China Watch Vol. 2, No. 20, May 2022
Finding a Reasonable Pathway for Finance to Help Achieve Common Prosperity
LI Yang[1]
Member and Former Vice-President of the Chinese Academy of Social Sciences
In recent years, “common prosperity” has become one of the hot topics. However, because the people joining the discussion have different starting points, emphases, or positions, there are great differences among them in all respects on this major issue, which relates to the essential characteristics of the socialist system and has strong policy significance.
The Central Economic Work Conference held at the end of 2021 ended this confusion over the term and established clear guidelines for common prosperity. There are three main points: First, we must correctly understand and grasp the strategic goals and practical ways for achieving common prosperity. Under China’s socialist system, it is necessary to continuously liberate and develop society’s productive forces, create and accumulate social wealth, and prevent polarization. Second, to achieve the goal of common prosperity, there is an irreversible logical sequence: first, through the joint efforts of people throughout the country, it is necessary to enlarge and improve the “cake” and increase the common wealth, and then, through reasonable institutional arrangements, we cut the “cake” well and share it well. Here, setting up a reasonable distribution system and making it an organic, integral part of the socialist market economy system is obviously a prerequisite for cutting and sharing the “cake” well. Third, the realization of common prosperity is a long-term historical process and cannot be achieved all at one go. Therefore, under the guidance of a clear strategy, a complete and systematic implementation plan must be formulated in order to move steadily towards the ultimate goal. Anything that might “turn long-term goals into short-term ones, break them into fragments, and turn the protracted war into a sudden assault” will do great harm.
As early as November 24, 2021, Vice Premier Liu He published a long article entitled “High-quality Development Must Be Achieved” in the People’s Daily, and he comprehensively expounded both the theory of common prosperity and the pathway for realizing it. In his article, he pointed out: “Entering a new stage of development, the CPC Central Committee with Comrade Xi Jinping at its core puts the realization of common prosperity for all of the people in a more important position.” This tells us that achieving common prosperity is the essential requirement of the socialist market economic system. However, after we have entered a new stage of development, since the goal of “getting rich” has been basically achieved, the pursuit of common prosperity has become more important. Therefore, he says:
We must insist on promoting high-quality development and common prosperity through joint hard work, and we must mobilize the enthusiasm of the entire society in the broadest and most effective way, improve the quality and professional skills of all of society’s human capital, and expand the middle-income group.
This passage points out the essence of common prosperity and fully embodies the Marxist position of “labor first,” i.e., common prosperity is based on common struggle, hard work, and common creation. It is therefore necessary to establish a set of incentive-compatible mechanisms, to rely on it to mobilize the enthusiasm and initiative of the broadest masses of the people, and to let the broadest masses of the people to participate in the process of “making the cake larger.” More importantly, we must use such a social process to improve the quality and professional skills of the entire society’s human capital to the greatest extent possible, so that the majority of workers can enter the “middle-income group” through their own honest labor and contribute together to the common prosperity.
Following these profound theoretical elaborations, the article precisely points out that in order to achieve common prosperity, we “do not engage in egalitarianism, do not kill the rich either to save the poor or make everyone poor, and avoid falling into the trap of ‘welfarism.’” The two “do not” phrases here give clear policy directions—namely, that the goal of common prosperity cannot be achieved through non-economic or even violent means, and it must be accompanied by the drawing of a strict line against the “egalitarianist” fallacy, which has been circulating in China for thousands of years, and against the “welfarist” fallacy popular in Western countries.
In my opinion, these two important documents comprehensively, systematically, and unambiguously expound the theory of common prosperity and the pathway for realizing it under the socialist market economy system.
To achieve common prosperity, we need to find an appropriate starting point. I think that all those small and micro enterprises, rural cooperative organizations, and the emerging “gig economy” that generate income for most low- and middle-income groups are precisely the starting point. This means that solidly supporting the development of these economic entities, contributing to the national policy of “employment first,” and creating opportunities for as many people as possible to become rich through their own honest labor should be the fundamental ways to achieve common prosperity.
