Common Prosperity: A Conundrum for China

To celebrate the 100th anniversary of the establishment of the Chinese Communist Party (CCP) in 2021, China hailed its “historic transformation” from a poverty-stricken country to a “moderately prosperous society” (xiaokang). The recently published government white papers on prosperity and advancing human rights declared that under a xiaokang society, the disposable incomes and quality of life of the people have improved significantly and the social insurance and nine-year compulsory education coverage have almost been fully achieved.

Above all, income disparities in between urban and rural residents and among regions/provinces have narrowed. China’s Gini coefficient, the key measure of income inequality, has declined. In the next stages of development outlined by the 14th Five-Year Plan (2021-2025) for National Economic and Social Development, the Long-Range Objectives Through the Year 2035, and the goals set for the centennial of the People’s Republic of China in 2049, China aspires to avoid the middle-income trap to become a high-income economy soon and then a modern socialist country by 2050.

New political, economic and social risks have emerged, however. Internationally, political and trade tensions have produced a more hostile and uncertain environment for maintaining continuous economic growth. Internally, China’s per capita income is still only about a quarter of that of high-income economies, and about 180 million Chinese live below the poverty line of US$5.50 a day.

Facing those formidable challenges, the World Bank and the Organisation for Economic Co-operation and Development (OECD) have called on China to formulate not only a new and sustainable economic development strategy but also to consider the urgent need to share more broadly the benefits of growth.

In recent speeches by Xi and policy documents, notably the 14th Five-Year Plan and the Long-Range Objectives, the term “common prosperity” has been included as the directive for China’s development. Bloomberg reckons that Xi uttered the term 65 times in addresses or meetings in the first eight months of 2021. On October 15, in an essay in Qiushi, the CCP’s journal on political theory and ideology, Xi expounded further on the meaning of “common prosperity”.

Like the concept of xiaokang, the term “common prosperity” has its roots in the Confucian utopian ideal of “Great Unity” (Datong). Beginning with Deng Xiaoping, followed by Hu Jintao and then Xi, China has begun to revive and incorporate traditional Confucian ideals into the Communist governance ideologies. Deng set the policy of allowing some people and some regions to become prosperous first to achieve common prosperity faster. 

To be sure, the concept of common prosperity remains a visionary and inspiring promise, as well as a general developmental directive. So far, there is no official detailed clarification of the concept, and comprehensive implementation plans are not yet on the government agenda. The Publicity Department of the Party gave a brief outline of it in August:

The concept

Based on the foundation of reaching a xiaokang society, the key tasks are how to make a bigger “cake” and how to distribute it. These include promoting high-quality development, raising incomes of the urban and rural residents, gradually reducing income gaps, and preventing social polarization. Common prosperity is just that – for all the people, not a minority. It includes both material and spiritual prosperity. It does not mean absolute equality; income gaps are acceptable.

The strategy

Common prosperity should be achieved through hard work and entrepreneurship. Through legal operations, entrepreneurs can become rich first, and help others to get rich later. This is not a matter of “killing the rich to support the poor”. In the process of development, it is important to offer people improvements in security and livelihood. Enhancing people’s educational levels and development capacities through universal and equitable provisions provides opportunities for upward mobility and wealth creation. In implementing the equalization of public services, it is important for the government to its best, but within its capacity. China should not fall into the welfare trap, encouraging dependency and laziness.

In coordinating and rearranging primary income distribution, redistribution and tertiary distribution, income taxes and social transfers should increase, expanding the middle-income group and creating an olive-shaped distribution structure, which is larger in the middle and smaller at both ends. With a supplementary distribution function, tertiary distribution (charitable donations and similar support) should be voluntary, not compulsory. It should be promoted through tax incentives. 

Long-term development

The process of moving from a middle-income xiaokang economy to a high-income modern socialist country is a complicated long-term endeavor. With the emphasis on Party leadership in the reform process, common prosperity is another political ideology to unify the country, promote the Party’s legitimacy and consolidate governance foundation in the context of a perceived hostile international environment and looming internal contradictions. It is clear that the Chinese government is not convinced of the strategy of “trickle-down economics” in which taxes are cut for the rich so that the benefits can drip down to the poor. At a recent roundtable discussion, leading academics seemed to agree that the Chinese approach should be different from the Nordic welfare development and is not simply about “taxing the rich and supporting the poor”. It should emphasize hard work and entrepreneurship and aim to create more opportunities for upward mobility and building wealth before redistribution.

