A 'Report on the Work of the Government', the official title of the speech with which Wen Jiabao introduced China's 12th Five Year Plan to the National People's Congress, might be expected to be pretty dry reading. Naturally, like any premier's speech, it inevitably contained passages primarily there to ensure it is comprehensive. But the content of this speech was not dry at all. Its conceptual framework represents a major advance even within the framework of China's economic reform since 1978. It is therefore worth stripping away details in order to concentrate on its essential core.

The framework of Wen Jiabao's report was not its precise numbers, which foreign media largely focussed on, but was stated as follows: "We must make improving the people's lives a pivot linking reform, development and stability." More generally: "We need to put people first, make ensuring and improving their wellbeing the starting point and goal of all our work."

Anyone thinking this is simply a commonplace is quite mistaken. It has huge implications for China and stands in direct contrast to economic policy in the US and Europe. It is therefore worth spelling out the implications of Wen's statement.

The contrast to US and European economic policy may be simply stated. Factually, US and European economic policy does not target people's wellbeing – you will find no targets for increases in wages or living standards in US, UK, or German budgets. Technically, US and European economic policy targets "intermediate variables" such as profit rates, inflation rates, budget deficits etc. It is then implicitly asserted that improved living standards will follow if these other targets are met. But this may or may not happen.

This distinction is clear in the policy response to the international financial crisis in the US or Europe. This has not been tackled by improving the population's living standards but at the expense of them. In the US and Europe living standards are falling sharply, as a result of deliberate policies such as social expenditure cuts, and indirect ones such as rising unemployment, while corporate profitability is rising sharply and attempts are being made to cut budget deficits – usually by cutting social expenditure. This is justified by a claim that eventually increased corporate profitability and reduced budget deficits will improve living standards. So far it hasn't.

For China, the precise significance of Wen Jiabao's formula can be understood most clearly by going back to the policies with which China's "reform and opening up process" were launched over thirty years ago. At that time the goal set was to "clear away the obstacles to the development of the productive forces" - put in cruder language, to maximise economic growth.

It was undoubtedly and correctly believed that "increase in the productive forces" would raise living standards. Nevertheless, what was targeted in the first place was GDP growth, not directly improving people's lives. This has a necessary consequence that if developing production and developing living standards contradict one another developing production takes priority.

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