Analyzing China’s current employment pattern will help us understand the complexity of this issue.
Judging from China’s overall situation of employment in recent years, it has been very good, but at the structural level, some new circumstances that have emerged cannot be ignored.
Take the first three quarters of 2021 as an example. Although the unemployment rate of the 16 to 60-year-old population was less than 5%, the unemployment rate for the 16 to 24-year-old age group was 15.4%, and the unemployment rate for the 20 to 24-year-old group was even higher, up to more than 20%. This shows that China has a serious structural unemployment problem. Needless to say, the disproportionately high youth unemployment rate in the general population may involve far more than just unemployment. Another conspicuous problem in China’s employment situation is that entrepreneurship’s marginal ability to drive employment is becoming weaker by the day. The average number of new urban jobs corresponding to each new entity entering the market has continued to decline from 0.9 in 2015 to less than 0.5 in 2020. In other words, market entities are increasing more rapidly, but the number of new jobs is comparatively small. This is another structural problem in China’s employment market in relationship to entrepreneurship.
Further analysis of the structure of market entities will help to understand the real problem. As of the end of February 2021, there were 144 million active or existing market entities in China, including 44.572 million enterprises (including 185,000 large enterprises) and 96.046 million individual industrial and commercial households. That is to say, most of the market entities in China are small and medium-sized enterprises and individual industrial and commercial households. Therefore, the focus of employment policy, as well as the focus of financial support for the development of the real economy, must be placed on these more than 100 million small enterprises and individual industrial and commercial households.
The critical role of small businesses needs to be reacknowledged. At present, there is a generalization about small and medium businesses, that they are “five six seven eight nine”—meaning that their taxes amount to 50% or more, that they contribute more than 60% of the GDP, that they develop more than 70% of new patented technology, that they provide more than 80% of the job opportunities in cities and towns, and they account for more than 90% of all businesses. But why do they occupy such an important position, when their development does not? Of course, there are conceptual problems, even ideological ones, and even more, the problem of insufficient understanding of small enterprises’ role.
In the eyes of most people, small enterprises are indispensable, but from the perspective of society as a whole, they play only supporting roles, and at best they only supplement large enterprises. The main pillar supporting social and economic development, in this view, is still large enterprises. This sort of understanding is wrong. To be precise, it is based on the traditional industrialization era and has become outdated, now that human society has become computerized, digitized, and networked.
Understanding once more the irreplaceable and increasingly important role of small enterprises in the social and economic system can be accomplished by looking in two directions: First, small enterprises are the main employers. This should be unambiguous. Second, small enterprises are the main entities for innovation. In this regard, people’s understanding is insufficient. It should be noted that large enterprises generally do not become actively involved in innovation, especially disruptive innovation. Why? Innovation would mean that they would have to break out of their “comfort zone.” It would mean breaking the order they themselves have established, abolishing the rules and regulations they have set up, and reorganizing the industrial sector in which they have a monopoly. Financially, it would mean potentially dealing with a lot of the “sunken costs” associated with the old technology, the old craftsmanship, and so on. That is not the case with small businesses. They welcome rapid scientific and technological development and the corresponding social and economic changes, because they are not afraid to break the “pots and pans”—they only have rosy expectations for the future and a passion for transcending the status quo. Therefore, innovation, especially disruptive innovation, originates mostly from small businesses.
In practice, small enterprises have roughly three directions for development: One is to grow into large enterprises. From this a number of high-tech enterprises and even so-called “unicorns” are likely to grow. It was precisely on the basis of this understanding that the Beijing Stock Exchange, which was established not long ago, directly positioned its service targets as “specialized, refined, and new” small enterprises. The second direction is to integrate into the existing social division of labor system, taking large enterprises as the core and serving large enterprises as their basic function. These become the contractors and supporting institutions of large enterprises. Japan after World War II and China’s Pearl and Yangtze River Delta regions in the last century were full of such small and medium-sized enterprises. These enterprises are established around a few large enterprises and form groups led by the large enterprises that extend along industrial chains; they rely on interlocking supply and demand contracts and develop supply chain finance or industrial finance. The third direction is to survive and develop with relative independence, and to rely on the increasingly developed platforms, networks, intermediaries, channels, and so on, to link up with society; they become indispensable nodes in the increasingly developed socialized economic system. We find that, in reality, the number of such small and micro enterprises that are not in any “subordinate” relationship with existing large enterprises is increasing exponentially.
