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Essay Number 6
October 1998 
Income Inequality in China's Post-Great Leap Forward Era

thin rule
By Satya J. Gabriel


Hu Angang, one of Chinese leading social scientists, has warned of the potential dangers of increasing income inequality, saying that it could set in motion centrifugal forces that lead to the breakup of China, in a manner reminiscent of the disintegration of Yugoslavia.[1]  

The struggle between the Maoist Left (also referred to as simply leftists) and the Pragmatic Right (also referred to as modernists, pragmatists, rightists, pragmatic modernists, modernist Marxists, pragmatic Stalinists or the Zhou Enlai faction) within the Communist Party of China (CPC), as described in previous essays, was shaped, in part, by different visions of the economic, political and cultural conditions necessary to keep the aforementioned centrifugal forces in check. The relative success or failure of economic policies seems to have been particularly influential in determining which faction gained prominence in public policy formulation during certain periods. During the Maoist period the primary criteria for economic success was the ability of the bureaucracy, which was pervasive in the form of state-owned enterprises (SOEs), communes, and state agencies, to guarantee that basic needs of the citizenry were met. In exchange, the citizenry was to be loyal to the bureaucracy and the leadership at the top of that bureaucracy, particularly the beloved Chairman Mao. The SOEs and communes provided all manner of social welfare to citizens (health care, education, childcare, subsidized food and clothing, protection, old age security[2], and so on), urban and rural and, in return, the citizenry was responsible for generating the material goods and services that comprised the social welfare bundles (the "iron rice bowl"). Surplus value generated in these institutions was mostly recirculated within local communities to meet local needs. In the SOEs, workers played an active role in determining the level of these social welfare bundles through their workers' councils.[3]  This served the Party and the nation for a time, but eventually concern about the level of economic growth began to dominate over the concern to meet the basic needs of the citizenry and to exhort the population to "socialist" ideals of cooperation. Over time, it came to be understood by much of the CPC leadership that economic growth, i.e. expansion in aggregate output, and economic development, i.e. expansion in the nation's productive potential, was a necessary condition to social cohesion and national defense. If China could not solve the problems of generating economic growth and economic development, then the dream of restoring the past glory of China, of protecting China from the domination of the Western powers, and of diffusing the centrifugal forces that threatened the cohesiveness of China as a nation-state would be very difficult to achieve. And no less importantly, the pragmatic modernists (the modernist Stalinists) understood economic growth and development as necessary to legitimize the one-party-rule ("vanguard role") of the CPC. Economic growth and rising incomes have tended to quiet dissent in China, although not completely or consistently. 

Although the Left and Right agreed on the need to "advance" the economy, there was not always agreement on how to do it or on whether this was the most important priority in "building socialism." There were times when the Maoist Left argued for placing the development of a "socialist consciousness" at a higher level of priority than growth in China's material prosperity. The Left saw no inherent reason that relative material prosperity could not be consistent with "counter-revolutionary" trends that might result in reproducing some of the social ills, such as exploitation and inequality, associated with both the Guomindang (KMD) and the Imperial past. In particular, the leftists argued against uncritical adoption of the hard and soft technologies of "Western" capitalist nations (an approach the Left called "pulling the cart without watching the road").  In this sense, the Left viewed legitimation as requiring more than simply generating economic growth.  Leftist leaders believed the legitimacy of CPC governance required a certain degree of political "purity" or, at the least, adherence to certain ideals that were easily recognizable by the population at large as "socialist."  Increasing income inequality, expansion in exploitative class processes, and instances of official corruption were understood by the Left as greater threats to social cohesiveness than a failure to generate rapid economic growth.

Furthermore, it could be argued that the leftists had a more "holistic" view of socialism than did the rightists. For the Left, socialism meant more than the simple political primacy of the Party and the Party's guidance of the economy towards more rapid technological advance and economic growth, but had also to involve psychological, cultural, and class aspects. The Great Leap Forward had not only been an attempt to improve the technology deployed by Chinese workers (particularly those vast majority in the rural areas) but was also an effort at simultaneously changing class processes and engineering an advance in the social consciousness of these workers, to create the preconditions for a "new socialist human being" who would act in the interests of the larger society, not simply in the interests of himself or his family. 

If it was possible to motivate the Chinese population to act in the social interest without material incentives, then there could be no justification for economic inequality. Indeed, it was understood that inequality in access to social resources was a symptom of a social structure of oppression and exploitation: a social structure wherein some people were placed into positions of relative power over other people. Inequality would then become self-reinforcing. Wealth confers power and power provides more access to wealth. Those with accumulated wealth could command the labor of others and live a parasitic existence. The Left could point to the recent past -- the corruption of the KMD, in particular -- as an example of the kind of parasitism that breeds inequality. For the Left, the 1949 Revolution had been fought to end this sort of social structure. It was incompatible with building a socialist society, a society which could evolve into communism (where everyone contributes and participates in the allocation of the surplus and no one lives a parasitic lifestyle).

