Economist makes case that new distribution must increase rural incomes and use taxation that favors the majority

Reform of the nation's controversial methods of income distribution was the center of the agenda at this year's session of the National People's Congress (NPC) that concluded Sunday. In his government work report to the top legislature, Premier Wen Jiabao vowed to incorporate more into the share of national revenues by continuing to develop the economy, but also promised to distribute it evenly based on a rational system.

Wen's remarks are a clear signal that the government knows that it must rectify wealth distribution in order to increase spending and consumption as well as improve the standard of living. It understands that closing the income gap will allow the country to transform its investment-dependent economy to a consumption-driven one.

Over the past three decades since the reform and opening up, China's gross domestic product (GDP) has grown at an annual average rate of 9.8 percent, faster than any other major economy. That GDP growth rate from 1978 to 2008 was also 2.6 percent and 2.7 percent higher than the income growth among urban and rural residents, respectively, during the same period.

The lack of symmetry between the development of people's incomes and national wealth has created a number of problems, such as a low rate of consumption to GDP and a widening income gap. The proportion of incomes for laborers has declined in recent years. Statistics shows that this proportion in China is 15-20 percentage points lower than in some developed countries, where the proportion stands at about 50 percent.

The expanding income gap between urban and rural areas, rich and poor, as well as between different industries and different regions has pushed the Gini coefficient, a measurement of wealth inequality, to 0.48 in 2007, exceeding the 0.4 cautionary level.

The gaping income gap makes it imperative for China to redistribute its wealth to boost the national economy in a more balanced fashion. With its economy accelerating in recent decades, China's comprehensive national strength and revenues have grown dramatically. Conditions are thus favorable for raising people's incomes and improving the standard of living.

But if the country is committed to transforming its economy and boosting consumption, as it has often said, it must start by increasing people's incomes. China's efforts to revamp the economy is closely related to income distribution, which has yet to be resolved.

Its economic transformation must begin with coordination of its demand pattern to sustain growth.