Sang's Economics Blog

Should China slow down and focus more on Equality rather than Efficiency?

The Economist: News Article

As the gap between the rich and the poor increases substantially, China’s prime minister, Wen Jiabao, has ordered the new upcoming president, Xi Jinping, to “satisfy the people” by focusing more on the equality. Wen Jiabao has set a low target of 7.5% growth rate for Xi Jinping in order to slow down the overheated economy, lower the inflation rate, and focus more on dividing the economic pie equally for the people.

This old debate about whether an economy should focus on equality or efficiency is a ever-real problem for China as its economy is growing at double-digit growth rate, however, the gap between the rich and the poor has widen. This gap stirs the conflict between the people and the government as they get upset about the problem. There has been outburst of unrest in many parts of China in relation to the low income and the ever-increasing inflation rate.

Therefore, this political situation has forced the Chinese government to focus more on the equality. Otherwise, the government will soon lose the support from people and authority, which will result in the demise of the communist China.

I think that the Chinese officials are well aware of the trade-off of focusing more on equality. The economy will soon lose the efficiency once it had and the economic pie will shrink, instead of increasing. Surely the officials will be able to slice the pie more equally for the poor, however, this will act as a disincentive for the rich to work hard, which lead to the shrinkage of the economic size. In short term, the poor experience the prosperity from equality. However, in the long run, “The poor will get poorer and the rich will get less rich,” which is a quote by Margaret Thatcher.

This is a video of Magaret Thatcher commenting on socialist policies and how everyone will be hurt by focusing on equality.

China’s GDP per capita is only $8,394 according to the recent data from IMF (2011). Its GDP might be the second biggest in the world, however, there are too many people, which decreases the GDP per capita. UK’s GDP per capita was absolutely higher than China’s around 1990, and they were still arguing about equality verses efficiency. UK led by Margaret Thatcher focused more on efficiency. China will almost certainly decrease its economic pie if Xi Jinping focuses on equality. If I were at the decision-making position, I would certainly have focused more on efficiency. I would focus on equality later when the GDP per capita is high enough.

I understand that China has to satisfy and relieve complaints from their people to sustain political power. I am also aware that the government is focusing on slowing down the economy at an appropriate level. However, if the economy loses its economic momentum from socialist policies, the chance that China will become a developed country will decrease substantially.