Jia Kang, President of China Academy of New Supply-side Economics, shares his perspective on how to advance common prosperity using economics.

Below is the edited transcript:

Good morning, everyone. I am Jia Kiang. I’m honoured to be invited to speak at the Wealth and Society 2021 conference. Today, I will be talking about common prosperity which I’d like to believe all of you are interested in. I'd love to share with you how as a researcher, I gained a basic understanding about common prosperity and how one can promote it in China.

First, I'd like to remind you that in the history of humanity, we have never achieved common prosperity. However, in the process of the development of human society, the vision and goal of common prosperity has always been enlightening us. These are representative words from the chapter Liyun in the book called Liji (Book of Rites) that expressed Confucius’s vision about an ideal society, “when the great way is followed, all under heaven will be equal”, “when all disabled are supported, it will achieve ‘datong’ (Great Unity).” Obviously, this is called common prosperity.

The future society proposed by the representative work of the founder of Marxism, The Communist Manifesto, is free association of producers. In this society, “the condition for the free development of each is the free development of all.” In Marx’s another book Critique of the Gotha Programme, he mentioned more specifically that “in a higher phase of communist society … all the springs of co-operative wealth flow more abundantly – only then … the society inscribe on its banners: From each according to his ability, to each according to his needs!” “To each according to his needs” which we called an ideal communist society is another understanding of common prosperity.

Well, on the path to establish a communist society which is also “free association of producers”, we are now still at the preliminary stage. So, how to understand the idea of distribution according to one’s needs in the future society? In terms of economics, resources are always limited. Even when the society reaches the highest development stage, resources are still exhaustible. So, according to this logic, it is impossible that everyone can take everything as per their needs. There will be some differences among individuals.

However, in terms of the mainstream of the development of human civilization, we should increasingly recognise that the advancement of human civilisation is when we can help all the members of society to share the benefits of development. In the process of achieving the strategic goal of peaceful rise and modernisation, China proposes to build a community with a shared future for mankind, which means all the members of the society achieve common prosperity, not only in China, but all over the world.

From the year 2000 to now, in the last 20 years, China has succeeded in building a well-off society in an all-round way. Then, the central government has further drawn up a two-stage development plan. During this whole process of development, Deng Xiaoping stressed that the essence of socialism with Chinese characteristics is common prosperity. As it is the essence of socialism, how can we then achieve the goal of common prosperity? He proclaimed it very clearly that going forward shoulder by shoulder is impossible. We should let some people and some regions prosper before others, so that they can bring along the backward regions and people to ultimately reach the goal of common prosperity.

At the 18th National Congress of the CPC, we could see the Central Committee inherit this philosophy and emphasised on this theory. At the Congress, it stated clearly that we could urge concrete actions to promote common prosperity now due to better material conditions. The system theory that I just mentioned is to consider this campaign as a systematic mechanism construction, which has three steps of distribution, first-distribution, second-distribution and third-distribution.

The relationship between fairness and efficiency which is a familiar topic for all of you has been discussed for many years and still needs further clarification. As per my understanding, when we discuss the relationship between fairness and efficiency in China, we need to further define these two concepts. We all have a common understanding about the fairness of the starting point, process and the rules. Fairness of the starting point means all enterprises should join the competition in the market at the same starting line, with the fair process and the rules. It is about justice. It refers to the fair play in the market. It is not contradicted with individual’s benefits. There’s no trade-off between these two.

What is the real problem? Regarding with the relationship between fairness and efficiency, what we need to make trade-off with is actually the result of distribution. The so-called fairness of distribution results refers to the average degree. If everyone gets equal share regardless the differences of individual’s contribution, it cannot develop effective incentive, and the economy cannot develop sustainably. If there’s a serious income inequality or even income polarisation, there will be more serious problems.

So how shall we deal with the relationship between fairness and efficiency? We should focus on the result of distribution and make trade-offs between these two. Neither towards egalitarianism, nor towards polarisation. This reasonable adjustment comes from systems construction as well as schemes and policy optimisation. This is also a trade-off from individual’s benefits to comprehensive social performance. Now let’s take a look at the “third distribution” system.

Specifically, the first distribution is the process of making the “cake” or economy bigger, which is the major premise for common prosperity. If the “cake” is not big enough, future plans are daydreams. We will unswervingly motivate individuals, liberate the productive forces, and take economic development as the central task. We should, in the process of first distribution, encourage entrepreneurship and innovation and develop personal potential, vitality and intelligence. The basic framework of the first distribution is to form distribution outcome according to various production factors, so that each gets his/her dues.

The market plays a major role in the process of first distribution, but it also requires governance. On the premise of protecting property rights and maintaining fair competition, government should also ensure minimum wages and uphold labour rights. We should appropriately collect indirect taxes to ensure there is enough fiscal revenue for the government to perform its functions. In our daily life, value-added tax (VAT) is a typical indirect tax, which accounts for the largest proportion of tax in China. We do not rely on this indirect tax to have an obvious regulatory effect. The main purpose is to raise the government revenue and ensure a fairly equal tax burden in a competitive market. In terms of its impact on economic activities, it only offers a slight tax adjustment to the government.

