The First distribution by the invisible hand of the market: economic growth and wealth creation need to become more inclusive and balanced
The first distribution, led by the market mechanism, has a decisive impact on the distribution of income and wealth.
There are many factors that affect income and wealth distribution. These include the political system, the relationship between state and business, whether resource allocation is market-led, industrial policy, the level of education among the population, population demographics, stage of economic development, level of infrastructure development, technological disruption, economic financialization and globalization, anti-monopoly regulations, mechanisms to promote fair competition, and so on.
Chinese and other scholars have done extensive research on the relationship between distribution and inequality of income and wealth, so I will not repeat it here. Instead, I will focus on two changes that may help reduce the income gap caused by the first distribution: enterprise system and corporate value orientation.
In 1997 I proposed the concept of the enterprise system. Based on the degree of separation of ownership and management, companies can be divided into three categories: family type (Type A), modern enterprise system type (Type B), and state-owned type (Type C). Among them, Type B enterprises display the characteristics of the enterprises that have achieved the separation of management and ownership, dispersed equity, and established a modern corporate governance system.
Globally, major developed economies such as the United States, the United Kingdom, Japan, and Germany, have the enterprise system, which is basically a combination of Type A and Type B companies. A common feature in these developed countries is the important role and presence of a batch of those Type B enterprises that transcend family ownership and control, that separate management and ownership.
In Germany, B-type companies include Siemens, BASF, and Bayer, while in Japan there are Toyota, Honda, Sony, and Panasonic. In East Asia, Japan is the only economy to date that has a significant presence of Type B enterprises.
The United States not only has traditional Type B companies such as IBM, General Electric, General Motors, Citi, Coca-Cola, and Procter & Gamble, but also a new generation of Type B enterprises that has sprung from ground-breaking innovations and has had an important influence in global development, such as Google, Amazon, and Facebook.
Since its reforms and opening up in 1978, China’s social and economic development has been spectacular. From the perspective of the enterprise system, the current Chinese system represents a combination of Type A and Type C companies.
In China, Type C state-owned enterprises play a dominant role, even a monopolistic role in many industries. At the same time, Type A enterprises have become the backbone of China’s gross domestic product (GDP), employment opportunities, and the creation of new jobs.
In the long term, China may need to spur and cultivate the development of Type B enterprises so as to build an enterprise system that combines Type A, Type B, and Type C companies. This could be a necessary condition for deepening its economic transformation and promoting common prosperity. For a detailed discussion of this issue you can refer to my article, “Enterprise System and its Optimization” published in 2019.
In some countries and regions where Type B companies dominate, the income gap between corporate senior management team, and ordinary employees remains significant after the first distribution. For example, in 2019 the salary of Google CEO Sundar Pichai was about US$280 million, or 1,085 times the average annual salary of a Google employee of US$258,000.
According to statistics from Bloomberg in 2018, among listed companies the ratio between the salary of a CEO and the average salary of their employees in the United States was 265:1. The ratio in the United Kingdom was 201:1, in Germany 136:1, and in Japan 58:1. In view of this, narrowing the income gap effectively may require companies to make fundamental shifts in their corporate value orientation.