Devise mechanism for distribution of wealth

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By Ma Hongman (China Daily)
Updated: 2008-11-26 07:47

Following a 4 trillion yuan ($586 billion) investment package recently announced by the central government to curb a possible economic downturn, people have been expecting the top authorities to work out a similar stimulus plan in the realm of consumption. In the long run, the latter will prove more effective in bolstering a sustained economic development.

As the leading economic engines, investment, export and consumption always produce different influences on a country's economy. With more flexibility and elasticity, investment can indeed bring an immediate effect to the overall economy. It can boost domestic needs in the early period of its implementation.

However, a large-scale investment will unavoidably increase product supplies to the market in two or three years, which are yet to be digested by an expanded consumer demand.

In other words, a forceful and workable investment plan could have immediate economic effects to a country, but it cannot serve as a long-term prop for its economic advancement in the absence of a parallel increase in the domestic demand capacity.

Worse, a large-scale investment is very likely to push up the prices of resources and thus fuel the overall rise of prices. Under such circumstances, deflation would ensue if the market fails to consume newly created products.

All these are enough to get at a conclusion: it is consumption that really serves as the key to a sustained and healthy economic development and any initiatives to step up investment would be more scientific and reasonable if they are pushed by a strengthened consumer demand.

So it is not difficult to understand why since the unveiling of the multi-trillion yuan stimulus package, there have been high expectations in the society for a similar stimulus package to boost domestic demand. Their coexistence will not only help avoid the emerging possibility of economic downturn, but will also be helpful to achieve a fruitful interaction between the government's macro-control policies and the market that usually fluctuates according to its own cyclical laws.

The success of the Chinese government's efforts to reactivate domestic needs depends on how it can raise people's income and set up an assuring system guarantee to encourage the country's large populations to consume after they get rich. The unprecedented severity in the domestic economic situation in the context of global economic slump should offer the government a rare opportunity to map out a far-reaching and considerate program to raise people's income by a large margin.

Our neighbor Japan once had a similar experience. As early as in 1960, it launched a program to double its people's income and started to revitalize consumer demand. The move turned out to be the turning point for the country's economic takeoff in the following years. In 1967, the average income of the country's people doubled from the level of 1960, and more than 90 percent of its families could afford to use durable consumer goods of various kinds.

Tokyo's practices should offer us some lessons. The exposed insufficiency in China's domestic needs already remained outstanding when the central government laid down macro-control initiatives as early as in the 1990s. However, no breakthrough has so far been made in this regard.

Japan's example also indicates that our country should also try to frame a reasonable wealth distribution mechanism among the government, enterprises and ordinary laborers, if it really wants to boost domestic demand. For this purpose, what the government should do first is to regard it as a long-term economic development guideline to make its people richer and go all out to raise their income at a faster speed. The pace of people's income growth in this country has long lagged behind that of the growth in government revenues.

Raising the individual income tax threshold by a large margin will be a positive move to transfer part of the country's wealth to individuals. Also, the government should make all efforts to set up a steady capital market to ensure ordinary people can gain a much-anticipated property income. Any drastic fluctuations in the stock market will affect people's expectations of income growth and are unfavorable to the whole economic operation.

When the gap between the rich and the poor further widens, it appears particularly important for the government to set up an effective guarantee mechanism to cover such disadvantageous groups as farmers and low-income residents. The strengthened consumption capability of this large group of people will also greatly help spur the country's domestic demand.

A reasonable wealth distribution mechanism also lies in whether or not we can amplify the voices of employees against employers in an effort to stop capital elements from excessively compromising labor ones. This, however, is a challenging task for the government.

On the one hand, administrative departments cannot directly intervene in the process of wealth distribution among employers and employees. On the other hand, some people remain very vocal against any move to raise employees' wages because they say the move will make struggling enterprises bankrupt. It is a short-sighted perception.

Low incomes of people will finally depress domestic demand, which has long been the lifeline of all enterprises.

The author is an anchorman with China Business Network, a TV network based in Shanghai

(China Daily 11/26/2008 page8)