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Common prosperity: more slogan than solution

First published: 10-11-2021

Common prosperity: more slogan than solution

Common prosperity is not a new slogan or mobilisation campaign for China’s Communist Party. It dates from 1953, and served important, though quite different purposes for both Mao and Deng Xiaoping.  Xi Jinping has revived it, referring to it at a Central Financial and Economic Affairs Commission meeting earlier this year as ‘an essential requirement of socialism’. 

This might sound self-evident but the extremes of income and wealth inequality in China warrant much closer scrutiny about what the  CCP means by ‘common prosperity’ and the context in which Xi has re-emphasised it. 

For the last 40 years or so, China’s political economy focus has been on what Marxists call  the forces of production, which is to say how the economy should be managed and people motivated to deliver rapid economic growth. Since the 19th party congress in 2017, though, the emphasis has shifted from the forces of production to the social relations of production. Reflecting concerns about the excesses and imbalances generated by China’s development model to date, this is an altogether different focus on income distribution, the treatment of capital returns, the role of the private sector, and the environment. It is, as Xi has said, the new contradiction to be resolved, ie, the quality of growth and of people’s lives. This is the context within which to view common prosperity, which, it should be said, is so far little more than a slogan. 

Some commentators, both in and outside China, have already expressed concerns that common prosperity may be an umbrella under which to target billionaires and successful entrepreneurs. To advance the cause, the government has started to set up common prosperity pilot zones, starting with the relatively wealthy coastal province of Zhejiang where income per head is already over $15,000. Goals have been set to boost a number of variables including the number of registered firms, the share of wages in GDP, urbanisation, college enrolment, and, to coincidentally to secure substantial corporate ‘donations’ to party projects and causes. 

Partly by way of response to fears that this is precisely the type of fight against inequality that might stifle the economy and discourage the private sector and innovation, the Commission’s executive deputy director, Han Wenxiu later said that ‘Common prosperity means doing a proper job both of expanding the pie and dividing the pie, on the foundation of the comprehensive building of a moderately prosperous society, energetically promoting high-quality development’. We will see. 

New development model 

The reference linking common prosperity with high-level development’, though, suggests that common prosperity might be expected to emerge out of a different pattern of economic development rather than as a created and typical welfare system model. It is important to note also that common prosperity, as Xi Jinping said at the start of the year, is ‘a major political issue that bears on our Party’s governance foundation’. The Party  clearly sees political risks in the extreme disparities of income and wealth between most people and the top 1 per cent, between regions, and between rural and urban areas. 

These framing references suggest that common prosperity is part of a new development model – which leaders acknowledge needs a make-over.  They talk nowadays, for example,  about the quality of growth, not the quantity, about the reduction of poverty and the growth of the middle class, about the necessity of financial stability, about a greener China, about innovation, and about vocational training as an alternative to college education.These goals may or may not be accomplished but there is no doubting the intent. 

The days when China could exploit under-utilisation of physical labour and capital are long gone, and the model that thrived on high savings, high investment and high debt isn’t delivering efficient or effective outcomes any longer. Productivity growth has stalled, the country is racked with too much debt and strains in the debt capacity of many borrowers, the real estate sector is facing a decade or more of denouement after over two decades of almost uninterrupted expansion, China is ageing faster than any other country on Earth, and it is facing the most hostile external environment since the Mao era. 

This environment, spurred by the trade war and growing concerns about national security on the part of both sides, explains, at least in part, the rationale for the Dual Circulation Strategy, announced in 2020, and which is fundamentally about decoupling, or self-reliance ‘in the new era’. Just as global firms in China have had to re-think their reliance on sole source suppliers and consider alternative or complementary locations for production, so Chinese firms have come under considerable pressure to underscore the ‘Made in China’ strategy, and especially to lessen or cut out dependence on high technology product imports from American and other ‘western’ suppliers.

