

Encouraging Charitable Activities

First, the government should encourage the establishment of various charitable foundation organizations and lower the threshold for establishing private foundations to promote the development of philanthropy. Second, the government also needs to encourage charitable giving activities, provide more assistance to the disadvantaged, and strongly encourage civilian charity. If the charity of entrepreneurs and rich people is the material source of charity, then the charity of ordinary civilians is fundamental to increasing charity. The participation of social members is conducive to the formation of a social atmosphere that promotes charitable behavior and the development of charity so that charity has a broader and more solid economic and social foundation. In addition, the power of the media should be used to focus on and encourage charitable activities because the social function of the media is to guide and motivate the public. The government needs to widely publicize the spirit and deeds of charity. For example, there are many typical deeds of helping people and giving charity in the Wenchuan earthquake in 2008 and the Yushu earthquake in 2010, which should be vigorously publicized in society as a whole to inspire the public and enterprises to participate in charity.

9.5 Cultural Heritage and Development The influence of culture is far-reaching and subtle. In particular, deep-seated psychological accumulation, habitual patterns and cultural secondary phenomena are not easy to eradicate and can even play a powerful role in social life. Therefore, it is necessary to conduct an in-depth analysis from a cultural perspective to study the regulation of the social income distribution order. Etymologically, the early “Culture” in English and French, as well as the German “Kulture”, are invariably translated from the Latin “Colere”. The word “culture” has many meanings, including dwelling, cultivation, worship, and practice in Latin, and means moral and temperament cultivation in French. The first clear definition of culture was given by the British cultural anthropologist Taylor in 1871, who said in his chapter “The Science of Culture” in Primitive Culture: “Culture, or civilization, taken in its broad, ethnographic sense, is that complex whole which includes knowledge, belief, art, morals, law, custom, and any other capabilities and habits acquired by man as a member of society.” This definition was influential in the field of cultural studies.

9.5 Cultural Heritage and Development

523

In 1952, the American anthropologists Kroeber, A.L., and Kluckhohn, C., in their book Culture: A Critical Review of Concepts and Definitions, defined culture as follows: “Culture consists of patterns, explicit and implicit, of and for behavior acquired and transmitted by symbols, constituting the distinctive achievements of human groups, including their embodiments in artifacts; the essential core of culture consists of traditional (i.e., historically derived and selected) ideas and especially their attached values; culture systems may, on the one hand, be considered products of action, and on the other as conditioning elements of further action.” According to Feng Tianyu, “Although people have different understandings of culture, they can be summarized as culture in a broad sense and culture in a narrow sense.” The former “refers to the sum of the fruits of human labor,” while the latter “refers to the values and codes of conduct that are transmitted by language as symbols and are compatible with a particular nation’s mode of production and way of life.” In summary, although there are many different views on culture depending on the perspective of the study, in a certain sense, it can be summarized into two views: broad culture and narrow culture. The concept of culture in a broad sense refers to the sum of material and spiritual wealth created by human beings; the concept of culture in a narrow sense refers only to the ideology of society, including ideas, morals, philosophy, values, religion, art, and other forms, as well as the institutions and organizational structures that correspond to them.

9.5.1 Reforming the Culture of Power 9.5.1.1

The Connotation of Power Culture

According to Kurt W. Back, power is “the enforcement of coercive control in situations of conflicting interests or values between two or more parties of an individual or group.” Max Weber, on the other hand, believed that power is the ability to impose one person’s will over the actions of others. What most interpretations have in common is the idea that the subject of power achieves his will by imposing his will on the object and causing the object to change its behavior. It is evident that power is coercive. Power can only achieve its goals by virtue of material forces such as wealth and violence. Moreover, power always adapts to the ordered structure of society. If this structure disintegrates, the power relationship ceases to exist. Power culture is “people’s psychological and spiritual reflection of power relation, and is the concept of power relation”, which includes power value system, power view, power operation mode and power restriction mechanism. As the center of political culture, power culture is the main and realistic factor that controls and influences people’s thoughts and behaviors.

524

9 Policy Recommendations for Regulating the Order …

9.5.1.2

Characteristics of Traditional Chinese Power Culture

Our country has a long history of power culture with the following basic features: (i)

Strong Worship of Power

China has formed a centralized bureaucracy since Qin Shi Huang, the first emperor of China, annexed the six countries and created the “Imperial system”. Local chief executives are appointed by the central government, and the supreme power was concentrated on the emperor. The despot was supreme, all power in the state belonged to the ruling class represented by the monarch, and the power was hereditary. By the Han Dynasty (206 B.C.–220 A.D.), the law explicitly stipulated the powers and duties of the despot and his subjects. Until the Tang Dynasty, the monarchy entered its heyday, and various political systems and laws were increasingly perfected to safeguard the feudal monarchy. Until the Tang Dynasty (618–906 A.D.), the monarchy entered its heyday, and various political systems and laws were increasingly perfected to safeguard the feudal monarchy. During the Ming and Qing dynasties, with the gradual tightening of the prime minister’s power and the expansion of imperial power, the dictatorship of the emperor eventually took shape. (ii)

Emphasizing the Rule of Man and Despising the Rule of Law

After the Western Han Dynasty (206 B.C.–24 A.D.), the ideological system of “rule by man” gradually formed. This kind of politics not only requires the rulers to have their own political views of “benevolence”, “virtue” and “propriety” but also carries out humane and moral education to both the Ruling class and the Ruling class, that is, educating and managing the people with morality to achieve the goal of ruling the country. In the politics of human rule, the supreme ruler is often deified. Emperors in each dynasty referred to themselves as the Son of Heaven to demonstrate the legitimacy of their behaviors. At the same time, the value of the law depends entirely on the needs of the supreme ruler, and the law must change with the power. The supreme ruler holds absolute power without restriction, and they can decide the choice of system and law according to their political needs. This political ideology of “the rule of man over the rule of law” makes the restraint on those in power mainly a moral mechanism rather than an institutional one. (iii)

Tight Bureaucracy

The hierarchical power that exists within the ordered structure of society operates in a unidirectional manner from the top to the bottom. This strict hierarchy is also used in government governance. During the planned economy, there was a hierarchical command relationship between rural and urban areas due to the people’s commune system, state monopoly for purchase and marketing system of agricultural products and strict household registration system. After the reform and opening up, with the loosening of the bureaucratic management system, the market space in rural areas was expanded, and farmers’ market-dominant position was initially reflected, thus narrowing the gap between urban and rural areas.

9.5 Cultural Heritage and Development

525

However, the administrative system of the “city governing county”1 and its supporting measures have followed the bureaucratic system of dealing with urban– rural relations, which has restrained the development of the rural economy to a certain extent. For example, in 1995, only 132 of the country’s 2159 counties were in deficit in their finances, accounting for 6.1%, and the vast majority was able to achieve fiscal balance, with some having a slight surplus. By 2002, there were 706 deficit counties and 914 financially subsidized counties among the 2030 counties, which together accounted for 1620, or nearly 80% of the total.

9.5.1.3

Capitalization of Power and Its Governance Measures Since China’s Reform and Opening-Up

The Evolution of Capitalization of Power The essence of power capital is the combination of political power and economic capital. The basic environment in which the capitalization of power in China arose is directly related to the transition from a state-owned to a market economy. The basic feature of this transition is the lack of effective oversight of the allocation and use of state-owned resources, resulting in the successful manipulation of the market by power. Dominated by the capitalization of power, power has become an important capital and the main form of economic competition. The political elite in the planned economy is transformed into an economic elite in the market economy. (i)

The Late 1970s to Late 1980s

During the planned economy, China established “public ownership”, including national ownership and collective ownership. The people exercise their rights through the system of people’s congresses, which in turn delegate the management of stateowned assets to the government through legislation. The government effectively controls state assets and indeed almost all social resources through the administrative system. In the early stage of reform and opening up, there was only power and no market. In this regard, one way is to collapse power, i.e., “shock therapy,” and the other is to make power create markets, i.e., gradual reform. Considering the stability of the reform, our country has opted for gradual reforms, i.e., power has not collapsed but has expanded toward the market, creating an “economy in which power and the market are combined.” As a result, power begins to turn into capital, fostering new subjects of interest in the development of the market economy. 1

The “city governing county” system is a component of China’s urban administrative system, that is, the administrative management system in which a number of counties or autonomous counties are governed by cities, and the surrounding rural development is driven by the relatively economically developed central cities. By the end of 2004, there were 333 prefecture-level administrative establishments, including 283 prefecture-level cities, and the number of prefecture-level cities leading counties accounted for more than 70% of the total number of counties in the country, and the population accounted for more than 80% of the total population.

