China’s economy has been rapidly expanding over the past three decades, with an annual GDP growth rate of over 9 percent on average. Now because of that stable increase, Chinese people have seen their wallets steadily growing bigger.

At a time when China began its arduous journey of opening up and reform, a sewing machine, a bicycle, a Shanghai-made watch and a radio were the four must have items for a decent wedding. By the middle of the 1980s, this was all replaced by a color TV, a refrigerator, a washing machine and a tape recorder.

At the start of the new millennium weddings have become bigger business. In addition to fashionable jewelry, overseas honeymoons, and luxurious wedding photos, a decent apartment is also a must.

It is obvious that Chinese people are getting wealthier due to the changes in the economy. The total amount saved by Chinese people was 21 billion Yuan in 1978, and by the end of 2007 it had reached 17,253.4 billion Yuan, 800 times higher than 30 years ago.

What has driven such an unprecedented growth of wealth in China? How can China maintain it’s positive growth in the years to come?

To discuss these issues, we caught up with Mao Yushi, the founder and Chairman of the Board of the Unirule Institute of Economics.

Mao Yushi is one of the most influential economists in China. He graduated from the Shanghai Jiaotong University in 1950 and served as a locomotive driver and engineer at Qiqihar Railway Administration.  In 1979, he worked out the mathematical method of the Principle of Optimal Allocation. Mao Yushi went to Harvard University as a visiting scholar. He also was took other notable positions such an advisor for African Energy Policy Research Networking, the Asian Development Bank and the UN Development Program. In July 1993, he founded the Unirule Institute of Economics in Beijing, an independent research institution providing economic analysis.

Wealth Growth

Q: Mr. Mao, welcome to the maintalk. Thank you for being here.

M: Thank you for your invitation.

Q: How fast and by how much has wealth actually grown in China? Can you give us any specific figures?

M: Economic output is 14 times as big as we did 30 years ago. This is according the statistics given by the National Statistics Office. And the ranking of the per capita income for China is No.63 among 133 countries. Before the economic reform is much lower. The most important factor is to move form the planned economy to market economy. At the same time we have established so many private enterprises to replace the state owned enterprises. And the third factor, I think, is the integration into the world economy. But behind these phenomena, I think the idea change is important. First, is the expansion of individual freedom. You can go to the Civil Servant if you pass the examinations. You can go aboard, and you can self-employed. So, many different opportunities you can choose. But, 30 years ago, there is no such kind of freedom. And the second is the open to the outside of the China. In the certain period of time, most Chinese see the western culture is evil thing. Now, we have developed these kind of idea: the banking system, the stock market, the education system and medical system. Everything we learned form the western country. We save time save cost.

Q: But you know it’s not a simple process of just copy and paste.  We know market economy is a concept that works that’s been working in the Western world for decades, and it proves to be effective in that area. But, we did have to make a lot of adjustments to this concept so it works well in China as well, right?

M: You see, there are so many counties previously in planned economy; then, they change into market economy. But, most of them not so successful as China. That means just copy the western system is not good idea. We have to create the idea to adopt the principles of market economy.  For example, we have so called double track. This is good invention for China. We keep the planned economy intact. On the other side, we create new market economy, and these two economies are operating on the parallel, and gradually the market system grown up bigger and bigger then replaced the planned system. This is a big creative experience and very important for the success of the Chinese reform.

Even though most Chinese people have grown richer, they still feel that their disposable income has not increased at the same pace as the GDP. The GDP in 2007 was nearly 70 times that of 1978; however, the disposable income of city residents has increased by about 40 times, while farmers have seen an increase of about 30.

Q: In China, people’s disposable income hasn’t really increased that much compared to the total GDP and also per capita GDP. Do you think this is a reasonable and healthy distribution?

M: If we make a international comparison, different county have different proportion. For example, in the north European countries, the disposable income is much smaller because the high tax and the government collected tax and provide education, medical care, and even transportation.

Q: So, public welfare system.

M: Yes, yes, this is the big difference. So, you ask whether this is reasonable, acceptable. My answer is, it depends on how much the government provide public service.

Q: Based on your observation and judgment, and how much the Chinese government has allocated for its public welfare system and public services is this reasonable now?

M: I think the proportion for the taxation in China is too high, as relatively to the social welfare provided by government. In the north European countries, people enjoy free medical care, but in China, only a small proportion of population can enjoy free care. The north European countries provide high quality education from primary up to university education. But, in Chinese case, the primary education is very poor. The teachers are not qualified, and classroom is so poor and no sufficient lighting.  This is obvious that the emphasis of the government expenditure is not high. So, there is lot of waste in the government expenditure. Wealth Gap

Income tax is an important instrument to adjust wealth inequality. Monthly individual income levy threshold has been raised from 800 Yuan to 2,000 Yuan. The Ministry of Finance announced in mid November that this threshold would be further raised to relieve the economic burden on medium and low-income groups. 

Q: There are different categories of taxes in China, so which categories of tax can be reduced and should be reduced?

M: We divide tax into direct and indirect. Direct tax means income tax; indirect tax is those tax related with trade with transaction. We should reduce the transaction cost, tax, and increase the direct tax.

Q: Why?

M: It can close up the income difference because you charge the income tax. You can charge a progressive tax for the rich people, but if you collect tax form the transaction…

Q: Applies to everyone…

M: Yes, everyone taxed.  In addition, most of the Chinese people don’t know they are paying tax.

Q: Or they don’t know how much tax they are paying.

M: They don’t know. In China, the tax is included in the price.

Q: And you know how much percent of that price is tax

M: For example, you make a telephone call and government collect tax, but you don’t know how much tax you pay. So there is a lack of supervision for the tax collection. Especially, no supervision of how the tax revenue is used.

