{"id":2475,"date":"2013-06-16T21:26:00","date_gmt":"2013-06-17T01:26:00","guid":{"rendered":"https:\/\/www.chinacenter.net\/?p=2475"},"modified":"2023-04-07T11:35:00","modified_gmt":"2023-04-07T15:35:00","slug":"toward-a-new-social-contract-in-china-overcoming-the-legacy-of-the-old-regime","status":"publish","type":"post","link":"https:\/\/www.chinacenter.net\/2013\/china-currents\/12-1\/toward-a-new-social-contract-in-china-overcoming-the-legacy-of-the-old-regime\/","title":{"rendered":"Toward a New Social Contract in China: Overcoming the Legacy of the Old Regime"},"content":{"rendered":"

\"Remington\"In early 2012, China’s government, in cooperation with the World Bank, issued a major white paper on the economic and social challenges facing the country in the period through 2030. The report called for a new model of economic growth and a fundamental reorientation of social policy.1<\/a><\/sup> The report called for moving up the global value chain, promoting innovation, raising efficiency, increasing consumption, increasing production of services, and reducing reliance on exports.<\/p>\n

It also called for fundamental reforms in social policy, urging higher overall spending and improved benefits; measures to reduce income inequality; expanded investment in human capital and infrastructure; widened social pooling of risks, costs, and gains from growth; a more efficient balance between state and private provision; and better quality of services. It tacitly urged democratization to give society more voice over policy.<\/p>\n

Coincidentally, a group of experts convened by Russia’s government issued a report at almost the same time with very similar content.2<\/a><\/sup> Russia’s challenge is to diversify the economy away from its resource dependency. But its solution is much the same as China\u2019s: to invest substantially more resources in upgrading skills and technology, expanding opportunity for entrepreneurship, reducing social inequities, and increasing public participation in decision-making. What explains the remarkable similarity in the two white papers? I would contend that many of the dilemmas China and Russia face in changing their economic and social policy models owe to the continuing impact of the common legacy of the old socialist “social contract.” Like other post-Communist states, both China and Russia have had to adapt inherited systems of entitlements to a market-driven, globalized environment. Unlike their East Central European counterparts, however, Russia and China have seen growing levels of informal employment, rising income inequality, and increasing deficits in their pension funds despite high payroll tax rates in the formal sector.<\/p>\n

Often China’s social policies are explained by the pressure of globalization.3<\/a><\/sup> But China’s rapid economic development is inextricably linked to its transition from a communist economic structure. This fact is particularly pertinent to the transformation of the urban industrial sector.4<\/a><\/sup> Therefore it is relevant to note that other post-Communist states with similar levels of foreign trade exposure and foreign direct investment exhibit far lower levels of inequality and dualism in their labor markets, and higher income replacement levels in their welfare regimes. Other studies emphasize specific characteristics of Chinese society, such as the enormous flow of China’s surplus rural labor to the cities after market reforms began in the late 1970s.5<\/a><\/sup> These perspectives need to be complemented, however, with consideration of the way the old regime shaped the distribution of political interests and resources.<\/p>\n

Most observers would agree that Russia and China represent diametrically opposite strategies of transition from communism to capitalism. For China specialists, it is axiomatic that Russia’s record demonstrates the failure of its model of reform. Most would agree with Susan Shirk that “the Soviet strategy of political reform before economic reform produced political chaos and disintegration and a decline in living standards and growth rates,” or Dali Yang’s assessment that “Russia’s shock therapy did not produce a sound market economy but instead a sort of anarchic capitalism riddled with corruption.” 6<\/a><\/sup><\/p>\n