Accordingly, an aggressive redistributive strategy using progressive taxation on rich individuals and businesses would be rejected. Instead, more tax revenue would come from the crackdown on corruption, tax evasion, illicit incomes of celebrities, and unfair business practices. In his Qiushi essay, Xi called for progress on legislation to implement a property tax, which Chinese authorities have been considering for years. Indeed, without substantially increasing government, particularly local government revenues, the tasks of redistribution through government social transfers would be difficult to achieve.

In promoting common prosperity, it is important to “make a bigger and higher quality cake” and at the same time decide how to “divide the cake”. It seems that creating wealth is still the major priority before redistribution. The role of the government is to ensure fairness and efficiency, let no one fall behind, and prevent polarization of society. The central strategy of achieving common prosperity is to enhance the equality of opportunity, facilitating the improvement of people’s livelihoods through their hard work and entrepreneurship to raise their incomes. In his Qiushi piece, Xi notably warned against the “lying flat” (tangping) trend among young people wanting to step back from intense workplace competition.

A central directive of achieving common prosperity is the expansion of the middle class. A bigger middle class is pivotal to expanding domestic consumption and the market in line with the new economic strategy of “dual circulation”. The self-reliance strategy of promoting the internal market as the engine of growth is expected to reduce dependence on exports and overseas investments. According to the Development Research Centre of the State Council, China aims to double the current number of people living on annual incomes of between 100,000 and 500,000 yuan for a family of three to 800 million people within a decade. As pledged in the 14th Five-Year Plan, the top priority is to boost employment, shifting focus to wage growth and expansion of the vocational education system to help drive domestic demand and upgrade industry.

As pointed out by the World Bank and OECD, reducing the gap between urban and rural incomes is the key to inclusive growth. Since 2017, China has emphasized “rural vitalization” and rural-urban integration through poverty alleviation, modernizing agriculture, urbanization, infrastructure and social service investment, and industrialization. Yet there are no specific plans to resolve complicated issues such as household registration, land rights, and quality education. Equalization of public services between rural and urban areas is a long-term commitment.

The concept of “tertiary distribution” is seen as a key strategy in promoting common prosperity. The concept encourages charity contributions from rich individuals and profitable enterprises, as well as volunteering. Charitable corporate donations in China have only a short history. The government only began to recognize its importance after the Sichuan earthquake disaster in 2008, in which charitable contributions proved significant. According to the World Giving Index, however, China’s charity performance, based on the proportion of the population participating in three aspects – volunteering, donations, and helping strangers – ranked bottom among 126 countries from 2010 to 2019. Yet in 2020, while the global charity development had been crippled severely by the pandemic, China’s ranking rose to 95th among 114 countries. After the implementation of the Charity Law in 2016, charity donations have soared significantly, though in 2017, they accounted for only 0.2 percent of GDP, compared with 2.1 percent in the US.

Noteworthy is the fact that charity donations in developed countries only constitute a very small proportion of the total GDP (The average public social spending expenditure of OECD countries is around 22 per cent of GDP). From the experience of many countries, the capacity of philanthropy to redistribute incomes and reduce inequalities is limited. In fact, countries with flourishing charity programs tend to be those where state welfare is limited, and the role of the government in welfare is residual.

In response to the government’s initiatives, billionaires and big enterprises in China have committed substantial charity donations to demonstrate their corporate social responsibility. At issue is whether these responses are sustainable. From another perspective, enterprises can be more effective in supporting the common prosperity directive by raising the wages of their low-income employees, improving social security contributions, and paying required taxes on time rather than by making charitable donations out of their substantial profits.

Internationally, the Nordic countries have come to represent a model welfare state, marked by high taxation, generous state welfare, and a low level of poverty and income inequality, as well as having top scores in the OECD “well-being” index. The Nordic experiences, however, are very difficult to transfer to other countries, especially developing economies. China has resoundingly rejected this model.

Given that China has been cautious, incremental, and gradual in initiating sensitive economic and social reforms, particularly in the current uncertain global environment, it cannot drastically change its current taxation policy, raise workers’ wages, and substantially improve its social transfers to the poor. These are sensitive issues which can have serious repercussions on the economy’s competitive advantages. Vigorous government intervention would also stifle the development of the private market. It would be difficult to foresee a basic restructuring of the distributive system in China in the near future. The road to common prosperity will pose a significant long-term policy conundrum for China as it aims to balance economic efficiency and equity.