Is Beijing ‘Misdiagnosing’ the Income Inequality Problem?

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Since I just wrote a post on tax policy and the income gap earlier today, I might as well throw a related issue out there, courtesy of a terrific post by Patrick Chovanec on the difference between wealth and privilege. Agreeing with a recent Diplomat article, he says that people in China do not resent the rich, they resent the privilege that the wealthy class enjoys.

Here’s the original quote from the Diplomat:

What people [in China] resent isnít wealth, itís privilege Ö What bothers them Ö†is the growing sense that thereís a special class of people who get to live by a different set of rules than everyone else.

It’s an excellent point that is not made very often. I definitely agree that privilege is far and away more of a problem than the wealth gap, but I don’t think it therefore means that there is no resentment of the accumulation of vast amounts of wealth in and of itself. Yes, people resent privilege, and there is of course a sense that the richest out there amassed their fortunes, to some extent, via privilege/guanxi.

However, let’s assume, for the sake of argument, a group of squeaky clean, fabulously wealthy Chinese industrialists who became rich on merit alone and never broke a rule.

No resentment? I doubt it. Even if we stipulate to that angelic group of rich folks, there are still hundreds of millions of people in this country who are desperately poor. It seems unimaginable that they would not resent seeing those rich individuals running around in their imported automobiles, luxury yachts, jets, etc. while they struggle for health care, education, food and housing.

The second point made in the Diplomat article, with which I believe Chovanec agrees, is that the government here is mistaking a resentment of privilege with a resentment of wealth. Therefore policies that target the income gap are misplaced.

Moreover, the kind of privilege that is resented often involves the exercise of government authority. This is referred to in the article as the government engaging in cronyism or generally “picking winners and losers,” which I guess is a criticism of the entire economic system and China’s industrial policy. The author sums it up:

In other words, itís the power wielded by government officials, not the absence of it, thatís fueling inequality and fanning popular discontent.

The conclusion: stop targeting the income gap when you should really be getting the government out of the marketplace.

I started off agreeing with the basic point about privilege (spot on), but now we’re back to a very familiar critique of government regulation. I won’t bother with an attempt at justifying China’s economic policies — not my job — but I would like to say that if the goal is to fight against privilege, which includes nepotism, cronyism and corruption, then reducing the scope of government action is a bad move.

You hear the same arguments about the financial crisis in the US. One side says that the reason the banks nearly failed is that there was too much regulation, while the other side says there was insufficient oversight. I’m in favor of more regulation for the US financial services industry, and I also think that more government oversight in China is needed.

Will less government intervention in China lead to fewer instances of insider trading? Pollution? Poison food? Shoddy construction materials?

Those were rhetorical questions. I think we know the answer already.

But this is somewhat of a straw man I’ve put up. I would guess that Chovanec is talking about instances where the government is actively involved in the deal itself. Take land transactions, for example. Most of the problems can be traced back to local government transfers to developers. If all land was private and we had a functioning market for land, then these problems would not arise.

Fair enough, and in that sector, I’m completely in agreement with Chovanec and the author of the article in the Diplomat. But of all the shady deals, fraud, and blatant cheating that goes on in this country, how often is the government either a direct participant or a significant enabler? My guess would be some of the time, but not in the majority of instances. I don’t think taking government out of the equation solves the problem.

At the end of the day, China, as a developing country, needs to strengthen rule of law and government oversight. Only when civil institutions are in place that can regulate the marketplace can the government then take a step back. In the meantime, I’m all in favor of selective privatization, if accompanied by adequate regulatory oversight.

10 responses on “Is Beijing ‘Misdiagnosing’ the Income Inequality Problem?

  1. Bill Rich

    I don’t think there is a misdiagnosis, but there is a mis-prognosis. CPC doesn’t think this is great enough threat to their perpetual reign.

  2. slim

    Foreign enterprises and many Chinese private firms face a rigged situation where their Chinese competitors and their regulators are on the same State team, directly or indirectly linked. (Think of Japan and South Korea in their mercantilist heyday but with a Leninist political system and no need to heed the complaints of outsiders). I don’t know how much headway can be made tinkering with this situation on the margins, before confronting the dilemma of reforming a one-party state — an existential issue for the CCP.

  3. colin

    Interesting argument, maybe even correct. There are plenty of examples of where the chinese admire genuine success from merit, perseverance and intellect. But on practical level, how do you distinguish privilege from wealth? After all, one begets the other, and vice versa. Even in the US, with so called rule of law, the wealthy continue to perpetuate their privilege and wealth by buying the politicians and changing the law to benefit themselves. Witness the Koch brothers and Walker in Wisconsin.

  4. Anon

    Just for the sake of presenting the opposite perspective… According to Richard McGregor:

    “Corruption thrives in sectors with heavy state involvement and considerable room for administrative discretion: customs, taxation, the sale of land, infrastructure development, procurement and any other sector dependent on government regulation.”

    His book is worth reading, if you haven’t already.

    1. Stan Post author

      I don’t disagree. It’s an important factor. However, I don’t think you can therefore solve the problem by taking the government out of the equation.

      1. Tim

        Agreed, taking the government out of the equation is tantamount to encouraging anarchy. However I believe Anon’s point and one I agree with, is that the government or at least those within its employ are the main enablers of graft. That is the Achilles heel of any regime that places itself above the law.

        Thoroughly enjoyed McGregor’s book as well.

  5. C.

    The authorities certainly know very well that people resent the fusion of political and economic power, and this resentment also isn’t knew. Such accusations are as old as the party state itself and were a major claim of the Tiananmen movement – the internet just makes them a bit more visible. The answer is the authorities cannot solve this problem because it is deeply intertwined with the very foundation of the party-state – the absolute dominance of the CCP all and every aspect of government. Therefore they try to work on income distribution in order to be able to claim they are doing something after all.

    Your solution – as reasonable as it is – is being advocated by all kinds of people for decades and nothing significant has ever happened. So, there are few reasons to believe it will in the future as long as the CCP can continue to cling on to power.

  6. laowai

    So, lemme get this straight… all in favor of privatization?

    you wanna know why buildings are built like crap now? privatization.

    privatization has lined the pockets of few at the expense of many… it’s a bad thing. i believe this is called the “america experiment”, it failed, get over it already.