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David Daokui Li: Common Prosperity Requires a Holistic Approach


This interview was originally published in Chinese by China News Agency on November 24, 2021. View the original article here.

Dongxiwen | Series on Decoding Common Prosperity

David Daokui Li: Why is China’s Approach to Common Prosperity Not “Paying Cash to the Poor and Levying Taxes on the Rich?”

Reporting by Pang Wuji

While addressing the issue of the gap between the rich and the poor, some Western countries have adopted a rather simple method—namely, to pay cash to the poor and levy more taxes on the rich. However, over the past three decades, and especially since the outbreak of COVID-19, the gap between the rich and the poor has been widening—even returning to historical highs in Western countries.

China has set the goal of achieving common prosperity, which also requires us to narrow the gaps of urban-rural development, regional growth, and income levels. David Daokui Li, Director of ACCEPT at Tsinghua University, shared his views on the topic during an exclusive interview with the Dongxiwen column (i.e., Exchanges between China and the West) of China News Agency. From his perspective, China should not promote common prosperity via a solely income-based approach. If we simply understand the goal of achieving common prosperity as bringing income to the same level, this could be both unrealistic and extremely harmful. The core of China’s approach to common prosperity lies in the all-round development of humankind. As a result, we need to take into account holistic factors including people’s health, education, and development opportunities instead of focusing solely on income equality.

Excerpts of the interview are provided as follows:

China News Agency: As pointed out by the French economist Thomas Piketty in his book Capital in the 21st Century, wealth inequality is widening on a global scale, especially in Europe and the U.S. What is your perspective on the global gap between the rich and the poor over the past few decades?

David D. Li: In general, Western scholars hold that the issue of global inequality has intensified over the past three decades mainly due to three factors:

First, under the impact imposed by neoliberalism, both the Reagan and Thatcher administrations forsook numerous roles conventionally played by the government. For instance, they weakened the role of trade unions at the direct expense of the interests of the working class.

Second, from the Western perspective, capital has flowed to developing countries and jobs have been “taken away” due to globalization over the past three or four decades. Consequently, labor wages in developed countries, including the U.S., have declined. This is the most popular view at present.

Third, as further technological progress has been made, high-skilled personnel have benefited more, with their income increasing rapidly. In contrast, the income of low-skilled personnel remains stagnant. In the meantime, high-skilled personnel tend to collaborate with each other, creating a superimposed effect. For instance, when people working in Silicon Valley collaborate with those working on Wall Street, their incomes increase even faster, thus further exacerbating the issue of inequality.

The limitation of this perspective is that it fails to take into account China as a variable. If we only focus on Western countries, their income distribution has indeed deteriorated over recent years. However, if China is included in the calculation, then global income inequality has actually declined over the past three decades or so. The reason is that China, which accounts for about one-sixth of the world’s population and was once categorized as a least-developed country, has now achieved the construction of a moderately prosperous society in all respects.  

China News Agency: What issues are likely to stem from the widening gap between the rich and the poor?

David D. Li: In essence, the gap between the rich and the poor, or the income gap, is an external environment—existing objectively, just like temperature. What truly impacts society is people’s subjective perception of such an environment. When people feel that others live better than they do, they will naturally generate a sense of inequality. People with this feeling may post their complaints on social media or choose to give up, and in the worst-case scenario, they might even commit crimes or extreme acts such as robbery. Some of the turmoil taking place in U.S. society is derived from this sentiment.

However, when the income gap is equally large in different societies, just like facing the same cold weather, some societies might “catch a cold,” whereas others will not. This depends on whether there are some institutional arrangements in place to improve people’s subjective feelings.

Therefore, when assessing the equality of income or wealth, people’s subjective feelings are just as important as the external environment. A major aspect of achieving common prosperity is to form an optimal and fair social expectation in people’s minds.

In practice, if we understand the goal of common prosperity in the narrow sense of being “solely based on the criterion of income” to address the income gap, this results in a misleading perspective.

China News Agency: In your opinion, what is the core of promoting common prosperity in China?

David D. Li: In essence, inequality among people exists in numerous aspects, including height, intelligence, appearance, athletic ability, literary talent, and other skills. However, these inequalities do not lead to very many social contradictions, as everyone understands that such discrepancies are formed due to objective factors.

Generally speaking, the core of socioeconomic development in pursuit of common prosperity is similar to designing the rules of a game. We must ensure that everyone has the same opportunity to join the game on an equal basis despite the many differences among players. By adopting this approach, we can create an environment where everyone is happy and willing to play. They will not feel discouraged from participating because the game is too hard, or pushed to go the opposite way and break the rules. At the same time, this approach does not advocate punishing advanced players and forcing them to quit.

Therefore, the core of common prosperity lies in ensuring the equality of opportunity. Everyone shall be given a fair opportunity for all-round development.

Furthermore, people should be able to receive basic support and social guarantees. Those who are naturally placed at a disadvantage in the social competition should be provided with necessary support or compensation accordingly. In this way, everyone will still be able to reach meaningful achievements as long as they work hard.