526

9 Policy Recommendations for Regulating the Order …

During the period of its origin, China’s power-capital economy was characterized by a process of capital accumulation injustice, including starting point injustice (lack of “Access Justice”) and rule injustice (lack of “Transfer Justice”). The transformation of the economic system provides a historical opportunity for the capitalization of power. Yang Fan summarizes the process of capitalization of power. The first was the transformation of power into agricultural capital in the late 1970s. In the rural land contract, approximately $1.6 billion of collective property was appropriated by the leaders of the collective economy. Second, in the early 1980s, power was transformed into commercial capital. According to the 10% commission of the total domestic and foreign trade, the total gray income amounted to tens of billions of dollars per year. Finally, there was the dual-track system of means of production in the late 1980s, where power was transformed into productive capital. The two-track price differential for the means of production, officially managed by the State Planning Commission alone, was 70 billion RMB per year. (ii)

The 1990s to Present

The reforms in the 1990s differed from those in the 1980s in that social secularization, interest grouping, and capitalization of power gradually became the basic drivers of reform and economic growth, and there was a substantial advance in reform and opening. Previous reforms were inclusive in that all people were able to enjoy the benefits they brought. The interests of reforms after 1995 were more occupied by power and the classes that depend on power, leading to serious polarization. During this period, the government and its subordinate departments abused their administrative power to restrict competition, which was typically manifested by local protectionism. At the same time, some public enterprises and other operators with exclusive status by law (such as railroads, postal services, water and electricity, telecommunications, airlines and financial companies) also force transactions or restrict competition.

Governing the Capitalization of Power and Regulating the Order of Income Distribution In the transition period, the capitalization of power not only hinders the rapid and healthy development of China’s economy but also makes capital concentrate on those in power, which widens the income gap and affects social stability. Therefore, the capitalization of power is a major problem in deepening the reform of our country. (i)

Improving the Political System and Promoting the Construction of Democratic Politics

The reform of China’s political system is a gradual and long-term process that requires the establishment of a democratic and rule-of-law government. The focus of the reform is to completely change the excessive concentration of power in the original political system, especially the highly centralized leadership system and

9.5 Cultural Heritage and Development

527

decision-making mechanism of individual leaders. To increase the opportunity cost of the power subject to use privileges to achieve capital appreciation and eliminate the objective institutional basis for power capitalization, we must establish a scientific and democratic decision-making mechanism, a system of social publicity and notarization, a system of accountability, and a mechanism for power supervision and restriction. (ii)

Promoting Economic System Reform to Improve the Market Operation Mechanism

The capitalization of power, the combination of the government’s political power and economic capital, takes advantage of the gap between the state-owned economy and the market economy. In this regard, economic system reform should be accelerated to achieve the integration of the two economic systems and eliminate the economic basis and institutional gaps for the capitalization of power. Improving the property rights reform system of state-owned enterprises and restraining the illegal formation and expansion of bureaucratic capital can effectively prevent the loss of state-owned assets and safeguard the legitimate interests of the majority of employees. (iii)

Strengthening the Legal System to Improve the Checks and Balances of Power and Supervision Mechanisms

First, we must strengthen the legal construction and supervision, especially the legislative work of administrative power, to effectively restrict power and completely end the rule of man, which replaces the law with personal opinions and power. At the same time, government departments and their personnel must also be required to exercise their powers in accordance with the law. Second, a sound external supervision mechanism should be established to regulate the exercise of power.

9.5.2 Building a Business Culture 9.5.2.1

History of Chinese Business Culture

The Formation and Development of the Chinese Thought of Emphasizing Agriculture and Restraining Commerce During the Shang and Zhou periods, the state adopted an active policy to support commercial development. Later, there was an increasingly serious problem of competition between commerce and agriculture for labor that threatened the rule of the regime, so the idea of emphasizing agriculture and suppressing commerce emerged. The Warring States period emphasized farming and warfare, and this idea was further strengthened. When Shang Yang was implementing the reform in the Qin State, he advocated “emphasizing agriculture and suppressing commerce”, and his policy stipulated that

528

9 Policy Recommendations for Regulating the Order …

land could be bought and sold, and those who engaged in commerce and were poor due to laziness would be enslaved in the government together with their wives and children. In the early Western Han Dynasty, the people were destitute, but businessmen made profits after a long period of war. Liu Bang, the founding emperor of the Han Dynasty, imposed heavy taxes on merchants and strictly forbaded them from acquiring land. These policies effectively prevented the hindrance to economic recovery caused by merchants making illegal profits. Emperor Wu of the Han Dynasty implemented measures such as official currency casting, price control and heavier taxation on business and industry, which to a certain extent curbed the power of rich merchants and magnates. The policy of cracking down on merchants has continued since the Qin and Han dynasties. Since the liberation of the mainland, people have discriminated against people of capitalist origin in terms of promotion, rank advancement, and joining the military. At the beginning of the reform, long-distance trafficking was still illegal. Buying at a low price and selling at a high price were also treated as speculation.

The Prosperity and Development of Chinese Business Culture Traditional Chinese commercial culture still has a long history, dating back to before the Xia Dynasty, although Chinese history has long been marked by the idea of emphasizing agriculture and suppressing commerce. The history of business administration policy was recorded before the Warring States period. During the Warring States period, city commerce was already flourishing. During the Han and Tang dynasties, ancient silk trade routes connecting Asia and Europe and the ancient tribute trade system centered on China were established. At the beginning of the fifteenth century, the Ming Dynasty began political, commercial and cultural exchanges between China and Asia and Africa. At this time, most of the countries visited by Zheng He’s fleet were still in the period of primitive tribes or slave societies, and some were even in the primitive state of existence, which was not yet enlightened. In the mid-eighteenth century, China and India accounted for 60% of the world’s manufacturing. Even by the end of the eighteenth century, China had a huge foreign trade surplus for a long time, and its economy ranked first in the world. It was not until after the mid-nineteenth century that the British, French and other powers changed the long-standing Chinese dominance of foreign commodity trade by means of illegal forceful invasion and illicit trade in opium and arms.

9.5 Cultural Heritage and Development

529

Characteristics of Traditional Chinese Business Culture The development of commerce has also contributed to the formation of traditional Chinese business ethics culture. At the same time, Confucianism has had a significant impact on traditional Chinese business ethics, in which the concepts of “righteousness”, “honesty” and “harmony” have permeated traditional business ethics and contributed to the healthy development of traditional Chinese business. It is part of human nature to pursue self-interest. People cannot live without property, and getting rich without business is not possible. In real life, all people run around for their own interests. However, valuing righteousness over profit is a principle value in traditional Chinese culture. This traditional concept of righteousness and profit has also deeply influenced businessmen, as evidenced by the emergence of “righteous merchants” in history. Fan Li, who was known as the “progenitor of merchants”, used his wealth to do some benevolent things. During the Spring and Autumn Period, Xian Gao rewarded the army to save the country, and in the Han Dynasty, Bu Shi donated money to fight against Xiongnu, an ancient nationality in China many times. These righteous acts sublimated the “righteousness” of businessmen into a strong sense of national responsibility and patriotism. Integrity, one of the traditional ethical codes, is an important principle in coordinating and managing traditional interpersonal relationships. Confucius believed that people without credit were not to be trusted. Businessmen who profit from business activities should be more honest. In traditional business ethics, “integrity” is undoubtedly seen as the foundation of business. This is a more prominent feature than Western business culture, which is premised on contractual law. There are a large number of virtuous and cultured businessmen in China who have a long-standing reputation for doing business with integrity. For example, the Shanxi businessman Qiao Zhiyong ranked “keeping one’s word” as the first way of doing business. The merchants of Huizhou insist on doing business by honesty and do not cheat on prices just because they meet small children. It can be seen that honesty and trustworthiness are important qualities in traditional Chinese business culture. “Harmony” is a universally accepted and general principle and law in traditional business culture. It requires businessmen to uphold the concept of customers first in the process of commodity trading. Zhou Shidao, a salt merchant in Hangzhou during the Qing Dynasty, said when he taught his son about business: harmony is the most important thing in doing business.

