Right time for China’s ‘common prosperity’ drive

Author: Cai Fang, CASS

Two hands run the Chinese economy, the market and the government. Market forces overwhelmingly allocate resources, after getting prices and incentives right. Government regulates competition, corrects market failures and safeguards fairness of distribution. China’s political leadership proposes and frames principal policy concepts to signal new policy directions to the people and direct various levels of government on policy priorities.

A prominent organising policy idea now is the concept of ‘common prosperity’. The Chinese leadership calls for promoting common prosperity in the course of high-quality development and building the necessary institutional structures to achieve this. The institutional structures will serve to coordinate the three domains of distribution — primary, secondary and tertiary. Primary distribution refers to income distribution among capital owners, labourers, and the government. Secondary distribution refers to government-led redistribution, and tertiary distribution engages with society through philanthropy and social responsibility.

The concept of common prosperity is not new in Chinese politics. It appeared when former Chinese leader Deng Xiaoping initiated economic reform in the late 1970s, and at the 1992 14th National Congress of the Communist Party of China (CPC) that declared its aim was to build a socialist market economy. The 18th and 19th Central Committee of the CPC under the leadership of President Xi Jinping included the term common prosperity in all major policy documents produced by the Party and the central government.

There is consensus around the benefits of past economic reform among the Chinese people as the gains from reform and opening have translated into improvements in living standards over the past 40 years. Yet despite growing prosperity, China has experienced periods of widening income inequality.

Prior to 1997, China’s income distribution was relatively equitable, given that reforms at the time were more focused on improving market incentives — known as breaking the ‘iron-rice bowl’, where people competed for scarce public sector employment in the absence of a strong private sector.

In 1997, the ratio of rural to urban household income was 1.833 and the Gini coefficient of nationwide income distribution was 0.398. Both indicators have since increased and reached their peaks — the rural-urban income ratio was 2.674 in 2009 and the Gini coefficient was 0.491 in 2008. In the decade that followed, the income gap has steadily narrowed, though only moderately. In 2019, the rural–urban income ratio and Gini coefficient was 2.325 and 0.465, respectively, hardly a satisfying result.

The leadership’s reiteration of common prosperity as a principal policy goal comes at the right time, for three reasons.

First, it is a logical continuation of the long-term task of eliminating poverty and nurturing the low-income to the middle-income group. From 2012 to 2020, China lifted 99.9 million rural people out of poverty, measured against a poverty rate of US$2.3 in purchasing power parity terms per day. If the elimination of absolute poverty corresponds to the goal of building a welfare society by 2020, realising common prosperity corresponds to the next goal of building a modern socialist country by 2049.

Second, there is need to tackle the challenges facing China’s economic development and social cohesion. The Chinese economy is increasingly constrained by weakening demand as its population rapidly ages. Growing the pie and dividing it fairly is the key to increasing the contribution of household consumption to economic growth.

Existing income inequality and the related entrenchment of social immobility causes discontent from low-wage workers, youth and the less-educated groups. The reassertion of common prosperity is both a credible solution to their problems and a skilful response to public opinion that favours action on combatting income inequality.

Third, it conforms to international experience and common practice. All three domains of distribution have their specific functions and appropriate tools to help reduce inequality in earnings, asset ownership and access to public services. The logical conclusion of China employing the market as the decisive mechanism of allocating resources, is that primary distribution retains its foothold, which guarantees that efficiency and incentives remain unharmed. A more dynamic economy will in turn enhance productivity and social mobility simultaneously.

China’s real per capita GDP is predicted to increase from US$10,687 in 2020 to US$23,000 in 2035. In such a span of development, according to cross-national data, the average proportion of government expenditure to GDP increases from 26 per cent to 36 per cent. This indicates a huge leap in the expansion of the welfare state which can significantly narrow the income gap.

The 19th National Congress of the CPC proposed a blueprint for the provision of basic public services. This included equal provisions for the nourishment of minors, children’s education, a decent working age wage, healthcare, support for the elderly, housing and assistance for vulnerable members of society.

Primarily using redistribution tools — supplemented by charity and social responsibility — the level of social welfare, social mutuality and social protection will all be strengthened. Inequality will be reduced as common prosperity is realised.

Cai Fang is former Vice-President and Professor at the Chinese Academy of Social Sciences.

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