The economic mechanisms that bring employment opportunities to the middle and lower classes are not limited to small and micro enterprises. People have found that more and more workers have opted for “flexible employment,” which has contributed to the rapid development of the “gig economy.”
Today, we have entered the fourth industrial revolution period, which is characterized by the growth of services, digital technology, information technology, networking, artificial intelligence, and the use of various kinds of “platforms.” This industrial revolution differs from the previous ones in that it is highly digitized, networked, and infotech-based. Therefore, during the process of restructuring social and economic systems, it basically tends toward decentralization. As part of this trend, the form of business enterprises began to undergo vast changes. Not only is the size of enterprises becoming smaller and smaller, but more importantly, apart from the small enterprises, “gig workers,” who are uncertainly affiliated with a specific enterprise, have appeared, and their numbers will increase dramatically. According to data recently released by the Ministry of Human Resources and Social Security, in 2020, the number of persons engaged in “flexible employment” in China already reached 200 million.
The gig economy is extremely broad and includes forms of manual labor such as takeout and express delivery; it also includes remote business and delivery work through online platforms, such as professional services for online legal and financial consulting, creative and multimedia services, online marketing support, software and technology development, writing and translation, etc. In short, individually-operated business, part-time employment, and new forms of employment comprise the main force of flexible employment.
Many researchers, trapped by old notions from the past industrial era, are accustomed to seeing employment in the gig economy as “temporary,” a “transition stage before formal employment.” This overlooks the essence of the gig economy as the product of the most modern, cutting-edge science and technology; it also overlooks the gig economy’s strong potential to impact current industrial and business structures, as well its important position as the node of modernization’s latest-developing form of social organization. According to McKinsey & Co., about 70 percent of freelancers do odd jobs “voluntarily,” and they “appear to be more satisfied” with their jobs than the people working in traditional industries. In today’s developed economies such as Europe and the United States, 10% to 15% of the working-age population makes a living by doing odd jobs, and another 10% to 15% do odd jobs besides their regular jobs.
The international community has already done research on this phenomenon. In 2019, the World Bank released a research report entitled The Changing Nature of Work, which described many of the latest developments in industry and employment. It pointed out that in the past decade, the explosion of technology, particularly artificial intelligence, has been shaping a new round of employment and socioeconomic patterns, so that the gig economy may become the mainstay of business and employment in the future.
The Institute of Economics, School of Social Sciences at Tsinghua University released a research report in 2020 entitled “The Gig Economy in the Internet Era: Development Status, Social Impact, and Policy Recommendations,” which further shows us the outlook for the development of the “gig economy.” Statistics show that the “gig economy” is becoming an increasingly important force for promoting “new forms of employment,” and a new growth point for the high-quality development of the national economy. In 2019, the contribution by China’s “gig economy” to total GDP growth was 10.43%, and it is expected that by 2035, this proportion will increase to 13.26%, accounting for 6.82% of GDP.
In the context of increased informatization, the growing number of small enterprises and “gig workers” are not “going it alone” in isolation, nor are they copies of the isolated individual economies in agrarian economy. However, through the Internet and various platforms, channels, and so on, they are linked closely together to form an increasingly integrated society.
Achieving common prosperity requires a multitude of strategies and coordination in order to advance.
We must note that there are differences among the pathways, linkages, strengths, and effects of different policy systems. To use them to promote common prosperity, we must first carefully distinguish their redistributive effects.