9.5.2.2

The Cornerstone of Business Civilization—Corporate Ethics

The Connotation of Business Ethics and Its Rise Business ethics refers to the ethics of business operations. Not only companies but all organizations related to business contain ethical issues. There are inherent ethical issues when a collective composed of people conducts business activities. An ethical

530

9 Policy Recommendations for Regulating the Order …

company should value humanity and actively adopt socially beneficial behaviors without conflict and friction with society. Corporate ethics is the sum of the behavioral norms of the company in dealing with the relationships between employees, between the company and society, and between the company and customers. However, in the present age, if companies only pursue profits without paying attention to corporate ethics, their business activities will become increasingly socially unacceptable and eventually be eliminated by the times. Since the 1970s, some advanced companies in the United States, Western Europe, and Japan have established strict ethical systems and regulatory systems within their organizations. These understandings have prompted companies to change old business concepts while positioning them to balance the pursuit of profit with the promotion of sound social development so that they can grow sustainably. For example, after Johnson & Johnson discovered that its tylenol capsules were contaminated, the CEO James Booker immediately decided to recall all all tylenol capsules nationwide, reflecting its corporate culture of aligning economic and ethical goals.

The Current Situation of Corporate Ethics in Contemporary China Ethical issues have not attracted the attention of most companies in China in recent years. Ethical constraints and regulations are still outside the scope of decision management in many companies. (i)

Commercial Bribery

In market competition, some operators, with the purpose of excluding competitors, secretly give property or other benefits to the relevant persons of the counterparty or other relevant persons who can influence the transaction to obtain trading opportunities. This kind of commercial bribery will cause unequal competition among operators, destroy the fair competition order, and eventually turn market competition into a vicious game. From January to March 2012 alone, the anti-corruption department of Guangzhou Municipal Procuratorate instituted 119 cases of commercial bribery, an increase of 48.8% year-on-year. The Xiamen Yuanhua mega smuggling case is a typical case of commercial bribery. (ii)

Tax Evasion

At present, some enterprises do not open or underinvoice the business income they obtain. They use various ways to conceal business income and do not declare tax to the tax authorities as required to avoid tax obligations. Tax evasion prevents the inherent role of taxation in regulating income distribution, which is not conducive to achieving equity. In addition, tax evasion will increase the net profit after the tax of tax-evading enterprises, and the high profit will attract more resource inflow and cause distortion of resource allocation. In 2011, among the tax evasion cases exposed in Zhengzhou, Henan Province, only 15 real estate enterprises were found to have evaded 8.87 million yuan in taxes.

9.5 Cultural Heritage and Development

(iii)

531

Labor Disputes

Increasing labor–management conflicts in China have become one of the main problems affecting economic development. In 1995, there were just over 30,000 labor dispute cases in China, and in 2006, there were over 310,000 cases. After that, the number continued to rise, reaching 350,000 cases in 2007. After the promulgation and implementation of the Labor Contract Law, there was a spurt of labor dispute cases, which increased by nearly 50% in 2008, surging to more than 690,000 cases. Moreover, more than 280,000 labor dispute cases were concluded nationwide in 2008, up 93.93% year-on-year.

9.5.2.3

Building a New Era of Business Culture to Regulate the Order of Income Distribution

Rational View of Wealth and Encouraging Business Development Wealth represents the strength of a country, the prosperity of enterprises, and the economic level of individuals. Business development is an effective way to achieve wealth. Therefore, the pursuit of wealth and business development should be approached with a positive and rational attitude. The traditional thought of emphasizing agriculture and suppressing commerce in ancient times has hindered the development of commerce in China. Therefore, in the new era, China needs to vigorously encourage the development of commerce and improve the status of merchants.

Promoting a Healthy Business Culture We must first establish the guiding position of Marxism and socialist theory with Chinese characteristics in the construction of business culture to lead the construction of business culture with socialist core values. In particular, two principles should be emphasized, namely, seeking truth from facts and the mass line. The people-oriented concept emphasized by the scientific concept of development should be implemented in the construction of business culture. The true meaning of market competition lies in reflecting human value, human dignity, and human equality. A modern business concept with Chinese characteristics should unite the development of enterprises with social progress.

Strengthening the Construction of Corporate Ethics In the process of strengthening corporate ethics, it is particularly important to cultivate a sense of corporate social responsibility so that while pursuing maximum profits, enterprises should also assume corresponding social responsibilities and create a

532

9 Policy Recommendations for Regulating the Order …

win–win situation in which both righteousness and profit are achieved. First, companies should operate legally and provide quality goods and services, which create more tax revenue for the country. Second, companies should strive to cultivate modern markets, upgrade industries, and provide a large number of jobs. Finally, enterprises should actively participate in social welfare projects to help poorer people and assist the country in achieving a fair third distribution.

9.5.3 Cultivating a Culture of Citizenship 9.5.3.1

Connotation of Citizenship Culture

The concept of “civic culture” is a contemporary political science concept that was developed in the study of “political culture”. The American political scientist Almond first used the concept of “political culture” in 1956. There are three basic types of political culture: participatory political culture, dependent political culture, and territorial political culture. Almond and others believe that “civic culture” is the result of the convergence of these three types of political culture. In a broad sense, “civic culture” is the political culture of a democratic political system, a political system that citizens internalize in their perceptions, emotions and evaluations. In a democracy, the political role of those in power, as well as of the general public, is that of citizens, not masters and subjects.

9.5.3.2

The Importance of Civic Culture Construction

Since the concept of a “harmonious society” was introduced, the role of building a civic culture has become increasingly prominent. First, civic culture helps promote political democratization. The construction of any democratic system is a conscious activity guided by a certain sense of democracy. This is because the Chinese Communist Party took the lead in fostering civic consciousness and worked to awaken people’s sense of subjectivity and their pursuit of democracy and freedom that a socialist democratic system was established. How well a country democratizes depends to a large extent on the understanding of democratic values, the cultivation of democratic social foundations, and the operation of democratic practices, which are inseparable from democratic culture. Therefore, the process of political development in our country should rely not only on the system but also on a good political culture of citizens. Only when civic culture gradually penetrates into the public activities of society and becomes the dominant value orientation of society can our political development be sustained in a harmonious and virtuous manner. Second, civic culture is conducive to strengthening social supervision. Civic culture is an intrinsic driver that enables social monitoring behavior to occur. On the one hand, the extent to which public officials accept supervision and control depends

9.5 Cultural Heritage and Development

533

on their civic consciousness. If their civic consciousness is not strong, their leadership behavior is likely to violate the principle of service and even create personal arbitrariness. On the other hand, the democratic rights that people exercise are strongly influenced by the civic consciousness of their populations. Only when citizens are aware of their subjectivity will they realize their rights and obligations as citizens and actively participate in politics and exercise supervision. Finally, the construction of a civic culture is conducive to governing corruption and regulating the income distribution system. Absolute power leads to absolute corruption, which is a Newton’s law in politics. It is necessary to give full play to the role of civic culture to truly and effectively supervise and restrict public power. In civic culture, “all power belongs to the people” is a value that officials must believe in. At the same time, civic culture places special emphasis on participation and requires citizens to actively participate in politics. Citizens can also make full use of mainstream media such as television, newspapers, and the Internet to expose corruption. All these factors are conducive to reducing black income and gray income and regulating the order of income distribution. In conclusion, the construction of civic culture is of great significance in promoting political democratization and regulating the order of income distribution. It will contribute to China’s institutional transformation while forming the cultural basis for a harmonious society in China.

