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.