The leftist view that all children should be born into a society in which they are relatively equal remains popular in China. It would not be difficult to identify large numbers of people who equate socialism with the public distribution of resources in such a manner as to afford relatively equal access to all citizens. The "iron rice bowl" is a phrase that captures this idea of equal access to certain social resources, particularly certain basic goods and services. The CPC policies, both before and after the 1949 Revolution, demonstrated a firm ideological commitment to providing extensive government provision of education (especially the expansion of literacy), health care, employment, housing, support for the elderly, subsidized staple foods, and other forms of social welfare. The social resources necessary to providing such a broad range of goods and social welfare services and support could either be seen as contributing to the overall economic development of the country (a healthier, more educated, happier population might be expected to be more productive and creative than one that was less healthy, less educated and unhappy) and, directly or indirectly, stimulating more economic growth or it could be seen as a drain on the resources needed for productive investment and a block on certain motivational factors that raise worker productivity and reduce management agency costs and, therefore, an impediment to economic development and growth. These diametrically opposed views of of the interaction of social welfare with economic growth would prove to be a major point of debate within the Chinese leadership, the intelligentsia, and the larger society over the years from the 1949 Revolution up to and including the current period. After the Great Leap Forward, the Right was able to make the argument that the "iron rice bowl" was in conflict with economic growth and development. 

And since the pragmatic modernists took the position that economic development, as reflected in the "modernization" of the Chinese economy, was synonymous with social(ist) development, then the "iron rice bowl" represented an impediment to socialism. They criticized what they saw as a "utopian" tendency in the Maoist Left: which the pragmatists labeled the Ultra Left was viewed as trying to create social relations too advanced for the material level of development of the Chinese society, as in the case of the Great Leap Forward. The rightists assumed that the "feudal" and "capitalist" consciousness, that Mao had wanted to transform into a "socialist" consciousness, might persist for a long time. This was part of the raison d'etre of the CPC's one-party rule, after all. The CPC-led government would have to guide society towards a more advanced stage by taking into consideration the pragmatic reality of existing imperfections in human behavior. This would require material incentives and a certain degree of economic inequality. 

In this debate, the pragmatic modernists were less sanguine about the possibilities of pursuing a strategy designed to simultaneously reduce income disparities and generate economic growth. Instead, they consistently promoted an "economic growth comes first" strategy. The Right argued that the distribution of income could be improved only if the basic problems of economic growth were solved first. The operative principle in the modernist version of CPC ideology was that the correct path to building socialism was by maximizing the aggregate productive capacity of the society and adopting advanced technology in all aspects of social and productive life. The well-being of specific individuals or sets of individuals could not be accorded enough importance as to override the social requirement for economic growth and the advancement of the productive forces. This theoretical position was in accord with the Stalinist logic, which has been discussed in earlier essays, that acted as a sort of foundation or starting point for most of the thinking of Party modernists. 

Nevertheless, the pragmatic modernists recognized that income distribution was not irrelevant. If the benefits of economic growth were distributed too unequally then the potential for social unrest would increase and, as we've seen in earlier discussions, fear of the disruptive effects of social unrest was always an important influence on the thinking of China's leadership. Much more than in the USSR, China's leaders desired legitimation. However, unlike the leftists, who argued that greater income equality was an essential component in constructing socialism, the modernists believed that this was, for the most part, an issue of equity and social harmony but not a condition of existence of socialism. Indeed, pragmatic modernist leaders, such as Deng Xiaoping, believed that some degree of inequality might be functionally important in stimulating the kind of activities necessary to economic growth and economic growth, not reducing inequality, was a condition of existence for socialism. In other words, socialism could be achieved with varying degrees of income equality or inequality, but social peace might require a greater degree of equality than might be necessary simply to meet the objectives of building a socialist society. The pragmatist concern was, then, to reduce inequality to tolerable levels, not to minimize it. 

In pre-1949 China, income inequality was conditioned by the existence of a traditional form of feudalism in the countryside. Millions of Chinese "peasants" lived under conditions of relative or even absolute poverty (absolute in the sense that a relatively small reduction in the goods available to these farmers and their families would result in starvation) while supplying surplus products to feudal lords who lived rather lavishly. The beautiful Chinese art objects, finely crafted furniture, and porcelain utensils that are so popular among Western collectors were the consumption goods of the Chinese elite. Most ordinary Chinese would never have even seen these goods. Official government statistics showed that in 1950 "rich peasants" (those who were likely to be capitalist, living off the fruits of wage laborers' efforts) and feudal "landlords" (living off the fruits of feudal serfs' efforts) directly owned 52% of the land, but were only 9% of the population. Urban inequality was shaped by the relatively low wages paid to workers in capitalist enterprises, the low prices received by self-exploiting artisans who either had to compete with products sold by large-scale merchants or sell their products to these same merchants (although it could be argued that the self-employed artisans were price takers, it was quite clear that the merchants had enough market power to be more accurately described as price makers), the exercise of political authority by a corrupt political system that made it difficult for the poor to escape the oppressive conditions into which they were born, and the manipulation of that same political system for the narrow self-interest of government officials and certain businessmen, often members of the ruling KMD or relatives of such members. 