However, valid these arguments may be in fact, it certainly is the case that the Chinese leadership believes the Russian model to have failed.7<\/a><\/sup> Deng Xiaoping, according to his son, thought Gorbachev was an “idiot” for trying to reform the political system before the economy: “He won’t have the power to fix the economic problems and the people will remove him.”8<\/a><\/sup> The chaos of the Soviet and Russian experience is treated as an object lesson in how not to conduct reform \u2014 “fanmian jiaocai” \u2014 negative teaching material.9<\/a><\/sup> Many Western scholars agree. For example, Mary Gallagher argues that China’s “integration into the global economy, the increased use of legal institutions to mediate conflict, and the influence of a small but growing middle class may together slowly build up a more stable societal foundation for democratization…there may be benefits to continued authoritarianism.” 10<\/a><\/sup><\/p>\n

Yet despite the differences, Russia and China share three marked similarities in the social sphere: high social taxes but rising pension fund deficits; a growing share of informal employment; and rising income inequality.<\/p>\n

In China, as in Russia, the government has converted state-funded, state-provided services to social insurance schemes for pensions and health care. With respect to pensions, beginning with a pay-as-you-go system of pension coverage for urban state-sector workers funded through enterprises in the 1950s, in 1984 China began reforming its pension system, adopting a three-tier scheme for state-sector workers in the cities. (Except for state employees in the countryside, the rural population was outside the state pension system. 11<\/a><\/sup>) Since then, the pension system has been steadily extended to wider categories of the population. In 1997 it was broadened to cover individual entrepreneurs and temporary workers. The current plan consists of public and individual accounts, both funded by social security taxes. Employers pay the equivalent of 20% of wages into the public account and employees pay another 8% into their individual accounts. Together with other social insurance contributions, the total payroll tax is effectively about 45% of the wage fund, which is one reason evasion is high.12<\/a><\/sup> By 2010, all provinces had a province-wide pension insurance fund for old-age incomes. As of July 2011, the government had enacted a pension plan nominally covering all urban residents, including those without jobs or covered by other programs, which was gradually being implemented. 13<\/a><\/sup><\/p>\n

Although the pension and other social contributions levels are relatively high, the pension system in China faces rising deficits. As is true of Russia as well, China’s government is meeting current pension obligations by raiding the individual accounts funded through the mandatory insurance contributions and through large transfers from the state budget.14<\/a><\/sup> In China in 2011 the central government budget transferred about 180 billion yuan (about $30 billion) to make up shortfalls in the provincial pension funds of 13 provinces. Province-level governments also subsidize their funds; Shanghai had to spend more than 10 billion yuan to make up the deficit in its pension fund.15<\/a><\/sup><\/p>\n

Like Russia, China still relies heavily on taxes that are administratively less costly to collect but regressive. Although payroll tax rates are relatively high, they are capped at relatively low ceilings, imposing a proportionately greater tax burden on low and middle-income individuals in the formal sector. They are also highly variable depending on local arrangements between firms and governments. Income tax revenues do not form a large part of government revenues (consumption taxes, including the VAT, comprise more than half of total tax revenue in China). The personal income tax yields only 7%-8% of total tax revenue in China, and it is principally a source of revenue for subnational governments.16<\/a><\/sup> Tax declarations are voluntary for the highest income groups, contributing to widespread evasion. As a result, the richest pay a much lower share of overall income tax than other groups.17<\/a><\/sup> The relatively low income ceilings on payroll taxes mean that high-end earners pay a much lower share of their total earnings into the social insurance system than lower-income groups, while informal labor is not paying in at all. This fact imposes a substantial burden on middle-income earners in the formal sector, and on state enterprises, where compliance with payroll taxes tends to be higher.<\/p>\n

The basic problem is that, as in Russia, the current three-tier pension system was built on top of the old socialist model that was based on state control of labor and capital. That system could offer generous pension benefits to all state employees and urban state-sector workers because wages were low and budget constraints soft. Even though wages and pensions were in cash form, cash could only make limited claims on goods and services. When the economies were put on a market footing, and budget constraints hardened, the government needed to finance its social spending obligations through new taxes that required substantial administrative capacity to collect. Wages became an important regulator of the labor market, so employers wanted to raise wages but minimize the taxes paid on the wage fund. Employees had little trust in the system and often preferred to receive the full amount of wages in cash. Tax evasion and labor market dualism \u2014 i.e. the divide between those “inside the system” and “outside the system” (\u201ctizhi nei\u201d vs. \u201ctizhi wai\u201d) \u2014followed. Many migrant workers in China prefer to receive all their wages in cash because they do not believe that they will benefit from the retirement benefits system.18<\/a><\/sup> Evasion of social insurance taxes by workers and firms at the micro-level aggregates up to large-scale deficits in the social funds at the macro-level.<\/p>\n