Q: I know you an advocate for tax reform in China. So, what should be included in a tax reform regime?

M: I mentioned to reduce the transaction tax, indirect tax, and to increase direct tax. Then, we can apply the progressive tax, and we can collect more tax from rich people for the poor, and then the income gap can be narrowed.

In 1990 the income ratio between China’s urban and rural residents was 2.2 to 1, but in 2007 it had grown to 3.33 to 1. With growing inequality between China’s rich and poor, the potential to lead to widespread social unrest has become a big concern.

Q: Can we say that today we are richer over all- wealth has increased, but there is large degree of income inequality?

M: This is exactly the case that we have.  And if you review all the countries in the world. Almost just only one or two exception, all of them experienced broadening income distribution. So, this is called the inverse Kuznet’s curve, inverse U curve. At the beginning, the income distribution is quite equal; then, it goes up very unequal. Finally, when the country becomes a rich country, developed country, income becomes getting smaller.

Q: Is this inevitable?

M: During the take off, economic take-off, the income distribution not equally divided, especially for the rural people. The percentage of rural people so high, and their income depends on the output of the land, which is very limited. So, it’s almost impossible for them to get rich as quick as the urban people. Many country in the world, when the per capita income reached $5,000 USD. Then they stop at this point. They can hardly going up.  This is a critical point because the income gap, and there is a social rest. If you can overcome this kind of difficulty, then the economy grow…continue to grow.

Q: Are we in that range now? You said China’s per capita GDP

M: Yes, we are facing this kind of problem.

Q: Right in that range. How can we overcome that difficulty?

M: There are a number of ways. The taxation systems with the change. And to develop the charity, NGO, and also the government can help to pay the insurance cost for the poor people. Now we in the rural China, we have began such a test the government paid the insurance fee for the poor farmers. This can reduce their burden if their got ill, got sick.

Q: Given the effort that the government is making these days and also looking at the pace of GDP growth, what is your prediction, how many years do we have to wait until we start climbing down on this curve?

M: As I see, now the income inequality is going down. Because in the recent years, we have a short supply of labor that means the labor cost is rising, and then we can see the coming years the labor cost for the most minuscule labor will increase. So I think now we have come up to the top point of the U curve. Now in the coming years, we will go down. That is the income distribution will become more equal.

Rural Assistance

Mao Yushi works hard to implement his economic theories. In 1993, he founded an individually operated micro-credit loan service in Shanxi Province to provide financial aid to poor farmers. After Mao’s 15 years of effort, the foundation has expanded from 500 Yuan in 1993 to 1.3 million Yuan in 2008.

Q: In 2007, you published a controversial article called “Speak for the Rich and Work for the Poor”. What kind of message did you try to convey in that article?

M: Now we have millions of rich people. All of them are grown up from the poor, no exception. The idea that rich people they have original sin and they are exploiting the poor people, and this is a dangerous idea because if you eliminate the rich people, finally nobody can be rich. Then the country becomes a poor country. That is experience we did have. So, I think we should protect the rich. At the same time, we should help the poor. So, I say work for the poor and speak for the rich.

Q: You’ve actually been working for them. You’ve started offering micro-credit loans to farmers in Shanxi in rural areas and rural villages. Has these been effective?

M: It’s very successful. Previously, we served just a little group of people just 200. Now we serve 2,500 people. Everybody, if they want they can borrow money from the foundation. You just write application form and no collector and no guarantee. Today you apply and week you can get the money.

Q: How did they use the money?

M: 1/3 of the borrow used for agriculture purposes, but 2/3 for non-agriculture. They use money to transport and go to urban to find employment. And one as a vendor to establish small shop or open a restaurant, various kinds of business. 1/3 for agriculture, they buy chemical fertilizer, or buy seeds.

The most dramatic urbanization has been taking place in China with millions of people migrating from the countryside to cities. China’s migrant workers now account for over 13 percent of its population. They move to big cities in the hopes of obtaining higher salaries, better career opportunities and a dream of a better life.

Q: There is still 60% of our total population who are farmers. And it’s not possible for everyone to rush into big cities. That just can’t happen. Is there a way to help these farmers to stay where they are, and not leaving their farmland dilapidated or impoverished?

M: First we should admit that all the developed rich country, the percentage of the farmers is very small, just 5%. This is because output of agriculture is quite low. So, you mentioned we still have more than 50% of rural population and this population their output is low. This is why China is still a poor country. Just because of these farmer. So, the only way for China to get rid of poor we must change the rural population into urban population.

Q: So your solution is still urbanization, to move them into cities?

M: Yes, so how to help them, first to provide funding, with money they can go to urban. Second, to establish…to create employment, and this depends on the development of the small and median prices in the urban area. The third is to provide vocational education for the rural people.

Q: Now looking back, at the past 30 years of opening up and reform, what would you say is biggest pitfall or lesson learned in this whole process?

M: I think my view, not only my view, I think many of the scholars agree that the problem with Chinese economic reform is the lack behind of political reform. Although we have made a big progress in political system, this is not pace in pace. The economic reform go much in advance, but the political reform is lag behind. So, if we want to overcome the difficulty we are facing in the coming years, I think one necessary condition is to open more possibility for the political reform. In fact, the Chinese government is under pressure not only in the domestic but also the international pressure to promote Chinese political reform, which is good for the people and also good for the government.

Now despite the growing numbers of the rich-elite, China is still predominantly a country of farmers with low incomes and limited conditions for development. If China looks to narrow the wealth gap it must put more emphasis on developing a middle class and creating sustainability for everyone.

                                                                                                 Nov.2008     ICS