The biggest challenge to Western-style capitalism in many industrialized countries today is inequality, the schism between the elites and grassroots masses, and the growing distrust of people toward the government and its institutions. These countries managed to grow rich, but without commensurate growth of the middle class. The “squeeze” as they call it in the West is evidenced by the fact that the real income of the middle class has not grown in the last 40 years, and that the next generation are worse off in real terms than their parents: In 1975, 90% of people earned more than their parents, whereas that number has fallen to less than 50% today.
China wants to do better. The Chinese government tends to prefer “group” to “class” when it comes to income levels. Therefore, it could be understood that China’s commitment to “common prosperity” carries a special weight on making the middle-income group of the population prosperous. China is striving to solve the most intractable problems which Western-style capitalism in its many varieties have been unable to deal with — and taking proactive actions ahead of the West. In the new digital age, where companies can grow boundlessly in a short time and the control of people’s data can lead to their misuse and manipulation against consumers’ will and interest, markets are poorly equipped to regulate market players’ behavior, still less their social responsibility.
The drive to marry prosperity with equity is a noble one, but it is important first to clarify some egregious misconceptions for such a hotly debated topic. First, not all inequality is “bad.” Income disparity could be the consequence of different attitudes toward life. Some people choose to work hard, while some others decide to languish on the beach. There is no reason why they should be earning the same income, or enjoying the same consumption. Chinese society prizes diligence. It is unlikely that China will become a large welfare state like some of the European economies. But China can do better in reducing income disparity while keeping the incentives for hard work.
There is a thorny issue of how to deal with the superrich. That is also a challenge for developed countries. Not all rich people are the same. Russian oligarchs who became billionaires by grabbing immense national assets through privatization are not to be mentioned in the same breath as those billionaires, such as Bill Gates, who have created cutting-edge technologies. Society needs those who are highly motivated to make changes that lead to efficiency gains and betterment of people’s lives through innovation and entrepreneurship. Furthermore, rich people’s behavior and lifestyle could be worlds apart from each other. Donald Trump and Warren Buffet do not deal with their wealth in the same way: Trump indulges himself in an ostentatious display of privilege, and purchases political influence, while Buffet keeps allocating resources to growth-potential investments and promising startups with his acumen, foresight and market-savviness. Buffet’s wealth directly spurred innovation and growth in the economy, which trickles down to more jobs and wealth for others. Gates’ philanthropic efforts help many people in need in Africa and elsewhere. Penalizing rich people and treating them indiscriminately is not sensible. Societies still need successful entrepreneurs with huge wealth to continue to invest and expand their businesses, creating jobs and funding small and midsize companies and startups. In China, wealthy businesspeople should be encouraged to do more in charity. They are not to be forced to dispense their wealth under a compelling obligation. Those who donate to society as their well-disposed payback should be recognized and encouraged. This will serve as a silent moral suasion.
It also makes lots of sense to tackle the “unequal” parts, such as entry barriers, unfair competition, excessive monopoly power, and corporations that suppress labor rights. Multinational companies tend to move around their profits through internal transfer so that they can pay as little tax as possible, locating themselves in places like Ireland, the Netherlands, or the Cayman Islands. A significant share of the rich people’s wealth is tucked away in offshore havens. Furthermore, capital income is taxed lightly whereas labor income is taxed heavily, giving unfair advantage to asset owners.
We also need to think more broadly about “equality” beyond income or wealth. The concept of “pre-distribution” is an important one — what a citizen born into the Chinese society has in terms of access to free and good education, health care and social infrastructure. What a retired citizen has in terms of finding support and a place in communities. I walk in the park close to my residence in Beijing and see the elderly citizens merrily engaging themselves in fitness activities every morning, having more than 30 groups to choose from. You could also see the weekend choir whose performance is intended more for their self-aggrandizement and artistic enjoyment than for the spectators. I’ve never seen that in any other country. Common prosperity renders it possible for an enlarged middle-income group to enjoy their lives, particularly in their post-retirement life. Social harmony starts from communal happiness.
So, what should be done? For one, corporations abusing their power should be reined in. The phenomenon is most stark in the U.S, where powerful lobbyists and corporations sway policies in their favor, where companies such as Facebook are not always disciplined commensurate with their wrongdoings as they deserve. It is known to have caused deep problems in society, such as helping terrorist groups coordinate or incite violence, or to create disinformation that manipulates consumers and voter preferences. Yet, nothing is done about it because it has the backing of some politicians that leverage the platform to garner public support.
Second, increased social mobility should be exploited to help the disadvantaged overcome the tyranny of geography — those vulnerable people who were trapped generation after generation in marginal, godforsaken areas. Economically vibrant areas teeming with innovation are correlated with high degrees of social mobility. Innovation can hardly come out of a stagnant pool of labor. A farewell to social traps precedes a farewell to poverty. Mainstreaming the poor from backwater places into economically active areas can rid them of a sense of predestination and prod them to work hard and come into their own.
Governments should consider taxing capital gains and carried interest at a higher rate than is the case now, and ramp up efforts to crack down on tax evasion. Taxation policies should also encourage innovation and incentivize companies to do more research and development. Most importantly, China should focus on creating jobs, even if technological advancement would do the opposite. Nevertheless, technology can also create jobs not seen before. Policies devised to incentivize companies to use more labor than capital will nudge them in the right direction — just like pushing firms to adopt clean energy will achieve the purpose. Finally, climate change will entail a host of new inequalities that deserve more focus and attention on who should be bearing the cost of making society a cleaner and greener one.
Common prosperity is a broader pursuit than just reducing income inequality, or redirecting wealth away from the top 1%. Of course, China should not let a large part of the wealth get into the hands of a few, but it is also important to recognize that reducing the wealth at the top does not automatically mean that everyone else will be substantially and sustainably better off. Instead, common prosperity is predicated on a whole range of policy initiatives and activities, from pre-distribution to redistribution, to make this a fairer (if not completely equal) society, to make sure that the majority of households have the chance to live a decent life with dignity, which every citizen deserves. Whether Western-style capitalism or China’s modern socialist economy can get there first is the most important competition of all.
Keyu Jin is a professor of economics at the London School of Economics.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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