Dual Labor Markets<\/h4>\n

A major reason that the payroll tax contributions in China do not meet rising pension obligations is the growing dualism of the labor market. A large and growing part of the labor force is informal, that is, working under ad hoc employment arrangements that leave earnings largely outside payroll taxes and social benefits. In China there are two different sources of informalization. One is the downsizing of workforces at state enterprises, which pushed tens of millions of workers into various forms of off-book labor (in many cases, as in Russia, workers earn wages outside the enterprise while maintaining formal relationships with firms).19<\/a><\/sup> The other is vast migration of labor from the countryside to the cities: around one-quarter of the urban workforce in China consists of migrants. This is the most important source of pressure on China’s social welfare regime, because until recently, rural migrants in the cities were largely excluded from the extensive social benefits provided to workers with urban residence status. Roughly speaking, 35%-40% of the urban workforce in China is informal, compared with about 30% in Russia. 20<\/a><\/sup><\/p>\n

Informality in China is higher than in Russia because of the significant overlap between migrant workers and the informal sector (most informal workers are migrants).21<\/a><\/sup> Approximately one-quarter of urban workers in China are migrants, but in typical industrial cities the figure is 40%-45%, and in some cities it is as high as 70%-80% of the labor force.22<\/a><\/sup> Specialists describe the rural migrant workers in cities as “a huge underclass of super-exploitable and low-cost labor.”23<\/a><\/sup> Only in the last few years have they begun to acquire the right to a labor contract, pension income, health care, unemployment, and other social protections. Actual enforcement of these rights has been slow, however, and the rights themselves are limited. For example, rural migrants obtain their health insurance through their place of residence, making benefits difficult to access when they are in the city. Moreover, when migrant workers move to another province or even city, they lose the employer’s portion of the contributions.24<\/a><\/sup> Although there are not recent figures on the extent of the problem, employers often do not pay into the social insurance funds for rural migrants. 25<\/a><\/sup><\/p>\n

There is much evidence indicating that dualism has increased, both in China and Russia. The new labor contract law that came in force in 2008 in China had perverse consequences: it obliged labor recruiting agencies that supply labor to contractors to pay social insurance contributions, letting the enterprises off the hook. As a result, informality increased, as enterprises hired more agency labor and cut back on wages and benefits for their formal workers.26<\/a><\/sup> In many cases, migrant workers hired by recruiting agencies are contracted out to other agencies who in turn contract them to construction or other firms. Workers lacking an urban hukou are often in a position of dependency, with little recourse in case the employers fail to pay them the full promised wage.27<\/a><\/sup><\/p>\n

Adding to the pressure on the social welfare system is a worsening demographic situation. Russia’s working age population began shrinking several years ago. In China, the decline in the size of the labor force is just beginning.28<\/a><\/sup> The booming coastal cities have already experienced labor shortages, raising wage costs and leading some firms to move inland in search of cheaper and politically more docile labor29<\/a><\/sup>. In both countries, the trend puts upward pressure on wages and further increases the incentive for firms to evade social tax obligations.<\/p>\n

Rising Inequality<\/h4>\n

Reforms of social policy have tended to reinforce income inequality in the labor market. As has been widely discussed, China features levels of income inequality comparable to that of both Russia and the United States. The U.S. Census Bureau reported a Gini coefficient for the United States in 2010 of 46.9 and a decile ratio (the 90:10 ratio) of 11.67.30<\/a><\/sup> Russia’s State Statistical Committee reported a Gini index of 42.1 but a decile ratio of 16.5 for 2010. China’s Gini index is a matter of dispute. However, in January, the National Bureau of Statistics reported that China’s Gini coefficient was 47.4 in 2012 and 49.1 in 2008.<\/p>\n

