Ge Yanfeng

Research Report No 83, 2001

The issue of income distribution is one of the social problems attracting attention from all social circles. What deserves our attention, however, is the obvious disagreement in the analysis and judgment about several important problems concerning current income distribution. Different judgments could lead to different policy guidelines with different effects engendered; it is therefore necessary to make an analysis and put forward our views on the related issues.

I. How to view the issue of egalitarianism

By the mid-1980s, the outstanding problem in income distribution had been egalitarianism caused by the system of centrally planned income distribution as accepted by various social circles. From the late 1980s to the early 1990s, there was not only the problem of egalitarianism left over from the system of centrally planned income distribution, but also that of widening income gap arising from the economic system reform and the major change in income distribution, and various social circles have reached a consensus on this as well. Then, what is the outstanding problem at present? The academic circles have obviously different views about this. Some of them consider that the two problems – egalitarianism and widening income gap, coexist at present and they are rather acute; and some others consider that the widening income gap is the main problem.

Nobody will deny the fact that income gap is widening in general. Therefore, difference between two judgments actually concentrates on the problem of egalitarianism, that is, whether or not the problem of egalitarianism is still a prominent problem.

According to the first view, the problem of egalitarianism, particularly the minor income gap in and among the state-owned departments, is most outstanding, and top priority should be given to solve this problem. We deem that this judgment merits further analysis.

We hold that egalitarianism is no longer the prominent problem. First, judging from the general situation, the booming non-state sectors, both in the countryside and cities, decide their income distribution mechanism by market competition, and with the income gap widened, the problem of egalitarianism no longer exists. Secondly, as the reform advances, state-owned enterprises have essentially established their role as key market players, and the autonomy in their internal distribution is growing. The income gap between enterprises or within individual enterprises is gradually widening, and in some enterprises, the gap has become remarkably big.Therefore, one can hardly jump to the conclusion that egalitarianism is still a prominent problem in enterprise income distribution. Thirdly, the distribution system characterized by egalitarianism that we could see is the basic wage distribution mainly in government departments, public institutions and some state-owned enterprises. The problem, however, is that the basic wages constitute a small portion of income, and there are still other forms of distribution as non-wage cash distribution and non-cash distribution in addition to basic wage distribution. Such forms of distribution still constitute a large proportion and are usually uneven. Taking this fact into consideration, it is also difficult to draw the conclusion that egalitarianism is still a prominent problem. The minor difference in basic wages actually has its ground to exist.

Based on the judgment that state-owned departments still have serious egalitarianism in income distribution, some tend to advocate the government’s speeding up wage reforms in the state-owned sectors, or in simple words, further widening the wage distribution gap with an aim to solve the problem of inadequate incentive mechanism resulted from egalitarianism. We hold that even if the egalitarianism in some distribution fields of the state-owned sectors is considered a problem, such an proposal as direct readjustment by the government also deserves further consideration.

First, the government may have insufficient competence in readjustment. To widen the income gap through the means of wage system reform has to, in principle, rely on increasing the total payroll, resorting to incremental adjustment rather than stock adjustment. The consequence of this option is to increase the cost of enterprises and to further increase fiscal expenditure for government departments and institutions. Considering the fact that a large number of state-owned enterprises are still in the loss-making status many local governments have financial difficulties, it is hard to predict if there is sufficient capability to make such adjustment or what consequence it will bring about particularly in the difficulty-ridden regions.

Secondly, it is highly possible to eventually lead to further widening of income gap among residents. In the state-owned sectors, non-wage cash income and non-cash income in various forms make a large and uneven proportion in the total income distribution, and it is difficult to solve this problem in a short period. If the wage difference were further widened, the difference in actual income among employees of state-owned departments would worsen. The widening of this gap will obviously have an impact, big or small, on the income gap among residents. It also deserves a second thought whether or not the widening income gap so arising could be accepted by the residents.

Thirdly, it is highly possible that it will have a negative impact on various ongoing reforms. According to the reform goals, the income distribution in the state-owned and state holding enterprises in the competitive fields shall be gradually liberalized on the basis of diversified stock rights and improvement in the internal corporate governance, and should be decided by the enterprises according to market rules. If the government continues to directly intervene into the income distribution of enterprises, it would be detrimental to the relationship between the government and enterprises, neither will it be constructive to the improvement in the internal corporate governance of the enterprises. On the contrary, it is highly possible to consolidate the current pattern of distorted income distribution.

The distribution within government departments, institutions and industries with natural monopoly should be controlled by the government, but such control and the extent of control must be decided with reference to such factors as social average wages on the basis of introducing internal competition mechanism and allowing free flow of talents and laborers. Unless some basic problems could be solved, simply imposing wage control is extremely undesirable for various reform measures, including institutional reform and personnel system reform.

In sum, egalitarianism is not the prominent problem at present. With results of various surveys and studies as reference, it is obvious that public attention concentrates on the problem of the widening income gap, and few people consider egalitarianism as a problem. Against such a background, it is absolutely unwise to regard a solution to the egalitarianism as one of the policy priorities in the future. Even if this problem is to be addressed, it should be conducted on the basis of a thorough reform of personnel system and distribution methods (such as full monetization of income and an adequate truthfulness of wages).

II. Has the current income gap and distribution conflict gone beyond the tolerance of the society?

Since the adoption of reform and opening up policy, the widening income gap among residents and the resulting contradictions and problems have been commonly recognized. However, there are obviously different judgments on how serious this problem has become. One judgment holds that there are problems, but not very serious. The income gap and relevant social problems are still within the limit of tolerance of society, and it makes no difference if the income gap is further widened. Another judgment holds that the current problems have become so serious as to approach the extreme limit of unacceptability by the society, if not beyond it. Our judgment favors the latter.

Judging from the objective income gap, the estimated Gini coefficient (with urban and rural combined) widely accepted by most people stands at about 0.45. Considering the incommensurability between farmers’ income and urban income and serious statistical errors in high incomes and illegal incomes, the actual gap is much bigger.

The 0.45 Gini coefficient or even higher in reality indicates that the income gap in China has far exceeded that in the majority of countries and regions. As an empirical result accepted by the international community, social contradictions or even unrest may arise when the Gini coefficient exceeds 0.4. Because China is still a low-income country, a wide income gap inevitably means poverty for some people, or even a large proportion of the social members, and an even weaker social tolerance for income gap. Therefore, we should be on the full alert for the current objective income gap, let alone other factors.

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