China Takes On Robbin' Hoods

The Age

Tuesday July 22, 2008

John Garnaut

The Chinese Government recently abolished agricultural taxes, a big step towards reversing a chronic and systemic robbing of the poor.

AUSTRALIANS may be loath to believe it but their Government tends to take from the rich and give to the poor. Australia would be a far more unequal place if not for progressive tax and welfare.

China, however, has mostly been the other around.

Since feudal times, and under Chairman Mao, the system taxed dirt-poor peasants a portion of their harvests in order to feed the cities and accumulate capital for the state. The nadir was during the Great Famine of 1958-61, when grain was taken from peasants who were starving to death while those in cities mostly survived and the "surplus" was exported.

Recently the Chinese Government took a big step forward by abolishing agricultural taxes, thanks in part to the intellectual work of Justin Lin, then director of Peking University's China centre for economic research. Last month Professor Lin started work at one of the world's most prestigious economic posts: chief economist at the World Bank in Washington.

The Chinese system still robs the poor to give to the rich. But these days it does so indirectly - by empowering the state and its associated capitalists to overexploit the nation's capital, business opportunities, land, mineral resources, environment and labour. Peasants, workers and the nation as a whole are being paid far less than they would be in a fair market. The fact that the market is rigged against the poor helps explain why the profits share of China's national income has soared in recent years and the wages share has crashed.

So, Lin's current campaign is to stem the flow from poor to rich by encouraging China to move towards market prices for the factors of production.

"I think this is the most important issue," says Lin, in a phone interview from Washington. "In the past the focus has been on efficiency. But the important thing is to achieve efficiency and equity at the same time."

Lin first floated the concept of "primary distribution" in a speech in December 2006, and then followed up with a commentary in the Government's mouthpiece, the People's Daily, on April 28 last year. Then, in October, President Hu Jintao gave the ultimate confirmation that the system was listening. He said in the five-yearly presidential report to the Communist Party Congress: "We will gradually increase the share of personal income in the distribution of national income, and raise that of work remuneration in primary distribution."

It was an important new trajectory for China. And in case people were unsure about what exactly President Hu was referring to, the People's Daily published an interview with Lin on the subject in January.

"This is the first time the Party Congress has mentioned we need to achieve efficiency and equity simultaneously," says Lin.

Lin set out his views in more detail in a chapter in China's Dilemma, a book published by the Australian National University last week.

"Providing subsidies to the rich by extracting from the poor will lead to a worsening of income and wealth distribution," he writes. "The price system must sufficiently and flexibly reflect the relative scarcity of every factor in the factor endowment structure."

The Chinese leadership, the World Bank and many of China's leading scholars are in broad agreement that China needs to adjust the availability and price of finance, land, labour and resources. Experts differ on the priorities depending on whether they are most concerned with equity, efficiency, labour rights, peasant land rights or the environment.

Some wonder whether the state will be willing to give up the power that comes with hugely profitable state-owned enterprises; others whether the Government can begin raising production input prices while inflation remains uncomfortably high.

Lin believes the state will let go "gradually" and it need not worry too much about consumer prices. "If you raise the land price and also raise the capital price, investment demand will reduce; and that's not necessarily inflationary," he says. "And if you raise the price of resources - like oil and coal - that will only affect profit margins."

He says the first priority is to reform the financial sector in order to divert funds from the state-owned giants - which have more cheap capital than they know what to do with - to small enterprises that have to pay blackmarket rates for loans. Small private banks need to be allowed to flourish.

His second priority is much larger and better-enforced resource royalties. Third, he calls for an end to the "administrative monopolies" that protect state-owned companies in "strategic" areas from private-sector competition, which needs to be accompanied

by a better market-focused regulatory regime.

Inflation is high, export and gross domestic product growth are falling, capital inflows are accelerating and key world markets are in trouble. But perhaps the risks are no greater than usual.

President Hu and Premier Wen Jiabao previously introduced welfare transfers and ramped up social spending in poor areas. And yet figures from last year show China is the most inequitable nation in Asia and getting more so. Perhaps the answers to China's equity, efficiency and environmental problems lie with a market-driven "primary" distribution of resources.

© 2008 The Age

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