Like the United States, Russia and China also have experienced a concentration of income gains at the top.31<\/a><\/sup> As in the United States, theories of globalization and skill-biased technological change fail to explain this fact.32<\/a><\/sup><\/p>\n

Not only are Russia and China similar in their levels of inequality, but they also have higher inequality than their post-Communist peers. Russia’s level of inequality is higher than that of any other former Communist country in Eastern Europe or the former Soviet Union, as China’s is higher than that of any country in East Asia.33<\/a><\/sup> Wage decompression and economic restructuring initially widened income disparities in all post-Communist countries in the immediate post-transition period. In Russia and China, however, the inherited institutional features of the Communist system reinforce labor market inequality, whereas in East Central Europe, rising inequality has been checked by democratic political institutions.<\/p>\n

In China, as in Russia, the largely non-redistributive system of taxation and social spending, the preservation of categorical rather than targeted benefits (such as the tie of social privileges to residence status), the widespread diversion of public resources into private gain by state officials, and deepening labor market dualism mean that inequality in earnings is translated directly into high post-tax-and-transfer inequality. Thus in some respects, social policy deepens inequality. Gao and Riskin estimate that the net effect of social benefits other than housing is to increase income differentials.34<\/a><\/sup> China’s minimum livelihood subsistence guarantee, the so-called \u201cdibao,\u201d is means-tested but extremely low.35<\/a><\/sup> Neither in intent or effect is it redistributive. The cumulative effect is to compound advantages for those well-off enough to benefit from access to better services. As in liberal market economies such as the United States, the entrenchment of privilege also increases the ability of the rich and powerful to block moves toward more redistributive taxation, spending or toward broader pooling of risks and benefits.<\/p>\n

Certainly Chinese leaders have repeatedly expressed concern over the high level of income inequality. In March 2012, seizing on the issue of inequality in a desperate but futile move to save his political career, Bo Xilai warned that \u201cif only a few people are rich, then we are capitalists. We\u2019ve failed.\u201d 36<\/a><\/sup> The next day Bo was expelled from his leadership posts. Two days later, however, Prime Minister Wen Jiabao declared that the government would do more to reduce inequality.37<\/a><\/sup> In January 2013 the National Bureau of Statistics published Gini index figures for the first time in 12 years. In February, the State Council released a major planning document detailing measures intended to reduce income inequality, particularly by raising the minimum wage. 38<\/a><\/sup><\/p>\n

While the social welfare regimes in Russia and China have been subject to very different pressures, the similar dilemmas outlined above can be traced to their common origins in the Soviet “social contract.” The term refers to the intertwined nature of the political regime, economic system, and social structure of the Soviet-type socialist state: the state maintained control over the economy, trading a certain level of social security for compliance with the terms of the contract. Unenforceable as it was, and extremely inefficient, it nonetheless allowed the state to achieve certain goals, and provided guaranteed employment and social protection to those segments of the population that it covered\u2014above all, the urban industrial sector. As the China Development Research Foundation observed, “a de facto contractual relationship existed among government, employers, and employees that ensured a lifetime job together with related pension and medical benefits to employees.”39<\/a><\/sup> Like “liberal market economies” and “coordinated market economies” in Western capitalist democracies, the Soviet-type social contract integrated political, social, and economic institutions. Reform of one set of institutions (notably the liberalization of economic relations), therefore, inevitably affects the balance of interests and demands in polity and society. Three lingering features of the old regime have particular significance for reform-era social policy outcomes.<\/p>\n