9.5.3.3

Difficulties in Building Civic Culture in China

There Being Multiple Differences in Our Civic Culture At this stage in our country, there were still some differences in the elements of civic culture. First, there are differences in the cultural orientations of different classes of citizens. The working class has a higher sense of political security and self-confidence than other classes and thus is willing to participate in politics. They have some knowledge of political phenomena and can choose political behavior in a more rational way. The peasant class, however, is deeply influenced by traditional feudal political psychology, resulting in a lack of political knowledge among most peasants who tend to interpret politics in terms of traditional feudal concepts. However, the sense of political efficacy, political security and political self-confidence of intellectuals are relatively weak under the influence of history. Second, in terms of regional structure, the cultural orientation of citizens varies from region to region. At this stage, this difference was mainly between the eastern coastal and western inland regions. Due to the developed economy in the eastern region, citizens have a stronger sense of openness, democracy, rights and participation, and the influence of feudal political culture is less. The western region, on the other hand, has slow economic development, a large proportion of the rural population, and a low level of urbanization, so citizens’ awareness and ability to participate in politics are not as high as in the coastal region. In the same region, the political

534

9 Policy Recommendations for Regulating the Order …

knowledge and participation ability of urban residents are stronger than those of rural residents. Finally, citizens of different ages have different civic cultures. This difference mainly stems from their personal experience of political practice and political socialization. Young people are energetic, sensitive to new things, and more knowledgeable about modern politics. Older people, on the other hand, have less modern political knowledge and less legal awareness.

Lack of Political Literacy Among Citizens Due to the influence of traditional political psychology, citizens’ awareness of political participation is not strong, and political apathy is common. Citizens’ conscious attention to and active participation in political life is an important guarantee for the maintenance of democratic politics. Typically, “the vast majority of citizens have little desire for political participation other than centrally directed political study, rallies, and voting elections held every few years.” As a result, the ability of our citizens to participate in politics is generally low. The demand for democratic politics for a sense of participation is also reflected in the conscious respect and maintenance of civil rights. First, public power should consciously respect and safeguard the legitimate enjoyment of citizens’ rights in political activities. Second, citizens should have a strong sense of self-protection. However, the frequent occurrence of various violations in China, as well as the “silence” of the victims, proves the lack of awareness of rights.

Lack of Awareness of Rights In our country, citizens’ awareness of their rights is weak. The first is due to the Chinese mindset. Confucianism, which has been dominant in ancient China, emphasizes the obligations of individuals to society and to the collective rather than rights. The Analects of Confucius says, “The gentleman values morality and righteousness, while the villain only profit.” Deeply influenced by Confucianism, Chinese people have always been ashamed to talk about profit. Second, ancient Chinese law attached importance to the overall interests of the state, not individual rights, and individual interests should be subordinated to collective interests. Finally, strict personal dependence also hinders the exercise of civil rights. In ancient China, the state was owned by the emperor alone, so the monarch had supreme authority. The highest mission of the law is to rule the people and serve as an instrument to maintain dynastic rule. This rigid hierarchy created an extremely strong personal dependency. The people were completely dependent on divine, clan, regime and patriarchal power, without freedom and rights. As a result, the public lacks the idea of defending their rights by law.

9.5 Cultural Heritage and Development

9.5.3.4

535

Building a Civic Culture and Regulating the Order of Income Distribution

Establishing Economic Basis for Civic Culture Civic culture with Chinese characteristics is a superstructure based on a certain economic situation; therefore, the level of economic development directly affects civic culture. As proven by history, the market economy is the basic driving force of civic culture. Therefore, China needs to vigorously develop a socialist market economy and cultivate the civic consciousness of the nation, thus forming a civic culture.

Promoting the Rise of the Middle Class and Building a Democratic System A just social class structure is a prerequisite for the stability and development of modern society and a social foundation for democratization. A society that forms a just social class structure with a stable middle class can help advance democratization and effectively prevent populism. For the democratization of politics in China, it is important to ensure that there is a stable and growing middle class so that democracy does not degenerate into mob politics. Therefore, our country needs to promote the rise of the middle class and avoid the trend of deformation of the class structure to build a democratic system and promote the development of civic culture.

Creating a Good Political Environment In our country, “power worship” inhibits the generation of power culture. In a state governed by the rule of law, however, citizens hold an attitude of trust in the state and the law, which makes them willing to surrender power to them. This social attitude acts as a buffer between the individual and the political system, thus allowing the state to develop a normal political order. Therefore, in our country, there is a need to strongly promote the rule of law so that all public power is based on the law. At the same time, China should also actively promote the reform of the political system to provide institutional guarantees for civic culture.

Taking the Culture of Rights Seriously The Western cultural tradition is rights-oriented, and there is a general consensus that “rights are to be taken seriously”. It is central to the culture of civil rights that state power exists for the sake of civil rights. Therefore, civic culture should be built, first of all, by establishing the predominance of civil rights in the whole society and at the same time creating the cultural atmosphere of the government. Second, it is necessary to change the passivity of our citizens’ participation in politics and

536

9 Policy Recommendations for Regulating the Order …

establish the sense of ownership of all citizens to promote their active participation in politics. It is also about raising bold questions about the government’s actions. Citizens can take legal action against state organs and their staff who abuse state power and demand legal responsibility through legal channels.

9.6 Summary In view of the chaotic income distribution order in China, it is necessary and urgent for the government to take effective measures to regulate and adjust the distribution order. At present, China’s income distribution is largely in a nonregulated state. Based on the core and key issues of the chaotic income distribution order analyzed in the previous section, this chapter puts forward several countermeasures and suggestions for regulating the order of income distribution by drawing on international experience. First, the correct handling of industrial relations is important. Based on the market failure of labor–management relations and the new changes in labor–management relations in nonpublic and state-owned enterprises during China’s transition period, the government must intervene in a timely manner in response to the new changes in these two kinds of enterprises to protect the legitimate rights and interests of both employees and employers. The government should play a strong role in improving labor laws and regulations, improving the wage system of enterprises, building a coordination mechanism for labor–management relations and improving the social security system for workers. Second, the reduction of public power and the cleanup of corruption should be considered. The trend of corruption and capitalization of power has worsened the order of income distribution in the process of transformation of China’s economic system. Thus, the government needs to take various effective measures to reduce public power and severely manage corruption. The government needs to make a new choice of abdicating and returning to its position to achieve it. Measures to reduce public power include building a service-oriented government, increasing the transparency of public power operations, promoting democratic politics, and applying the rule of law to regulate public power. Measures to eliminate corruption include strengthening integrity; streamlining institutions; establishing a scientific and rational administrative system; strengthening anti-corruption institutions; cracking down on commercial bribery; strengthening administrative supervision and purifying the administrative environment; and building informal institutions. Third, prevention and control of the hidden economy is necessary. The hidden economy is the culprit of the chaotic order of income distribution and the intensification of conflicts in the field of distribution in China. First, it is necessary to classify and manage the different sources of hidden economies to regulate the order of income distribution. The focus of governance has two: cracking down on and outlawing illegal income and standardizing gray income. Second, establish a sound

9.6 Summary

537

income monitoring system. The absence of the current income distribution monitoring system objectively further aggravates the disorder of income distribution. This makes it difficult to grasp the real situation of the current income distribution of Chinese residents, which is not conducive to public policymakers making scientific decisions. For this reason, it is urgent to establish a sound monitoring system for income distribution. The monitoring system of income distribution should include first establishing a personal credit system; second, strengthening the management of tax inspection; third, establishing a system of property declaration for officials; and fourth, improving the social supervision mechanism. Fourth, the third sector plays a very important role in regulating the pattern of income distribution. It is not only an important supplement for the government but also a tool to resist market tyranny and restrain public power. Considering that the government should take effective measures to encourage and guide the development of the third sector, these measures mainly include improving the relevant legal system, strengthening the third sector’s own construction, regulating the relationship between the third sector and the government, advocating the concept of public welfare, encouraging philanthropic activities, and thus promoting the development of philanthropic culture and philanthropy. Fifth, the inheritance and development of culture is vital. In China, power culture is an important part of traditional political culture. The capitalization of power during the transition period has had a negative impact on the order of income distribution. Therefore, governing the capitalization of power is an issue that must be taken seriously in promoting reform. Chinese history also has the tradition of emphasizing agriculture and suppressing business. In the new era, China should view wealth positively by encouraging business development and promoting a healthy business culture. Civic culture embodies the basic principles and spirit of democratic politics, serving as the cornerstone of social stability. A harmonious society implies a contractual state governance system based on civic culture. Cultivating a civic culture is an urgent task to regulate the order of income distribution and build a harmonious society at present.

