Op-Ed Contributors

Bridging the income gap

By Qi Jingmei (China Daily)
Updated: 2010-03-17 07:52

Economist makes case that new distribution must increase rural incomes and use taxation that favors the majority

Reform of the nation's controversial methods of income distribution was the center of the agenda at this year's session of the National People's Congress (NPC) that concluded Sunday. In his government work report to the top legislature, Premier Wen Jiabao vowed to incorporate more into the share of national revenues by continuing to develop the economy, but also promised to distribute it evenly based on a rational system.

Wen's remarks are a clear signal that the government knows that it must rectify wealth distribution in order to increase spending and consumption as well as improve the standard of living. It understands that closing the income gap will allow the country to transform its investment-dependent economy to a consumption-driven one.

Over the past three decades since the reform and opening up, China's gross domestic product (GDP) has grown at an annual average rate of 9.8 percent, faster than any other major economy. That GDP growth rate from 1978 to 2008 was also 2.6 percent and 2.7 percent higher than the income growth among urban and rural residents, respectively, during the same period.

Bridging the income gap

The lack of symmetry between the development of people's incomes and national wealth has created a number of problems, such as a low rate of consumption to GDP and a widening income gap. The proportion of incomes for laborers has declined in recent years. Statistics shows that this proportion in China is 15-20 percentage points lower than in some developed countries, where the proportion stands at about 50 percent.

The expanding income gap between urban and rural areas, rich and poor, as well as between different industries and different regions has pushed the Gini coefficient, a measurement of wealth inequality, to 0.48 in 2007, exceeding the 0.4 cautionary level.

The gaping income gap makes it imperative for China to redistribute its wealth to boost the national economy in a more balanced fashion. With its economy accelerating in recent decades, China's comprehensive national strength and revenues have grown dramatically. Conditions are thus favorable for raising people's incomes and improving the standard of living.

But if the country is committed to transforming its economy and boosting consumption, as it has often said, it must start by increasing people's incomes. China's efforts to revamp the economy is closely related to income distribution, which has yet to be resolved.

Its economic transformation must begin with coordination of its demand pattern to sustain growth.

The establishment of a more rational method of distributing income is also expected to help ease the minds of people who are reluctant to spend.

Last year, China's per capita GDP was $3,678, which, according to World Bank standards, is the level for an intermediate-income country and region.

More consumption is believed to drive people to improve their standards of living and reap the fruits of the economic boom. China must transform from "a wealthy country" to a land of "wealthy people".

Premier Wen mapped out measures to push for the country's income redistribution and increase people's incomes in his government work report. To further reform how the nation distributes income, the premier vowed to adopt and effectively establish a mechanism aimed at ensuring a normal rate of wage growth. Measures will also be adopted to guarantee that the incomes of laborers will be increased.

The new distribution will also gradually favor laborers in that it will increase the proportion of residents' incomes to the national revenues and increase their remunerations in the first distribution of the country's incomes.

The first and second distribution of the country's incomes will be efficient and impartial, Wen said in his report.

He also said that effective measures will be taken to reform the current income distribution in the country's monopolistic industries. The unreasonably high incomes among these industries have long been a source of public dissatisfaction and should be strictly regulated, he added.

To frame a more reasonable income distribution mechanism, the country's financial and taxation instruments will be in a better position to regulate the redistribution of national wealth. A workable mechanism to bridge the widening income gap will also be established. In this process, forcible measures have been vowed to ban any illicit incomes and the government has promised to create a transparent and open income distribution system.

As people's living conditions improve, they have mounting expectations for the construction of a well-developed social security network and better development in other social aspects, ranging from employment, healthcare and housing to food safety. To press ahead with the long-anticipated reforms on the current income distribution, the government should take concrete steps to improve people's livelihood as a key channel to boost a lasting domestic consumption and try to construct a social security network.

The author is a senior economic analyst with the State Information Center.

(China Daily 03/17/2010 page8)