China News Agency: Why shouldn’t we adopt a solely income-based approach to achieve common prosperity?

David D. Li: There are two major reasons. First, if we adopt a solely income-based approach, as some Western countries have, it would be difficult to address the fundamental issue of inequality simply by providing direct cash payments to the poor. Nevertheless, since the outbreak of the pandemic, many countries—including the U.S.—have adopted such an approach. Still, many problems persist and go beyond the level of income distribution, such as spiritual emptiness and loneliness, etc.

For instance, many people experiencing homelessness in the U.S. are able to support themselves through labor, but for a variety of reasons may still end up sleeping on the street. The fundamental issue lies at the spiritual level. Since China’s approach to common prosperity includes the spiritual level, we ought to avoid “relying solely on money to address every issue” while turning a blind eye to other factors.

Second, if we adopt a solely income-based approach, we will tend to simply compare China’s Gini coefficient with other countries. This is a mistake similar to comparing the winter temperatures between Beijing and Los Angeles to measure whether the two societies are healthy or advanced. Such a comparison does not make much sense—even when facing the same temperatures, some will get sick, while others will not.

Although China’s Gini coefficient is high, it is mainly derived from the gap between urban and rural areas. A large number of people at the lowest income level live in rural areas and do not enter the cities. However, the income gap among villages and rural residents is not so large. As such, their perception of the gap between the rich and the poor is not so strong.

China News Agency: Why does China stress the need to promote common prosperity at this moment?

David D. Li: Judging from international experience, when an economy has developed to a particular level, it will have the necessary conditions and foundation to address certain issues related to people’s basic livelihoods. At this moment, people tend to pay more attention to the all-round development of society and individuals. They also demonstrate a stronger demand for equal access to public services in the fields directly related to people’s livelihoods, such as education, medical care, pensions, and housing. This means that we should not only focus on economic development, but also address the development issues at a higher level, and enhance people’s sense of gain and level of satisfaction.

China News Agency: What should China do at present to promote common prosperity?

David D. Li: At present, the most critical task for China is to address the major contradiction—namely, to narrow the urban-rural gap and the regional gap. First, we should pay closer attention to the construction of new rural areas and the endeavor of rural revitalization. Second, we should enhance the quality and accessibility of public services including pensions, medical care, education, etc. Third, we should identify ways to narrow the income gap. This does not solely refer to the gap of labor income, but also the gap between income from labor and gains from capital.

China News Agency: Should we learn from the Western practice of levying more taxes on the rich, including by imposing a high inheritance tax, real estate tax, and other sorts of property taxes?

David D. Li: This approach is not applicable to Chinese society in the near term, or even in the next decade or two. Chinese society is quite distinct from Japan and the U.S. in that Chinese people have a strong concept of family. In many cases, they work hard to pass on sufficient wealth to ensure basic support for their parents, spouses, and children. Against this backdrop, many people would be unhappy about the introduction of an inheritance tax. They may opt to transfer their property in advance or even “quit the game,” which is likely to intensify social contradictions and violate the original intent of achieving common prosperity.

Only when the government has ensured the optimal provision of public services such as pensions, education, and medical care, eliminating people’s worries at home, will the conditions be more mature for levying a series of property taxes.

China News Agency: What is the global significance of China’s efforts to promote common prosperity?

David D. Li: China’s realization of common prosperity is of greater significance than building a moderately prosperous society in all respects.  Developing countries or emerging market economies may draw inspiration from China’s experience of building a well-off society, but if common prosperity can be achieved in China, it will have greater implications for developed countries in the West.

Developed countries have failed to address the issue of common prosperity, and some countries have simply adopted a solely income-based approach, as mentioned earlier. If China can solve this dilemma, the corresponding Chinese experience is bound to benefit the entire world.

Profile of the interviewee:

David Daokui Li is the Mansfield Freeman Chair Professor of Economics, Director of the Academic Center for Chinese Economic Practice and Thinking (ACCEPT), Co-president of the Society for the Analysis of Government and Economics (SAGE), and founding Dean of the Schwarzman Scholars at Tsinghua University. He is currently a member of the 13th National Committee of the Chinese People’s Political Consultative Conference (CPPCC) and a member of the Committee on Economic Affairs, Vice-president of the China Society of World Economics (CSWE), Distinguished Professor under the Cheung Kong Scholar Program, and enjoys the special allowance of the State Council. Professor Li is also a member of the Sino-German Economic Advisory Council. He previously served as a member of the Monetary Policy Committee of the People’s Bank of China (PBOC), a member of the 11th and 12th CPPCC National Committees, President of the Chinese Economists Society (CES), and the first chief economist of the BRICS New Development Bank (NDB). As a renowned economist in China, he has long been engaged in research on government and economics, comparative economic systems, and China’s macroeconomic operation, and is committed to studying modern economic theories from the practice of China’s reform and opening up.