Xi Jinping has spoken about a ‘new development concept’. Dual Circulation Strategy is an important part of this, but it has been joined by the recent and current regulatory blizzard blowing through important parts of the private sector, and greater emphasis on the organising and leading role of state enterprises. At the same time, private firms and entrepreneurs are being pressured, subtly and otherwise, to come to heel in pursuit of party goals and strategies. Common prosperity, mobilising the party and people behind ‘equality’, is the most recent and prominent  feature. 

The problem is that while all of these concepts or slogans help shed light on the political objectives, they don’t add up to a development model, or to policies designed to realise objectives. As much as the government may want them to work, it hasn’t, at least yet, been able to articulate a model that would both work and be politically acceptable. For that to happen, it would have to embrace liberalising market reforms, a major shift from investment to consumption in the structure of the economy, overhaul of the tax structure in favour of direct taxes, redistribution from the state to the private sector, the abandonment of the urban household registration system, and a new focus on both social welfare, and opening up service producing industries.

All of these things are politically awkward, if not impossible.

Common prosperity needs policies, as well as politics

Although there is a lot of discussion about common prosperity, it remains to all intents and purposes a slogan without substance.It would be helpful if authoritative people or senior party members had been authorised to explain what common prosperity entails and what sort of programmes the government is intent on pursuing. It is not reassuring than something like this has not happened. The only things that have been referred are the likelihood of taxation of ‘unreasonable incomes’, a focus on tertiary distribution, aka corporate donations, and pilot schemes for the introduction of a nationwide property tax, and common prosperity zones. 

The property tax proposal, on the drawing board since about 2011 and so far only in the form of mild pilot schemes in Shanghai and Chongqing,  has already been diluted in the face of the kind of stubborn opposition that has blocked this policy for over a decade. It now seems that a dozen cities will introduce pilot schemes and that the ultimate decision may be taken in 2025. 

Tertiary distribution differs from primary – basically what people earn through wages and salaries – and secondary – what they get via taxes and transfers – in that it relies on what people get via corporate donations and what we might call philanthropy. And the government can and has coerced private firms and billionaires into making donations to support party projects and goals for fear of succumbing to a regulatory backlash or punishment. This type of payment has typically been a small fraction of much less than 1 percent of GDP, and even if payments doubled or tripled, they would undoubtedly benefit causes, but not really make much difference to the mass of people or to regions. 

It is of course possible that more flesh, in the form of tax measures, public service provision and welfare programmes, will be added to the bones of common prosperity in due course. Yet, these things don’t seem to be on the agenda and public officials haven’t said much to encourage expectations that announcements along these lines will be forthcoming.

Nor does it seem that classic fiscal policy options revolving around redistribution of income and wealth are in the pipeline.

They should be because China’s Gini coefficients for income and wealth are very high, perhaps of the order of 48 and 70, respectively, and there is a strong case for redistribution from the top 1 per cent of income earners to the middle and lower income and wealth cohorts: the top 1 per cent now earn as much as the bottom 50 per cent of income earners, compared to a fifth as much in the 1980s when reform and opening up kicked off. 

In China though, common prosperity – to the extent that it means greater equality outcomes – is a big ask unless the authorities tackle a uniquely Chinese redistribution problem. Middle and lower income cohorts in China receive wages and salaries that are a much lower proportion of GDP than is the case in say, developed economies. While the latter report labour compensation as a share of GDP that is between 70-80 per cent, China’s is more like 55 per cent. Much of the difference is attributable to social transfers to households, which are about 8-9 per cent of GDP in China, but over 14 per cent in the US, and 18-19 per cent in the EU. 

In China the problem is not only that rich people earn so much more than most citizens, but also that the share of the economic pie allocated to citizens is repressed and constrained by the state sector. Redistribution then would have to be based strongly around state transfers or asset sales to 

the private sector – precisely the kind of shift which the CCP is adamant it doesn’t want to make. On the contrary. 

Common prosperity is a slogan about inequality, not a solution to it. That can only come from policies the party is unwilling to implement.