To achieve common prosperity, China must maintain growth rates, adjust income distribution
(JIN DING / CHINA DAILY)
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Most of the world’s major developed countries are now facing widening gaps in income distribution and rising inequality. Japan was the first highly developed and industrialized capitalist country with a culture different from the European and North American ones. Its per capita GDP has been maintained at between $40,000 and $50,000. Japan’s strategies for adjusting wealth distribution can be a useful reference for China to narrow the gap in income distribution and achieve common prosperity.
First, Japan increased the income of workers with higher productivity in the process of primary distribution. Japan’s well-developed manufacturing sector lays the foundation for workers to obtain higher incomes. Workers’ incomes have remained stable even in the face of external shocks and an economic downturn. The share of remuneration in the primary distribution in Japan has remained at around 70 percent in recent years.
Japan’s aging population has led to labor shortages, which further elevated the status of workers. Even for jobs involving low skills, employers have had to raise workers’ pay due to the difficulty in recruiting workers, thereby narrowing the income gap across industries. In 2021, the average annual income of workers employed in financial and real estate sectors, skilled workers in the manufacturing sector, and taxi drivers was 6.96 million yen ($50,590), 6.5 million yen, and 6.14 million yen, respectively.
Second, the redistribution system serves as a correction to primary distribution. Since 1984, the Gini coefficient of Japan’s redistribution has been below the international warning line of 0.4. Personal income tax, corporate income tax and consumption tax are the three major tax categories in Japan, accounting for about 80 percent of the nation’s tax revenue. The high share of direct taxes, especially a tax structure with a high proportion of personal income tax, enables better income distribution adjustment.
Third, the tertiary distribution system in Japan, compared with the primary distribution and redistribution, is not playing a prominent role due to its late start. However, the Japanese government encourages all sectors of society to participate in charitable donations and offers optimal design of taxes such as capital gains tax and inheritance tax. Japan offers support to various social activities, from the response to environmental pollution and product quality problems to more wide-ranging areas of public welfare.
China should promote common prosperity through primary distribution, redistribution and tertiary distribution. It is important to reverse the trend of the continuous decline of labor remuneration in the share of primary distribution, before gradually increasing the proportion to about 60 percent.
More work must be done to encourage the use of market-oriented methods in the distribution of workers’ wages, while some caps should be imposed on income from capital to improve the wealth accumulation mechanism. The levying of new taxes such as capital gains tax, inheritance tax and a digital services tax should be explored. Businesses should be encouraged to participate in tertiary distribution in an innovative and diversified manner.
Meanwhile, it is important to draw lessons from the sluggish income growth in Japan. China cannot achieve common prosperity by adjusting distribution alone. Instead, it must maintain a medium-to-high rate of economic growth to build a material foundation.
China can take the aging of its population as an important opportunity for income adjustment. With the rapid graying of Chinese society, a labor shortage will gradually emerge. On the one hand, it can make it easier for college students and migrant workers to find jobs. On the other, the aging society can further elevate the position of workers, enable better wages for individuals employed in less well-paid jobs, and narrow the gap in wages between regions and between urban and rural areas.
Relevant departments should combine their efforts in response to the aging of the population and strive to better the income structure. For example, greater support for child care and education is needed to support the work of parents while increasing fertility rates.
It is important to keep up the share of the manufacturing sector. Based on the current development stage of China, the proportion of the added value of the manufacturing sector to GDP must stand at 25 percent or higher. The share of high-end manufacturing in the manufacturing sector, such as high-tech manufacturing and equipment manufacturing, must be continuously increased to build a solid foundation for people to increase their incomes.
In the process of industrialization and digital transformation, it is important to properly handle the relations between people and machines. Even if some jobs are replaced by machines, those affected should be properly handled.
It is important to rely on the digital economy to promote common prosperity. The affluent countries in the world, including Japan, built up their wealth during the era of the industrial economy. China must properly handle the issue of distribution in the digital economy, and strive to achieve the optimized goal of ensuring the rapid growth of the digital economy while bettering the distribution structure. A core issue is how to enable more people to start new businesses or find new jobs with digital skills and digital assets through proper distribution, and enable better upward social mobility.
Yan Kun is a researcher at the Institute of Japanese Studies at the Chinese Academy of Social Sciences. Liu Cheng is an associate researcher at the National Academy of Economic Strategy at the Chinese Academy of Social Sciences. The authors contributed this article to China Watch, a think tank powered by China Daily.
The views do not necessarily reflect those of China Daily.