President Xi Jinping has advocated 'common prosperity' for the Chinese people. Photo: AFP

There is no shortage of Western analysts suggesting that President Xi Jinping’s “common prosperity” will set back the Chinese economy by taking wealth from the rich and giving it to the poor. The analysts’ logic, to some extent, was probably based on the Mao Zedong era’s “from each in accordance with ability and to which according to needs” policy.

That policy did disincentivize entrepreneurship and hard work, culminating in keeping China backward and poor until Deng Xiaoping reformed the economy in 1980.

However, the Communist Party of China has evolved from ideologically driven to practical economic development since then, applying economic principles when formulating and implementing policies. A case in point is the “common prosperity” policy.

The idea was to redistribute wealth by increasing the size of the middle class, broadly defined as people able to afford a reasonable standard of living. This was to be achieved by providing free or affordable education to poor or low-income people, implementing a property tax, and others.

There is no indication that the policy will disincentivize entrepreneurship or hard work, other than the government asking the rich and large corporations to donate some of their wealth to the community. Nor are the poor be given a “free lunch” – they must learn how to create wealth for themselves.

In this regard, equitable wealth distribution is to be realized by lifting the incomes of the poor and working class, which makes economic and social sense. With more people able to afford a reasonable standard of living, total consumption will increase, leading to economic growth and social stability.

Furthermore, “common prosperity” complements the government’s “dual circulation” strategy. Enlarging the middle class will increase domestic consumption and investment, thus strengthening domestic demand as the engine of growth.

However, “common prosperity” is nothing new. Investment in education was, in part, responsible for China being what it is today.

Society’s value of and the government’s willingness to invest in education resulted in a pool of highly skilled and professional labor. That, in turn, increased labor productivity and resulted in higher wages. As well, skilled labor coupled with comprehensive infrastructures and supply chains attracted new investments. The rest, as the old saying goes, is history.

Impact of affordable education

The socio-economic impact of providing free or affordable education to the poor or poorly paid unskilled workers has been proved positive. A case in point is the government’s “de-radicalization” policy in Xinjiang, which consists of putting unemployed youth into vocational training centers.

Contrary to the West’s allegations of the Chinese government committing “genocide,” providing vocational training killed two birds with one stone. The policy improved trainees’ employment prospects, attracted new investment, and minimized terrorism.

For example, many of the trainees gained jobs inside and outside of Xinjiang because their newly acquired skillsets and Chinese language proficiency increased employment prospects and mobility. According to the Chinese media, there have not been any terrorist acts since the policy was put in place.

Indeed, the Muslim world praised China’s “de-radicalization” policy. It gave young unemployed Uighurs a future and hope. Some would argue that if that is committing “genocide,” the indigenous populations of the US, Canada and Australia might welcome such acts from their governments.

Simply put, the availability of education for all, particularly those who otherwise could not afford it, is the key to enlarging the middle class.

Though the Chinese government has eradicated extreme poverty, the middle class is under-represented, creating socio-economic problems.

Problems of under-represented middle class

China’s middle class numbers around 400 million, which is less than 30% of its 1.4 billion population, suggesting a few at the top of the pyramid owning the majority of the wealth while the majority has little.

That pyramid-shaped economy caused under-consumption, prompting the government to rely on investment and exports as the engines of economic growth. However, such policies led to “unbalanced, unstable, unequal and therefore unsustainable growth,” to paraphrase former Chinese premier Wen Jiabao.

Over-reliance on exports exposed China to external shocks. A case in point is former US president Donald Trump imposing tariffs on Chinese goods and barring Chinese technology products from entering the US market.

Turning the pyramid into an “almond-shaped” economy should allow it to weather the anti-China policies of the US and its allies. Expanding the consumption-to-GDP ratio will reduce the need to export, lessening the economy’s exposure to external risks.

China will further wean itself from the US and its allies with expanding trade and investments in the 140 countries participating in the Belt and Road Initiative. The combined Chinese and BRI markets comprise more than 2.5 billion people, enough to sustain stable growth without relying on the US and its allies.

To strengthen its efforts to alleviate income inequality and enlarge the middle class, the government proposed to experiment with imposing property taxes on selected regions. If that strategy is unopposed and proves successful in gaining additional revenues, the government could institute a property tax nationwide.

Property tax reform

The absence of a nationwide property tax is considered partially responsible for China’s relatively high Gini coefficient – a measure of income inequality – of 0.46. This is because the lack of a tax reduces the costs of home buying and maintenance, resulting in a few rich people buying many homes, some for speculation. The resulting high demand raised home prices, making the rich richer.

Moreover, speculation led to risks beyond the real-estate market itself. For example, the property developer Evergrande accumulated huge debts, resulting in payment defaults. For a while, there was some concern that the financial system might be at risk.

Imposing a property tax could minimize housing speculation, thereby stabilizing prices. That would enable more people to buy homes. Real-estate prices would increase over time, allowing the new home owners to accumulate wealth. Moreover, an increase in home sales would expand the production of goods such as home appliances, stimulating economic growth.

No free lunch

Contrary to some Western pundits’ assertion that the “common prosperity” policy will dis-incentivize entrepreneurship and hard work, it is not a “Robin Hood” policy of robbing the rich to give to the poor. The poor would be “taught how to fish,” rather than being given a fish.

The purpose of free or affordable education is to teach skills and stimulate entrepreneurship. Such an education policy was first applied in the 1980s when the government was privatizing non-strategic industries. The millions of laid-off workers were given vocational training, providing them the tools to become small business owners.

Unsurprisingly, those retraining programs not only prevented the economy from falling off the cliff, but increased economic growth. Laid-off workers found alternative employment opportunities, and some started new businesses.

Socially responsible citizens

Encouraging the rich and corporations to share the wealth does not mean penalizing them for being wealthy or successful. In the US, companies like Facebook and rich people like Warren Buffett donate millions of dollars to charity every year. The rich also pay a higher marginal tax rate. Does that stop them them from being creative or working hard?

It could even be argued that the rich and corporations making donations is not only good for the country but also for them as well. Donating money to socio-economic-enhancing projects or organizations would increase the recipients’ ability to buy goods and services. This would improve businesses’ bottom line.

Equitable distribution of income also reduces economic and social injustice, preventing economic and social instability. When the majority of the population – or all of it – is able to afford a minimal standard of living, there is no reason for social protests against the rich.

Indeed, it is in part the widening of the rich-poor gap that has divided Americans. Over the last few years, the rich became richer and the poor poorer, culminating in increasing tensions among classes and racial groups.

China’s “common prosperity” is a practical policy for promoting and sustaining stable economic growth.

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China’s Economic Rise and Its Global Impact in 2015. His second book, Developed Nations and the Economic Impact of Globalization, was published by Palgrave McMillan Springer.