The 1949 Revolution disrupted the status quo ante, led to the flight of many rich merchants, industrialists, and feudal lords, and emboldened the poor in many areas to take justice into their own hands, including the confiscation of material wealth from the homes of the rich. However, it was the Land Reform of 1950 that resulted in the most dramatic reduction in income disparities in China. The rural landlord system was demolished and replaced by an ancient economy (an economy of predominantly self-employed/self-exploiting direct producers) that was far more equal than anything that China had experienced in its modern history. According to official government statistics, the landholdings of "rich peasants" and feudal "landlords" fell from the previously mentioned 52% to 9% in 1954. 

The redistribution of wealth after the 1949 Revolution stimulated a significant increase in aggregate output. There was a boom in agricultural output (agricultural output grew 25% in real terms from 1952 to 1957) and, due to both the output increase and to a sharp drop in corruption, a dramatic increase in revenues available for the provision of public goods and services. The multiplier effect of the increase in rural output and income and the increased government provisions for public goods and services resulted in a substantial improvement in per capita income in China. Thus, in the early years of the post-revolutionary regime, economic growth and a reduction in income disparities were completely compatible objectives. It certainly appeared possible to make a majority of the people better off, and consequently more supportive of the new government, while simultaneously pushing production closer to the production possibilities frontier. This undoubtedly added impetus to the Maoist push to make greater income equality a priority for the new government. 

In addition to improving income equality and raising per capita income, the government's policies resulted in greater mobility across status positions in the society. In the feudal era, a person born into a landlord family had little to worry about. This person could look forward to relative wealth and power, marriage to someone in the same well-to-do social class, and little reason to engage in work. A person born into a "peasant" family had a very different, but similarly fixed, future to anticipate. The 1949 Revolution destroyed the old system of status rigidity and replaced it with a more flexible system wherein any individual could, potentially, rise to a position of status within industry, the government, and/or the Party. After the 1949 Revolution, being born into a relatively poor family no longer precluded someone rising to the highest levels of the social structure. Although membership in the CPC has served to "open doors" for individuals seeking to gain in status (or serve in certain appointed positions in industry or government), Party membership was (and continues to be) relatively open. This "equal opportunity" aspect served as an important factor in legitimizing CPC rule in China. 

The redistribution of land and resources after the 1949 Revolution may have initially resulted in a sharp reduction in income inequality, but the encouragement of self-exploitation, the expanded role of village markets in the circulation of goods and services, differential quality of land allocated to different direct producers, differential skills, the compensation of state functionaries based on national pay scales, rather than local income levels, and other factors generated a dynamic by which greater income disparities began to emerge. The Party modernists may have seen this as a sort of social natural selection at play that would not impede the attainment of socialist goals and objectives, but the Maoist Left viewed this development with great suspicion. Moderates within the party, particularly those representing the People's Liberation Army (PLA), may have also been concerned about rising inequality because of the potential for renewed polarization in the countryside (control over rural surplus products concentrated in identifiable groups and other equally identifiable groups being in a position of relative poverty), one of the factors that produced the revolution of 1949. The inequality generating aspects of the ancient economy in rural China may have, therefore, been a significant motivation for the creation of the communes, which had an equalizing effect on rural standards of living. 

The failure of the Great Leap Forward strategy created, perhaps for the first time in the new China, evidence that could be used to argue for a contradiction between economic growth and egalitarianism. It became much easier for the Party modernists to formulate a criticism of the leftist approach as "utopian" and at odds with the principles of Marxian economic theory (as interpreted within the Stalinist version of Marxian economic theory). It became possible to extend the critique of the Great Leap Forward experiment to a more general critique of "ultra leftism." This critique included a reappraisal of a wide range of policies that were, in part, directed towards reducing inequalities, including the distribution of necessary product on the communes by means of criteria other than actual work performance and the widescale provision of social services and subsidies for the urban working class, both of which were seen as reducing incentives to higher worker productivity. The pragmatic modernists could then openly acknowledge their willingness to tolerate an increase in income inequality in the pursuit of the more important objective of economic growth. This is important for understanding the economic policies adopted in the wake of the Great Leap Forward's collapse and for understanding the contemporary "Dengist" era of Chinese economic development. 

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[1] Hu Angang, 1996, "Too Large Regional Income Inequality is Risky," in Chinese Economic Studies, 29(6), p. 72-75.

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[2] (Note added December 30, 2003):   By the mid 1990s, pension payment obligations consumed over 50% of state-owned enterprise profits. See Wei Liu and Minghua Gao's Zhuanxingqi de Guoyou Qiye Chongzu (The Restructuring of the State Owned Enterprises in the Transition), published in 1999, Shanghai: Yuandong Chubanshe (Far East Press) Thanks to Natalya Marusich for finding this information.

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[3] (Note added January 2, 2004): The algorithm by which surplus value was allocated within state-owned enterprises included a stage where the workers' council was given powers to influence the social welfare budget. This power was the only instance where workers could act collectively to determine their standard of living and quality of work (and home) life. One of the consequences of the reforms has been a weakening of workers' councils powers by shifting more power to enterprise management to determine the size of the social welfare fund. Given that private enterprises (domestic and foreign) are not required to have workers' councils with such powers, the trend away from workers participation in budgeting is likely to continue.

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