State Enterprises as Central Sites of State Welfare Provision<\/h4>\n

State enterprises were central to the administration of social benefits and controls, and even more so in China than Russia because Chinese enterprises formed their own pools for pension and other funds.40<\/a><\/sup> The political implications of this are far-reaching. Because of the weakness of other associational means of pooling and representing collective interests, state enterprises became major sources of power. They were powerful both in their relations with local governments, for which they supplied employment security and a wide range of public goods, and vis-a-vis their employees. The leverage possessed by the large state enterprises has persisted well into the post-Communist era.41<\/a><\/sup><\/p>\n

The power of the SOEs stems in part from the characteristic gigantism of the Stalin-era enterprises. Often an enterprise is the source of employment and social amenities for an entire town. In Russia, there are several hundred “mono-cities,” the equivalent of company towns, that depend on a single massive enterprise. An example is Togliatti, in Samara Oblast, home to the giant AvtoVAZ autoworks. At the point when the worldwide recession struck in 2008, one in seven residents of the city worked for AvtoVAZ, and 90% of the city’s revenues came from the plant. Like GM and Chrysler, AvtoVAZ was “too big to fail,” so the government intervened with a bailout and a restructuring plan that saw it through the immediate crisis. Post-Soviet Russia has hundreds of similar towns.42<\/a><\/sup> In other cases, of course, SOEs in both countries serve as state champions in international markets (as in the energy and telecommunications sectors).<\/p>\n

State enterprises in China have emerged from the drastic downsizing in the 1990s in an even stronger position than before. According to the World Bank report, a quarter of SOEs in China are loss-making. Often they restrict competition in their industries. Because they provide politically crucial public goods, such as employment and social services, and enjoy privileged relations with governments at different levels, they resist restructuring.43<\/a><\/sup> One of the dilemmas in China has been that richer state enterprises have resisted turning over their social insurance funds to the fund pools of the jurisdiction to which they are administratively attached. Poorer enterprises of course are only too happy to do so.44<\/a><\/sup><\/p>\n

Extensive In-Kind Benefits<\/h4>\n

The old social contract made wide use of in-kind benefits, such as subsidized housing, utilities, transportation, pharmaceuticals, food, recreation, cultural services and the like. Additional benefits were available for designated categories of the population, such as officials and war veterans. In both Russia and China, in-kind benefits and social services represented about one third of the total wage bill.45<\/a><\/sup> Generally the in-kind benefits system was regressive in its effects because higher-ranking people enjoyed better benefits. The infrastructure providing in-kind benefits, such as housing, utilities, and transportation, was inadequately financed. Maintenance costs were deferred. Russia and China have handled the conversion of in-kind benefits to new financing mechanisms somewhat differently. China transferred responsibility for providing many social services to “public service units” on contract to local governments. These have often found creative ways to generate private incomes for their employees.46<\/a><\/sup><\/p>\n

Both countries have found it difficult to put the in-kind benefits onto a fully market-based footing, in part because monopoly providers are able to keep prices high and services poor, and in part because cash incomes remain low. An attempt at marketizing a few benefits in Russia in January 2005 \u2014badly planned and implemented\u2014 resulted in nationwide protests, often featuring elderly people deprived of needed medications and transportation in the dead of winter.<\/p>\n

Moreover, the system of in-kind benefits linked social privilege to administrative status. After the transition, therefore, the system enabled officials to continue to use their positions to control access to education, health care, housing, child care, and other services.47<\/a><\/sup> This has fed rent-seeking and corruption in both countries. Officials often prefer holding on to their privileged access to administratively allocated benefits (elite hospitals, housing compounds) rather than to see them placed in a competitive market.<\/p>\n