Second distribution is to properly divide the big “cake”, that is the results from the first distribution. The government will play major role in dividing this big “cake” in two aspects: The first is revenue transfer, which requires supports from social policies. The government should provide relief, subsidies and pensions to the disadvantaged and low-income population to raise their living standard. The second is direct tax, for example, personal income tax and property tax which is still under discussion right now, requires relatively affluent to contribute more to the treasury. We call it “taking it from those who are better off and giving it back to those who are worse off” in Economics. The government funding should support raising the living standard of the poor; and restrict excessive earnings of the affluent.

Aside from striking a balance between the aforementioned two groups, there’s one more goal the government is achieving to raise the proportion of the middle class in the entire society. We call this social structure as olive-shaped society, where middle class outnumbers the other two classes. Fewer wealthy are at the top and fewer underprivileged are at the bottom, with the majority of the members being the middle class. This is a vivid and intuitive metaphor of the social structure to achieve common prosperity.

In addition to the first distribution and second distribution, at the tenth meeting of the Central Committee for Financial and Economic Affairs held on 17 August, the central government particularly stressed the third distribution. The third distribution refers to charity and philanthropic activities that we have already seen. It encourages high-income groups and enterprises to give back to the society with morality and ethics. It plays a major role in promoting social harmony. The government shall better guide and promote the third distribution by institutional arrangement, policy formulation and optimisation of policy implementation, to achieve a sustainable development of the third distribution in China. Generally speaking, experience both globally and locally has demonstrated that the third distribution plays a more supportive role rather than a decisive one in the entire process of social distribution. We need to further optimise the second distribution process to create a more favourable environment for the development of low-income groups.

These three distributions co-exist in our life. But logically, during the process of social reproduction, there is a sequence. The first step is making the “cake” bigger, next is dividing the “cake” through the second distribution. On the basis of these two steps and with voluntary gifts and charitable donations, we will achieve ultimate distribution outcomes as per common prosperity’s description.

As a researcher, I would like to particularly stress that, in the promotion of common prosperity, we need to pay more attention to systematic, administrative and technological innovation while continuing to deepen reforms. Chinese leaders reiterates that it is a key move to revitalise and tackle difficulties while promoting modernisation reforms. Fiscal reforms as one of China’s supporting measures is closely related to the promotion of common prosperity. Revenue first and then second distribution are key focus areas of the government campaign. Measures to better support underprivileged groups and reasonably strengthen regulations on direct tax of high-income groups for “taking from those who have better”, “giving to those who have worse” and “expanding the middle class”, shall be advanced step by step with reforms as the basis and other political, social and cultural construction factors.

The 10th meeting held on 17 August has clearly signalled the promotion of reforms in direct tax by the Chinese government. The direction of property tax reforms that has been a hot and sticky issue over the past few years still remains unclear. The central government has now specified a clear instruction which is a “two-pronged approach”. The taxation on possession of property shall be vigorously but prudently legislated and enacted. We previously emphasised the steady promotion of legislation but now the proactive and steady promotion which indicates speeding up the preparation of legislation vigorously. In addition, to supporting legislation with more domestic experiences, more pilot reforms in property taxation in Shanghai and Chongqing shall be established. We may wait and see. The legislation is well on its way but will require specific measures to be unveiled by the concerning authorities.

Let’s understand it from a different perspective. What is not common prosperity? We should avoid falling into the bypass. At the meeting on 17th August, the central committee clarified that common prosperity is definitely not prosperity for a few people, but the prosperity of all Chinese community. It’s neither towards egalitarianism nor towards absolutely equal share regardless of the differences of individual’s contribution in our conventional system. The central committee also emphasised that it’s not robbing the rich to help the poor. We cannot achieve a steady common prosperity deliberately by administrative means or movement as it is not a sustainable and rational approach to head for common prosperity.

I want to stress another point, from a scholastic perspective, we may promote common prosperity by enhancing people’s abilities rather than mainly relying on this to achieve common prosperity. Take an example, everyone learned a lesson in stock market over the years. Each day there are new individual investors entering the stock market and expect to get profits. While about 50% of investors lose, 30% break even and only 10% gain profits. This proves that common prosperity is not merely an outcome of endeavour, instead it is an integration of individual differences with redistribution just like systems construction.

To conclude, I would like to restress several key points. We need to regard the continuously propelling common prosperity in China as an infinite progress of building an olive-shaped society. The top has been formed in China, while the bottom is far behind. China is actually in a shape of pyramid at this stage. We should make efforts to shrink 800 million population at the bottom of the pyramid into the tip of olive, enlarge the middle class from 400 million to 800 million, and further to 1 billion or even more. So that the rich and the poor will constitute the top and bottom of the pyramid while the middle class will be the majority.

To achieve the goal, we should have a sense of urgency, patience and a rational attitude. For instance, how to establish a widely-recognised and high-level legal documents in the legislative process of reforms in property tax? This must involve public participation and standard public selection to form acceptable plans and optimize them always. Citizenry may exert their civil rights to fully express opinions and then comply with their civic responsibilities.

The common prosperity we are heading towards is consistent with the systematic reforms of “modern state governance” proposed by the central government. “Modern state governance”, as the core concept of governing the country at the top decision-making level, is to promote overall system innovation, scientific and technological innovation, administrative innovation and achievement of people’s wellbeing. We need to rationally understand that we will face a series of complicated problems while achieving common prosperity. We should actively respond to the challenges and properly handle the relevant reforms, system construction and policy optimisation in the process of promoting common prosperity. Thanks.