Fiscal policy is obviously a powerful tool for promoting common prosperity, because all of its policy tools, whether fiscal revenue (taxes) or fiscal expenditures, have strongly redistributive effects. In fact, what people call the “secondary distribution” of national income to achieve common prosperity refers mainly to the redistribution mechanism, of which fiscal policy is the main body.
The mechanism by which finance assists the formation of common prosperity is very different from that of fiscal policy. This is attributable to the fundamental differences between the operating mechanisms of the two policy systems—fiscal revenue and expenditure are basically characterized by the words “free” and “compulsory,” while financial operations are characterized by the words “paid” and “return.” This difference in their basic characteristics means that it is basically impossible for finance to assist the growth of common prosperity by following the pathway of “giving away profits,” because, if it were to do so, finance would no longer exist.
Policy-based finance may be the main mechanism and pathway that helps achieve common prosperity. Here, I use the concept of policy-based finance in the broadest sense. I call commercial finance an activity in which financing decisions are made and prices set on the basis of risk; various other financial arrangements are all made more or less on the basis of policy.
The three essential provisions of policy-based finance would be that it is financial, policy-based, and preferential in nature. The first essential quality of policy-based finance, that it is financial in nature, means that it is a form of finance, similar to other types of financial activities. Both forms of finance are activities characterized by the paid transfer of the right to use funds within a certain period of time. But the difference between policy-based finance and other types of finance is that it is also policy-based and preferential. By policy-based, I mean that the financial activity is set up and implemented in order to achieve the government’s specific policy objectives. By preferential, I mean that it differs from commercial finance in terms of the availability of funds (credit recognition, mortgage and guarantee conditions, etc.) and costs (interest rates, fees, etc.), precisely because policy-based finance is not based on risk, which in ordinary finance is used to make financing decisions and set prices accordingly. That is to say, the iron rule of finance—that “interest rates cover risk”—is not universally practiced in this field, so that the implementation of policy-based finance is usually done in coordination with fiscal policy measures.
Following the development of policy-based finance, we can see that the government and financial management departments have actively promoted inclusive financing and small and micro-enterprise loans for many years. By now they have become relatively mature, systematic tools that help to achieve common prosperity. However, it will be necessary to use financial technology to make deep transformations on the existing financial inclusion system and the small and micro-enterprise financing system, so that they can reach disadvantaged groups as well as the vast number of small enterprises more widely and deeply. It will be necessary to continue providing them with necessary, affordable, and dignified financial services to help them improve the quality of their human capital and professional skill levels, so that they can gain the ability to rely on their own honest labor to embark on the road to prosperity.
Financial support mechanisms to support flexibly employed groups must be studied as soon as possible. Experience has shown that the most important feature of the “gig economy” is its dependence on Internet technology and various “platforms” and “channels.” Therefore, supporting the healthy development of various platforms, networks and channels, connecting tens of millions of small businesses and gig workers into developed social networks, and further connecting them closely with regional markets, national markets, and even the global market will be an important direction for future employment and industrial development.
If we understand that the Internet, platforms, channels, and so on are the main supports for the development of the gig economy and the employment of tens of millions of people, then improving the human capital and professional skills of the vast number of gig economy workers and small enterprises would be the main path toward achieving common prosperity based on honest labor. As for financial assistance that helps to achieve common prosperity, its focuses would be: to vigorous develop technologies relating to blockchain, big data, the Internet, the Internet of things, and artificial intelligence; to vigorously support digitization in finance and the economy, or “fintech”; and support and create the healthy development of various platforms, networks, and channels. If these are used as the starting points, then the development of the gig economy will be sustainable, and we can sustainably provide small and micro-enterprises financing services. Correspondingly, our monetary, financial, and financial supervision policies should also be designed and implemented around providing the conditions for regulating and facilitating these activities.
Translated by Thomas E. Smith
[1] This article is based on the author’s speech at the “2021 China Financial Research Conference” and was first published after further authorial revisions in Zhongguo jinrong (China Finance) 2022.2.