References

Chinese References An Zhimin, The Crisis of Marxist Belief in Contemporary Chinese Society and Its Reconstruction, Journal of Economic Research, No. 28, 2011. Bai Baoli, General Theory of Value Price, Economic Science Press, 2006. Bai Xuemei, Education and Income Inequality: An Empirical Study of China, Management World, No. 6, 2004. Ban Gu, The Book of Han, China Book Bureau, 1983. Bao Jianguo, An Overview of the Main Theories and Policies of Clean Government Construction in Contemporary Western Countries, Modern Agricultural Science and Technology, No. 12, 2007. Bi Li and Gui Suyu, A Review of Fiscal Decentralization Theory, Journal of Yunnan Institute of Finance and Trade, Vol. 6, 2004. Bian Yanjie, Wu Xiaogang, and Li Lulu, Social Stratification and Mobility: New Developments in Foreign Scholars’Research on China, Renmin University of China Press, 2008. Bian Yanjie and Zhanxin Zhang, Marketization and Income Distribution: An Analysis of Urban Household Income Surveys in 1988 and 1995, Chinese Social Science, No. 5, 2002. Cai Dingjian, On the Boundaries of State Power, Chinese Jurisprudence, No. 1, 1991. Cai Jiming, From the Thirteenth Congress of the Communist Party of China to the Seventeenth Congress of the Communist Party of China—A Shift in the Perspective of Distribution, Journal of Zhengzhou Institute of Light Industry (Social Science Edition), Vol. 9, No. 1, 2008a. Cai Shoubai, The Theory of the Leisure Class by Van Buren, The Commercial Press, 1981. Cai Xiaobin, The Faithfulness of Traditional Confucian Morality and Its Modern Inspiration, Contemporary Education Theory and Practice, No. 4, 2011. Cai Xiujin, Analysis and Countermeasures on the Problem of Administrative Market Monopoly, Journal of Fujian Provincial Socialist College, Vol. 3, No. 3, 2007. Cao Guizhi, The Three Elements of Faith and the Analysis of Xinyang Crisis, Hu Xiang Forum, No. 6, 2011. Cao Yinghua: A Comparison of the “Shadow Economy” in Russia in Different Periods, Siberian Studies, Vol. 34, No. 2, 2007. Chang Kai, On the Nature of Labor and Employment Rights in the Market Economy and Its Realization—Also on the Protection of Labor and Employment Rights in the Transformation of Employment, China Labor, Vol. 6, 2004. Chen Dachai, The Historical Development of Labor-Management Relations and Its Trends in Western Market Economies, Theory and Practice of Economics, No. 4, 2004. Chen Gang and Li Shu, Corruption, Income Distribution and Income Disparity in China, Economic Science, No. 2, 2010. © Huazhong University of Science and Technology Press 2022 C. Yang, Research on Normalizing Income Distribution Order in China, https://doi.org/10.1007/978-981-19-1886-5

539

540

References

Chen Genfa, On the Moral Growth Point Under the Conditions of Market Economy, Mao Zedong Deng Xiaoping Theory Research, No. 6, 1995. Chen Hanming, The Current Situation of Labor-Management Relations in China and Reflections on Building Harmonious Labor-Management Relations, Mao Zedong Banner, December 2, 2007. Chen Jun, Huyuanzhi, and Chen Jigui, A Preliminary Exploration of Technology Equity Model, Research Management, No. 4, 2001. Chen Li and Li Chen, International Comparative Study on Measures to Cope with Malicious Tax Planning and Implications, Fiscal Research, No. 8, 2011. Chen Microwave, Research on Some Issues of Labor Relations of State-Owned Enterprises in the Transition Period from the Perspective of Interest Analysis, PhD dissertation, Shandong University, 2010. Chen Shirun and Yu Xinsheng, On the Confusion of Marxist Beliefs, Gansu Journal of Theory, No. 4, 2004. Chen Tan, Government Credit and Government Self-Consciousness, Ethical Studies, No. 4, 2003. Chen Xiaofeng, The Foundation and Development of the Third Income Distribution, Journal of Minjiang College, No. 1, 2010. Chen Yan, The Inspiration of Japan’s Cooperative Labor-Management Relations to China, Journal of Hubei Higher School of Finance and Economics, No. 2, 2008. Chen Yanqing and Jing Xuemin, The Crisis and Reconstruction of Faith in Chinese Society, Journal of Jianghai Studies, No. 4, 1998. Chen, Yefeng Chen, Yean Zhou, and Zifeng Song, Are People Concerned with the Motives or the Outcomes of Distribution?—An Examination of Two Views of Equity from the Perspective of the Ultimatum Experiment, Economic Research, Vol. 6, No. 1, 2011. Chen Yilin, An Overview of Theoretical Views on Income Distribution, Red Flag Manuscript, No. 5, 2011. Chen Yunquan, Labor Value and Knowledge Value, Philosophy Research, No. 11, 2001. Chen YY, Wang CG, and Wei CZ, Income Inequality and Its Changes Among Chinese Urban Residents in the 1990s—The Role of Regional Factors and Human Capital in It, Economic Science, No. 6, 2004 Chen Zhanglian, A Few Approaches to Restrain Power in the United States, China Monitor, No. 16, 2008. Chen Zhao, Wan Guanghua, and Lu Ming, Inter-Industry Inequality: The Increasingly Important Causes of Urban Income Disparity—Decomposition Based on Regression Equations, China Social Science, No. 3, 2010. Cong Riyun, The Civic Education Function of the Democratic System, Political Science Research, No. 3, 2001. Cui Hongyi, Problems and Countermeasures of Labor Relations in State-Owned Enterprises, Shanxi Normal University Journal (Social Science Edition), No. 1, 2002. Cui Jian, The Shadow Economy in Russia from the Perspective of Government Capacity, Shandong Economic Strategy Research, No. 8, 2009. Ding Xuedong, Several Issues on Expanding Domestic Demand, Management World, No. 12, 2009. Ding Yuanxing, Labor Property Rights and Harmonious Enterprise Benefit Distribution Relationship, Journal of Hubei Administrative College, No. 6, 2005. Ding Zhifeng, On the Basic Conditions of Wage Increase Under Market Economy Conditions, Financial Value China, May 22, 2009. Dong Jianping, Official Property Declarations: Reform Trends and Institutional Constructs, Journal of the Party School of the Zhejiang Provincial Committee of the Communist Party of China, No. 3, 2009. Dong Xiaoyuan and Li Shi, Women’s Employment and Income in China’s Urban Areas Under Economic Transition and Their Impact on Household Income Inequality, Economics (Quarterly), Vol. 6, No. 4, 2007.

References

541

Dou Ling, The Practical Experience of Power Restraint in Foreign Countries and Its Implications: A Discussion of the Ideas of Power Restraint of ‘One Hand’ in China, Academic Forum, No. 5, 2003. Du Zhaohua, The Essence of “Moral Crisis” and Its “Socio-Cultural Roots”, Journal of Central South University (Social Science Edition), Vol. 17, No. 1, 2011. Du Zhenji, The Origin of Morality and Human Needs, Journal of Theory, No. 5, 2003. Duan Wanchun, Wang Pengfei, and Zhong Chongfeng, The Construction and Evaluation of Corporate Culture, Science Press, 2008. Fan Jianzheng, Analysis of Public Power and Anti-Corruption and Integrity, Shanghai Party History and Party Construction, February 2009. Fan Yang and Zhang Qitai, Principles of the Philosophy of Law, by Hegel, Commercial Press, 1982. Fei Jinyun and Yan Ping, Property Declaration and Disclosure System for Public Officials in Korea, Journal of Law, No. 2, 1997. Feng Peicheng, Russia’s Shadow Economy and Corruption, Russian Studies, No. 1, 2004. Feng Tianyu and Zhou Jiming, The Mystery of Ancient Chinese Culture, Hubei People’s Publishing House, 1986. Friedrich von Hayek, Law, Legislation and Freedom, translated by Deng Zhenglai, Encyclopedia of China Publishing House, 2000. Fu Wei, Introduction and Comparative Analysis of Foreign Credit File Management Models, Global Vision, 2008. Ge Chenhong, Establishing a Mechanism of Moral Dedication and Moral Reward, Ethics and Civilization, Vol. 3, 2001. Ge Yuhao, The Effect of Sectoral Choice on the Gender Gap in Wages: 1988–2001, Economics (Quarterly), Vol. 6, No. 2, 2007. Ge Yuhui and Sun Weilian, The Construction of New Labor-Management Relations in China During the Transition Period, Business Times, No. 31, 2006. Gong Yutao, Discussion on the Development of the Third Sector in China, Journal of Chengdu Administrative College, No. 4, 2009. Gu Shutang and Cai Jiming, On the Principle of Distribution in the Primary Stage of Socialism, Theory Vertical (Previous), Hebei People’s Publishing House, 1988. Gu Xin and Fan Youqing: Trade Union Movement in the Context of Globalization: The Example of Major European Countries, Socialist Issues in the Contemporary World, No. 4, 2005. Gu Yingchun, The Century Enhancement of Business Civilization—Corporate Social Responsibility Vertical and Horizontal, Journal of Ningbo University (Humanities), No. 2, 2009. Guan Shan, Labor-Management Autonomy—A Unique Mechanism of Labor Relations Adjustment in Germany, Entrepreneur, No. 7, 1997. Guo Dali and Wang Yanan, A Study of the Nature and Causes of National Wealth (Next Volume), by Adam Smith, The Commercial Press, 2008. Guo Hongxia, The Constraint Mechanism of U.S. Government Officials and Its Implications, Journal of Graduate School of Chinese Academy of Social Sciences, No. 4, 2005. Guo Hongze, The Role of Faith in Moral Education, Jilin Education, No. 2, 2011. Guo Jianxiong, Human Capital, Fertility and the Convergence of Urban-Rural Income Gap, Chinese Social Science, 2005, No. 3. Guo Mengshu, Accelerating the Transformation of Government Functions to Effectively Curb Systemic Corruption, People’s Daily Online, December 15, 2010. Guo Yong, Economic Transition, Institutions and Corruption, Social Science Literature Publishing House, 2007. Hao Dawei and An Lezhe, Thinking Through Confucius, translated by He Jinli, Beijing University Press, 2005. Hao Jiming, Alienation of Public Power and Its Control, Journal of Jiangsu Radio and Television University, No. 4, 2008b. He Liancheng, On Labor Theory of Value Monism—A Brief Review of Su and Gu’s Controversy and Others, Chinese Social Science, No. 4, 1994.

