Editor's note: The following is the fourth and final excerpt from Shi Zhengfu's interview with the Shanghai Economic Review where he discusses the challenges of uneven income distribution. [1st excerpt; 2nd excerpt; 3rd excerpt]

Shanghai Economic Review: Rapid economic growth under China's 3-D market economy is intensifying social conflicts and one of the reasons for this might be the widening income gap. What's your view?

Shi: We could ask any number of questions here: If we had a normal market economy rather than a market economy with Chinese characteristics, what would economic growth be like then? How about income distribution and social conflict? In such an instance, would we have a better country than the one we have today? The answer is, quite categorically, "no."

We have to admit that public dissatisfaction is growing at the uneven distribution of income; however, it is an inevitable consequence of economic development. China is now at the stage of rising organic composition of capital which Karl Marx argued is a necessary effect of capital accumulation and competition in the sphere of production, at least in the long term. In this process, the lion share of income goes to capitalists and the share of total labor income declines. As economic growth continues, technology advances and the tertiary sector thrives, the problem of income inequality will diminish.

SER: Is it because of the social security?

Shi: Social security is not the only reason. What is more important is that income distribution itself is changing. According to the Kuznets curve proposed by American economist Simon Kuznets, as a country develops, there is a natural cycle of economic inequality driven by market forces which at first increases inequality. However inequality then decreases after a certain income level has been attained.

But the economy reality might not align with economic theories. Before the 1980s, America was witnessing the growth of its middle class. However, since President Reagan took office in 1981, the middle class has been shrinking. Many people who were part of the middle class have climbed up the ladder and are now part of the upper class, while even more from the middle class are gradually sinking to the lower-income group. The structure of American society has emerged into an "M-shape"distribution.

Why does this happen? It is presumed that informationization, globalization and the technological revolution are playing a major role. In terms of globalization, for example, many companies in developed countries are outsourcing to developing countries to cut costs. In a sense, globalization is amplifying the power management at big companies. We have to admit that under normal market economic conditions, income inequality is inevitable.

However, I think it is possible that under a market economy with Chinese characteristics, income inequality can be alleviated because we have economic means, for example the asset revenues from state financial management.

SER: How is it possible to use the asset revenues from state financial management to readjust income distribution?

Shi: Generally, initial income distribution plays an important role in deciding the rich and the poor. It is very difficult to divert money to the poor through taxation because the rich are much more influential than the poor. In a market economy, the Matthew Effect, which refers to the phenomenon where the rich get richer and the poor get poorer, is not unusual. The underlying logic is that assets appreciate at a much faster rate than salaries rise. In recent years, China has seen the emergence of a large number of millionaires and billionaires at the expense of income equality. This is not sustainable for social development in the long run.

If we want to achieve some sort of equality in income distribution, we should focus on initial income distribution. My theory is that we need a state financial management system that diverts a portion of state asset revenues to the poor, especially the poorest 30 percent. In this case, the non property-owning poor can get a share of the state asset revenues. Basically, we should pay attention to income equality in initial income distribution.

Shi Zhengfu is director of Center for New Political Economy, Fudan University and chairman of Comway Capital Group. He is also the author of the newly published book Supernormal growth: China's economy between 1979 and 2049.

The article was translated by Liu Qiang. Its original unabridged version was published in Chinese.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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