Weak Organized Labor<\/h4>\n

A third feature of the old social contract was that labor was incorporated into state-run trade unions that enjoyed organizational monopolies but lacked autonomy from the state. Membership in the unions was universal but labor protest was outlawed. Trade union leaders were part of the party nomenklatura. Labor solidarity was undermined by wide differences in individual earnings within enterprises and by the dependence of workers on the enterprise for social benefits.48<\/a><\/sup> Rather than negotiating for common wage rates and conditions, trade unions collected and administered social benefits. They were also “transmission belts” for political control over the workforce. In practice, they were part of a clientelistic system in which trade union officials enjoyed access to power in return for enforcing worker quiescence. To a large extent, this relationship between unions, workers, employers, and government has continued.49<\/a><\/sup> In China, there is universal agreement that the official trade unions have been ineffective in representing workers in confrontations with employers despite the fact that labor protest has increased.50<\/a><\/sup> The passage and implementation of the new Labor Contract Law in 2007, where the All-China Federation of Trade Unions participated in drafting the law, demonstrated, according to Mary Gallagher and Baohua Dong, “the lack of legitimate bargaining bodies” that could represent workers’ collective interests.51<\/a><\/sup> In China, the ACFTU depends on the government to pay its expenses out of the wage fund.52<\/a><\/sup> Unauthorized labor organizations are repressed.<\/p>\n

In Russia there are legal rival unions to the successor organization of the old Soviet trade union federation. However, the Labor Code makes it extremely difficult for rival unions to compete successfully (only one union may bargain collectively for the workers at any given enterprise). Meantime the main union federation avoids any confrontation with the state or private employers, preferring instead to maintain clientelistic relations with local authorities and a subordinate role in bargaining over wages and social benefits.53<\/a><\/sup><\/p>\n

In both countries, the weakness of organized labor means that business has not had to generate the capacity to bargain with labor over thorny redistributive issues. Studies of advanced Western democracies suggest that the capacity of business to unite around common interests is greater where organized labor’s bargaining power is greater.54<\/a><\/sup> The ability of peak business and labor associations to constrain their own members and enforce agreements depends in part on the degree to which they must unite against their opposite numbers in the labor market. Where business and labor featured higher levels of centralization, they were also able reach agreements that alleviated redistributive conflict, for example by coordinating investment in human capital formation.55<\/a><\/sup> This helps explain the lower levels of inequality in coordinated market economies than in liberal market economies. The legacy of the authoritarian social contract in China is therefore not only a weak and clientelistic trade union movement, but also a business sector poorly equipped to form a collective will in dealings with the state or to reach agreements with labor over human capital investment. As Kellee Tsai and Bruce Dickson have shown, private entrepreneurs have little desire to exercise political influence in behalf of their common interests.56<\/a><\/sup><\/p>\n

The enterprise-centered nature of the welfare system, the importance of non-monetary benefits, and weakness of organized labor under the old regime have shaped the course of subsequent reform in both countries. Powerful enterprises resist demands for higher social spending by underreporting the wage bill on which they pay taxes and expanding the use of informal labor. Organized labor is complicit in labor market dualism and patronage relations rather than championing workers’ interests. The government’s efforts to rebuild the social contract are hampered by the persisting political leverage of the interests that were most advantageously situated in the old regime: enterprise managers and state officials.<\/p>\n

Although China exhibits levels of income inequality characteristic of liberal market economies, its levels of social taxes are similar to those of social democratic welfare states\u2014but only in the formal sector and only for middle-income earners. The growth of the informal sector and rising income gains at the top undermine the regime’s goals for social policy by leaving social insurance pools starved of contributions. I have argued that this pattern reflects the enduring influence of institutional arrangements inherited from the old social contract. Greater associational capacity on the part of business, labor and other broad social sectors would enable the state to alleviate some of the conflict between growth and redistribution by raising the productivity of labor and investing in skill formation. This is the proposal of both the China 2030 report as well as that of the Strategy 2020 for Russia. Doing so will require overcoming the cooperation dilemma inherent in the relations between economic agents and the state. Firms and workers are more likely to contribute to the public welfare by paying taxes on the full value of their wages to the extent that they believe that the state is providing public goods such as order, legality, and efficient state administration. Strong institutions for coordination between the state, business, and labor might help overcome many of these dilemmas. In turn, cooperation among them could forge the basis for a new social contract.<\/p>\n

\n

Thomas F. Remington is the Goodrich C. White Professor of Political Science at Emory University in Atlanta, Georgia.<\/p>\n","protected":false},"excerpt":{"rendered":"

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