542

References

He Mengpen, Government Competition: A Theoretical Analytical Paradigm for the Institutional Transformation of Large Countries, Journal of Guangdong Business School, No. 3, 2009. He Qinglian, The Pitfalls of China’s Modernization, China Today Press, 1998. He Qinglian, A General Analysis of the Current Evolution of China’s Social Structure, Book House, No. 3, 2000. He Zhonghua, Try to Talk About the Problem of the Relationship Between Market Economy and Morality, Philosophy Research, No. 4, 1994. Hong Ping, Some Thoughts on Improving the Real-Name System of Deposits in China, Finance and Economy, No. 10, 2006. Hou Guiwen, A Preliminary Study on Cultural Soft Power, Master’s thesis, Huazhong University of Science and Technology, 2009. Hou Jian et al., Freedom and Power: The Collected Discourses of Lord Acton, by Acton, The Commercial Press, 2001. Hu Angang, Corruption: China’s Biggest Social Pollution, China Reform, No. 4, 2001. Hu Angang, How Much Economic Loss Is Caused by Corruption, China Reform, No. 5, 2002. Hu Angang, China Challenges Corruption, Orient, No. 7, 2001. Hu Angang and Guo Yong, Economic Analysis of the Costs-Benefits of Civil Servant Corruption, Comparative Economic and Social Systems, No. 4, 2002. Hu Guogang, Problems and Countermeasures of Electronic Bank Notes Under the New Situation, Jilin Financial Research, No. 2, 2009. Hu Shigeng, A Stochastic Model of Macroeconomics, Huazhong University of Science and Technology Press, 2006. Hu Xueyan, The Chinese Way of Business, Contemporary World Press, 2005. Hu Ying, Income Distribution Policies and Implications in Postwar America, Theoretical World, No. 3, 2006. Hu Ying, Comparative Analysis of the Causes of Domestic Income Disparity Between China and the United States and Implications, Only the Facts, No. 1, 2008. Hua Jinqiu, Huang Min, and Wen Tao, The Real Name Financial System in Korea and Its Lessons, Finance and Economy, No. 1, 1999. Hua Yingfang, Labor Relations Adjustment in China, China Labor, No. 3, 2002. Huang Benyu, A Trial on the Reconstruction of Business Culture in the Age of Humanistic Economy, Modernization of Shopping Malls, General No. 511, 2007. Huang Chuan-Jie, The Origin of Labor-Management Tension in the Federal Republic of Germany, Western European Studies, No. 5, 1986. Huang Rujin, The True Meaning of Harmony Management: Harmony Produces Wealth, Cooperation Produces Victory, Journal of Management, No. 30, 2007. Huang Ying, Model Selection and Construction of China’s Personal Credit System, Master’s Thesis, University of International Business and Economics, 2010. Huo Xiumei, Promoting the Construction of World Trade Center with the Innovative Development of Business Culture, Exploration, No. 4, 2011. Jia Kang, Analysis of the Seven Causes of the Wealth Gap, People’s Forum, No. 3, 2011. Jia Kang and Yan Kun: Medium- and Long-Term Thinking on Improving the Reform of the SubProvincial Fiscal System, Management World, No. 8, 2005. Jia Xijin, Global Civil Society, by Lester M. Salamon, et al., Social Science Literature Press, 2002. Jiang Guoping, Regulating the Order of Distribution to Achieve Fair Distribution, Tangdu Journal, No. 2, 2004. Jiang Guoqiang, Rent Seeking, Imbalance in Distribution Relations and Its Countermeasures for Correction, Modern Economic Discussion, No. 5, 2011. Jiang Huafeng, On the Transformation of Government Functions and Anti-corruption, Qingdao Financial Daily, April 14, 2007, Jiang Jinqi, Zheng Fengtian, and Liu Jie, Health Risks and Belief Choices of Rural Residents, Southern Economy, No. 3, 2011.

References

543

Jiang Mingan, Administrative Law, Party School of the Central Committee of the Communist Party of China Press, 2002. Jiang Weishi, Research on Countermeasures for Establishing Property Declaration System in China, Master’s Thesis, China University of Political Science and Law, 2009. Jiang Yongming, A Study on Russia’s Shadow Economy, Master’s thesis, Jilin University, 2005. Jin Anguang, On the Crisis and Construction of Faith, Academic Forum, No. 3, 2011. Jin Yeqin, Political Participation and Citizenship Culture Cultivation, Journal of Guiyang Municipal Party School, No. 1, 2010. Jing Xuemin, On Faith in Contemporary Chinese Society, People’s Publishing House, 2008. Kang Le and JianHuimei, The Protestant Ethic and the Spirit of Capitalism, by Max Weber, Guangxi Normal University Press, 2004. Kang Long, The Influence of Chinese Traditional Culture on Chinese Accounting Culture, Master’s Thesis, Northeast University of Finance and Economics, 2010. Kang Xiaoguang and Feng Li, eds. 2011 China Third Sector Observation Report, Social Science Literature Publishing House, 2011. Kong Deyuan and Zhu Weiwei, Institutional Moral Construction—A Prerequisite for the Moral Construction of a Harmonious Society, Socialist Studies, No. 5, 2006. Kong Xiangren, Introduction to the Property Declaration System in the United States, China Monitor, No. 8, 2001. Kuang Xiaoping, An Empirical Analysis of the Impact of Transfer Tax on the Income Distribution of Urban Residents in China, Proceedings of the International Symposium on Income Distribution Theory and Policy, Wuhan, October 2011. Lang Xianping, Who’s Saving China: Behind the Recovery and Highlights of the Depression, Oriental Press, 2009. Ma Qinghuai, Selected Political Writings of Aquinas, by Thomas Aquinas, The Commercial Press, 1997. Ministry of Labor, Wage Problems in Private Enterprises in Various Places, December 21, 1951. Ministry of Labor, Wage Reform in the People’s Republic of China in the Past Three Years, April 24, 1952. Lai Ming and Cui Lu, Public Power, Individual Rationality and Institutional Checks and Balances— A Kind of Thinking about the Construction of Political Civilization in Contemporary China, Journal of Wuhan University (Humanities and Social Sciences Edition), Vol. 57, No. 5, 2004. Leng Shuqing and Zeng Guojun, Market Economy—The Cornerstone of Moral Progress, Jiangxi Social Science, No. 5, 2003. Li Bing’an and Xiang Shuqing, The Role of Government in Labor-Management Relations in the Transition Period, China Party and Government Cadre Forum, May 29, 2010. Li Chuanzhu, The Definition and Research Significance of the Concept of “Political Culture”, Journal of Anhui Education College, No. 3, 1997. Li Chunling and Li Shi, Market Competition or Gender Discrimination: The Trend of Widening Gender Difference in Income and Its Causes, Sociological Research, No. 2, 2008. Ma Dianjun etc., Civic Culture: Political Systems and Democracy in Five Countries, by Almond Wieba, Zhejiang People’s Publishing House, 1989. Ren Ze and Yu Zhen, Looking at Development with Freedom, by Amartya Sen, People’s University of China Press, 2002. Sun Yu, Principles of Ethical Economics, by Peter Koslowski, China Social Science Press, 1997. Wan Junren, Liberalism and the Limits of Justice, by Sandel, Translation Press, 2001. Wang Yintong et al., The End of Work—The Coming of the Post-Market Era, by Jeremy Rifkin, Shanghai Translation Publishing House, 1998. Wang Zhaoxiang, The Modern Characteristics and Innovation Model of Business Culture, Modernization of Shopping Malls, General No. 534, 2008. Wang Zhikang, The Choice That Determines Destiny, by E. Lazlo, Shanghai Sanlian Bookstore, 1997.

