Thursday, May 22, 2014

A third road for China´s economy - Sara Hsu

Sara Hsu
+Sara Hsu 
Financial analyst Sara Hsu reviews for the Diplomat the book by Thomas Piketty, Capital in the Twenty-First Century, and the debate on state socialism and capitalism. For China´s economy there is a third road, she argues.

Sara Hsu:
In China, the socialist market economy has, as in other nations, developed into a “patrimonial capitalism” (Piketty’s term for unequal capitalism in the West), in which wealth is handed down from one generation to the next. Although millions of Chinese were pulled out of poverty by growing wages attributable to sheer economic growth, a searing inequality has now arisen. This can be attributed to the uneven growth of returns to capital versus output (i.e., profit versus wages) that Piketty underscores in his book. The horror of rampant poverty, in which individuals were forced to “eat bitterness” in the name of egalitarianism has, in China, given way to the devil of pervasive capitalism, in which the poor remain underfed while the wealthy fatten themselves in luxury. It appears that, after all of this time, neither Mao nor Deng had the whole answer when it came to economic dogma. So what is the solution to China’s problems associated with equality versus growth?
Piketty, without intending a policy prescription specific to China, provides a middle way between these two extremes that is eminently applicable to China today. Piketty resurrects the idea of a “social state” that redistributes wealth, via taxation, from the rich to the poor via the state, which would provide public services and replacement incomes to boost access to health, education, and pensions. An increase in taxes on the wealthy would increase government funds used to finance social programs.
This is a strong solution for China’s growing income gap, which has fuelled social unrest and generated immense disparities between the elite and the economically disenfranchised. While Piketty himself lauds progressive taxation in China, he neglects the nature of wealth holdings by China’s elite within corporate and/or state entities. This, coupled with insufficient enforcement of tax laws, has dampened the benefits that a progressive tax might offer and has resulted in deepening inequality.
Enforcing tax laws and curtailing the use of loopholes in wealth holdings would provide the state with more funds, which it should use to expand social services as it grows. These policies would require substantial state support, but only in this way can China’s capitalist trajectory be checked and a meaningful compromise between egalitarianism and growth be struck. Perhaps then, capital can take on a gentler, less inflammatory meaning in China.
More in the Diplomat.

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