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One-time doles no help in tackling big issues

By Sun Lijian (China Daily)
Updated: 2008-07-17 07:31

The city government of Dongguan, in southern China's Guangdong province, announced that it was planning to distribute more than 120 million yuan ($17.6 million) in "red envelope" money to the poorest residents of the city. Each qualified citizen would receive 1,000 yuan ($144) as living subsidy to help cope with high inflation.

It is reported that people receiving the subsidy include eight groups, like those living on the government subsidy for minimum living standard, disabled former service persons, elder people without family, orphans and the disabled.

Such acts are laudable for the Dongguan government is helping the most needed groups with the fiscal income raised from the people through taxes.

How the State could assist the common people to overcome the pressure posed by inflation and unemployment against the background of a high-rate fiscal income growth has become an issue of extensive concern. The Dongguan government has come up with a solution to this issue with its own financial resources.

The Dongguan government's subsidy is actually a transfer payment to citizens it chooses to help. The money was not given to groups paying higher taxes or those making more contribution to the society.

In practice, though, it is also possible that not all low-income people get the money for only those with permanent residence in Dongguan could get the subsidy. It is well-known that Dongguan has a large floating population because it is a city with a developed processing industry which is composed of numerous labor-intensive factories.

These questions aside, it is also debatable as to how much a subsidy of 1,000 yuan could help ease the common people's hardships in the face of continuously intensifying inflation pressure.

Actually, the current inflation is caused by the price hike of raw materials and energy produces coming into China from the world market.

The global inflation is a consequence of the imbalance in the development of the world economy. As China depends heavily upon the international market, the local government's subsidy could have really limited effects upon easing such imported inflation pressure.

Worse, if this subsidy is abused, it might disturb the normal market order and weaken the market's role in the economy.

Before all these questions are answered, it is too early to judge whether the Dongguan government has made a correct decision although it means well.

Therefore, besides applauding Dongguan officials' consideration for the needy, we should also realize the red envelopes are not a fundamental solution to lift them out of financial difficulty.

The lopsided economic structure has directly weakened China's capability to resist the shocks from inside and outside the country.

To control the excessive liquidity, the monetary authorities have taken several measures to control money supply and slow the bank credit growth. Besides cooling the economy down, the policies have also posed unprecedented challenges to the development of private businesses, most of which are really vibrant.

If the government could grant tax breaks to these businesses, it would not only lift them out of the current financing difficulty, but also prevent many other conflicts caused by the economic imbalance from surfacing at this moment.

Theoretically, the interest rate, salary and the exchange rate could all be used as policy tools to prevent overheating investment and ease the inflation pressure. Yet these solutions could also pose shocks to the economy when the market is not mature enough, or the industrial structure is to be upgraded.

Therefore, a combination of policy tools, like transparent and efficient fiscal policies and improvement to tax policies facilitating economic restructure, would help cushion the negative effects brought by the continuously tightening monetary policies.

The real responsibility of the administration is to invigorate the market's function in resource allocation by eliminating the administrative measures intervening into the market operation and creating a fair ground for all market players.

When the market operates in a fair, just and transparent manner, it would naturally bring more benefits to the businesses, the consumers as well as the administration in the long run. This is much more rewarding to the society than offering one-time subsidy to certain sections of the population.

The authorities should also use the tax policies more flexibly. Tax breaks and extra taxes should be integrated in such a manner that they could become an incentive to the businesses and the market, encouraging them to create new value and serve as a curb on financial speculation.

Meanwhile, the government should also increase the proportion of spending in the fields that could produce more social wealth and bridge the income gap in the future, like education, research and development, medical care and housing.

The author is a professor of finance at the School of Economics, Fudan University

(China Daily 07/17/2008 page8)