544

References

Wei Changling, The Manifestation of Moral Faith Crisis, Its Social Roots and Its Distortion, Journal of Henan Normal University (Philosophy and Social Science Edition), No. 1, 2004. Wei Chang-Ling, Folk Beliefs and Their Relationship with Moral Beliefs, Journal of Henan Normal University (Philosophy and Social Science Edition), No. 3, 2009. Wei Jie, Enterprise Frontier Issues, China Development Press, 2001. Wen Xiaoyi, The Adjustment Path of Labor Relations in Sweden and Its Implications for China, Productivity Research, No. 2, 2010. Wen Xiaoyi, Cooperativism in Swedish Labor Relations, China Human Resources Development, No. 4, 2010. Wen Xiaoyong, National Moral Crisis and Moral Reconstruction—Implications of Macintyre’s Moral Philosophy, Studies in Ethics, No. 3, 2006. Wu Canxin, A Brief Discussion of Moral Mechanism in the New Socialist Era, Philosophy Research, No. 5, 1996. Wu Jinglian et al., The Next 30 Years of China, Central Compilation Press, 2011. Wu Maomian, Institutional Innovation of State Intervention: The Third Sector—And on the Dimension of the Third Sector and Government Intervention, Thought Line, No. 3, 2007. Wu Weidong, Economic Analysis of Corporate Culture and Implications for the Construction of Corporate Culture in China, Mao Zedong Deng Xiaoping Theory Research, No. 4, 2006. Yan Fu, On the Spirit of Law, by Montesquieu, Shanghai Sanlian Bookstore, 2009. Yao Zhongqiu, The History and Philosophy of the Idea of Natural Law, by Heinrich Rohm, Shanghai Sanlian Bookstore, 2007. Zeng Guangle, Faith and Virtue: A Further Discussion of the Relationship between Religious Beliefs and Morality, Southeast Academic, No. 4, 2010. Zhou Hong, On the Origin of Morals, by Nietzsche, QIN JIA YUAN PUBLISHINF CO, 1992.

English References Aguiar, A.M., and Amador, M., 2011, Fiscal Policy in Debt Constrained Economies, NBER Working Papers No. 17457. Ahumada, H., Alvaredo, F., and Canavese, A., 2007, The Monetary Method and the Size of the Shadow Economy: A Critical Assessment, Review of Income and Wealth, Vol. 53, No. 2. Alanon, A., and Gomez-Antonio, M., 2005, Estimating the Size of the Shadow Economy in Spain: A Structural Model with Latent Variables, Applied Economics, Vol. 37. Antràs, P., 2004, Is the US Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of Substitution, Journal of Macroeconomics, Vol. 4, No. 1. Berthold, N., Fehn, R., and Thode, E., 2002, Falling Labour Share and Rising Unemployment: Long-Run Consequences of Institutional Shocks? German Economic Review, Vol. 3. Bian Yanjie, Xiaoling Xu, and John R. Logan, 2001, Commumist Party Membership and Regime Dynamics in China, Social Forces, Vol. 79. Blackburn, K., and Forgues-Puccio, G.F., 2007, Distribution and Development in a Model of Misgovernance, European Economic Review, Vol. 51, No. 6. Blanchard, O.J., 1997, The Medium Run, Brookings Papers on Economic Activity, Vol. 2. Blinder, A.S., 1973, Wage Discrimination: Reduced Form and Structural Estimates, Journal of Human Resources, Vol. 8, No. 4. Box, G., and Cox, D., 1964, An Analysis of Transformations, Journal of the Royal Statistical Society, Vol. 26, Series B. Caballero, R.J., and Hammour, M.L., 1998, Jobless Growth: Appropriablity, Factor Substitution and Unemployment, Carnegie-Rochester Conference Proceedings, Vol. 48. Cagan, P., 1958, The Demand for Currency Relative to the Total Money Supply, Journal of Political Economy, Vol. 66, No. 3.

References

545

Cameron, Kim S., and Quinn, Robert E., 2011, Diagnosing and Changing Organizational Culture: Based on the Competing Values Framework, Jossey-Bass. Chong, A., and Calderón, C., 2000, Institutional Quality and Income Distribution, Economic Development and Cultural Change, Vol. 48. Chow, Gregory C., 1985, A Model of Chinese National Income Determination, The Journal of Political Economy, Vol. 93, No. 4. Coes, D.V., 2008, Income Distribution Trends in Brazil and China: Evaluating Absolute and Relative Economic Growth, The Quarterly Review of Economics and Finance, Vol. 48. Commission of the European Communities, International Monetary Fund, 1993, Organisation for Economic Cooperation and Development, United Nations. World Bank. System of National Accounts, New York. Daniel, R. Denison, 1995, Toward a Theory of Organizational Culture and Effectiveness, Organizational Science, Vol. 2, No. 2. David Han-Min Wang, Jer-Yan Lin, and Tiffany Hui-Kuang Yu, 2006, A MIMIC Approach to Modeling the Underground Economy in Taiwan, Physica A, Vol. 371. David, P.A., and van de Klundert, T., 1965, Biased Efficiency Growth and Capital-Labor Substitution in the US, 1899–1960, American Economic Review, Vol. 55, No. 3. Dell’Anno, R., 2007, The Shadow Economy in Portugal: An Analysis with the MIMIC Approach, Journal of Applied Economics, Vol. 10. Dell’Anno, R., Gómez-Antonio, M., and Pardo, A., 2007, The Shadow Economy in Three Mediterranean Countries: France, Spain and Greece, A MIMIC Approach, Empirical Economics, Vol. 33. Diamond, P.A., and McFadden, D., 1965, Identification of the Elasticity of Substitution and the Bias of Technical Change: An Impossibility Theorem, Working Paper No. 62, University of California Berkeley. Diamond, P.A., McFadden, D., and Rodriguez, M., 1978, Measurement of the Elasticity of Substitution and Bias of Technical Change, In Fuss, M. and McFadden, D., editors, Production Economics, Vol. 2. Amsterdam and North Holland. Dincer, O.C., and Gunalp, B., 2008, Corruption, Income Inequality, and Poverty in United States, FEEM Working Paper No. 54. Duffy, J., and Papageorgiou, C., 2000, A Cross-Country Empirical Investigation of the Aggregate Production Function Specification, Journal of Economic Growth, Vol. 5, No. 1. Feige, E.L., 1994, The Underground Economy and the Currency Enigma, Supplement to Public Finance/Finances Publiques, Vol. 49. Fields, G.S., 2003, Accounting for Income Inequality and Its Change: A New Method, with Application to the Distribution of Earnings in the United States, Research in Labor Economics, Vol. 22. Fleming, M., Roman, J., and Farrell G., 2000, The Shadow Economy, Journal of International Affairs, Vol. 53, No. 2. Friedman, M., 1957, A Theory of the Consumption Function, Princeton: Princeton University Press. Glaeser, E.L., and Saks, R.E., 2006, Corruption in America, Journal of Public Economics, Vol. 90. Gregory, M.N., Romer, David, and Weil, David N., 1992, A Contribution to the Empirics of Economic Growth, The Quarterly Journal of Economics, Vol. 107, No. 2. Gupta, S., Davoodi, H., and Alonso-Terme, R., 2002, Does Corruption Affect Income Inequality and Poverty? Economics of Governance, Vol. 3. Gymiah-Brempong, K., and Gymiah-Brempong, S.M., 2006, Corruption, Growth and Income Distribution: Are There Regional Difference? Economics of Governance, Vol. 7, No. 3. Hongbin Li, and Yi Zhu, 2006, Income, Income Inequality, and Health: Evidence from China, Journal of Comparative Economics, No. 34. Isachsen, A.J., and Strom, S., 1985, The Size and Growth of the Hidden Economy in Norway, Review of Income and Wealth, Vol. 31. John, H.R., 1932, The Theory of Wages, Second Edition, London: MacMillan and Co.

546

References

Johnson, S., Kaufmann, D., and Shleifer, A., 1997, The Unofficial Economy in Transition, Brooking Paper Economic Action, Vol. 2. Jöreskog, K.G., and Goldberger, A.S., 1975, Estimation of a Model with Multiple Indicators and Multiple Causes of a Single Latent Variable, Journal of the American Statistical Association, Vol. 70. Conesa, Juan Carlos, Kitao, Sagiri, and Krueger, Dirk, 2009, Taxing Capital? Not a Bad Idea After All! American Economic Review, Vol. 99, No. 1. Julia, K., 1997, The Political Economy of Corruption in China, New York: M.E. Sharpe. Kanbur, Ravi, and Xiaobo Zhang, 1999, Which Regional Inequality: Rural–Urban or Coast–Inland? An Application to China, Journal of Comparative Economics, Vol. 27. Kanbur, Ravi, and Xiaobo Zhang, 2005, Fifty Years of Regional Inequality in China: A Journey Through Central Planning, Reform, and Openness, Review of Development Economics, Vol. 9. Karl Marx, 1956, Edward Aveling (Translator). Capital: A Critique of Political Economy (Volume I). Moscow, USSR: Progress Publishers. Keynes, J.M., 1936, General Theory of Employment, Interest and Money, New York: Harcourt, Brace and Co. Khan, A.R., and Carl, R., 1998, Income Inequality in China: Composition, Distribution and Growth of Household Income, 1988 to 1995, The China Quarterly, Vol. 154. Klump, Rainer, and Saam, Marianne, 2007, Calibration of Normalized CES Production Functions in Dynamic Models, Goethe University Frankfurt. Le´on-Ledesma, M., McAdam, P., and Willman, A., 2010, Estimating the Elasticity of Substitution with Biased Technical Change, American Economic Review, Vol. 100, No. 4. Li, H., Xu, L., and Zou, H., 2000, Corruption, Income Distribution, and Growth, Economics and Politics, Vol. 12, No. 2. Loayza, N.V., 1996, The Economics of the Informal Sector: A Simple Model and Some Empirical Evidence from Latin America, Carnegie-Rochester Conference Series on Public Policy, Vol. 45. Mehrara, M., Firouzjaee, B.A., and Gholami, A., 2011, The Corruption and Income Distribution in OPEC and OECD Countries: A Comparative Study, International Journal of Economics and Research, Vol. 2, No. 6. Meng, Xin, 2004, Economic Restructuring and Income Inequality in Urban China, Review of Income and Wealth, Vol. 50, No. 3. Mincer, J., 1974, Schooling, Experience, and Earnings, New York: Columbia University Press. Morduch, J., and Sicular, T., 2000, Politics, Growth, and Inequality in Rural China: Does It Pay to Join the Party? Journal of Public Economics, Vol. 77. Morduch, J., and Sicular, T., 2002, Rethinking Inequality Decomposition, with Evidence from Rural China, The Economic Journal, Vol. 112. Oaxaca, R.L., 1973, Male-Female Wage Differential in Urban Labor Markets, International Economic Review, Vol. 14, No. 3. Parish, W.L., and Michelson, E., 1996, Politics and Markets: Dual Transformation, American Journal of Sociology, Vol. 101. Ravallion, M., and Shaohua Chen, 2007, China’s (Uneven) Progress Against Poverty, Journal of Development Economics, Vol. 82. Rona-Tas, A., 1994, The First Shall Be Last? Entrepreneurship and Communist Cadres in the Transition from Socialism, American Journal of Sociology, Vol. 100. Shorrocks, Anthony F., 1980, The Class of Additively Decomposable Inequality Measures, Econometrica, Vol. 48. Shorrocks, Anthony F., 1984, Inequality Decomposition by Population Subgroups, Econometrica, Vol. 52. Shorrocks, Anthony F., 1999, Decomposition Procedures for Distributional Analysis: A Unified Framework Based on the Shapley Value, Unpublished Manuscript, Department of Economics, University of Essex. Smith, P., 1994, Assessing the Size of the Underground Economy, the Canadian Statistical Perspectives, Canadian Economic Observer, Vol. 11.

References

547

Solow, Robert M., 1979, Another Possible Source of Wage Stickiness, Journal of Macroeconomics, Vol. 1, No. 1. Steven, D.N., Andros, K., and Artur, M., 2001, The Local Solow Growth Model, European Economic Review, Vol. 45, No. (4–6). Tanzi, V., 1995, Government Role and Efficiency of Policy Instruments, IMF Working Paper No. 95/100. Thomas, J.J., 1986, The Underground Economy in the United States: A Further Comment on Tanzi, IMF Staff Papers, Vol. 33, No. 4. Thomas, J.J., 1999, Quantifying the Black Economy: ‘Measurement Without Theory’ Yet Again? Economic Journal, Vol. 109. Tylor, E.B., 1958, The Origins of Culture, New York: Harper and Row. Ullah, M.A., and Ahmad, D.E., 2007, Corruption and Income Inequality: A Panel Data Analysis, Economia Global e Gestão, Vol. 13. Walder, A.G., 1995, Career Mobility and Communist Political Order, American Sociological Review, Vol. 60. Walder, A.G., Bobai Li, and Treiman, D., 2000, Politics and Life Chances in a State Socialist Regime: Dual Career Paths into Urban Chinese Elite, 1949–1996, American Sociological Review, Vol. 65. Wan Guanghua, 2004, Accounting for Income Inequality in Rural China: A Regression-Based Approach, Journal of Comparative Economics, Vol. 32, No. 2. Wan Guanghua, and Zhang Xiaobo, 2006, Rising Inequality in China, Journal of Comparative Economics, Vol. 34, No. 4. Wan Guanghua, and Zhou Zhangyue, 2005, Income Inequality in Rural China: Regression-Based Decomposition Using Household Data, Review of Development Economics, Vol. 9, No. 1. Weber, Max, 1968, Economy and Society, New York: Bedminister Press. Wei Shang-Jin, and Yi Wu, 2001, Globalization and Inequality: Evidence from Within China, NBER Working Paper No. 8611. Wu Xiaogang, and Xie Yu, 2003, Does the Market Pay Off? Earnings Inequality and Returns to Education in Urban China, American Sociological Review, Vol. 68. Xiaoling Shu, and Yanjie Bian, 2002, Intercity Variation in Gender Inequalities in China: Analysis of a 1995 National Survey, The Future of Market Transition, Vol. 19. Xiaoyun Liu, and Terry Sicular, 2009, Nonagricultural Employment Determinants and Income Inequality Decomposition, The Chinese Economy, Vol. 42, No. 4. Yang, D.T., 1999, Urban-Biased Policies and Rising Income Inequality in China, American Economic Review Papers and Proceedings, Vol. 89, No. 2. Yanjie Bian and Logan, John R., 1996, Market Transition and the Persistence of Power: The Changing Stratification System in Urban China, American Sociological Review, Vol. 61. Yanjie Bian, and Zhang Zhanxin, 2002, Marketization and Income in Urban China, 1988 and 1995, The Future of Market Transition, Vol. 19. Zellner, A., 1970, Estimation of Regression Relationships Containing Unobservable Variables, International Economic Review, Vol. 11. Zhou Xueguang, 2000, Economic Transformation and Income Inequality in Urban China: Evidence from Panel Data, American Journal of Sociology, Vol. 105, No. 4.