China’s economic overhaul is simply a matter of inequality
There is a consensus around the benefits of past economic reforms among the Chinese people, as the gains from opening up the economy have translated into improvements in living standards over the past 40 years.
Yet despite growing prosperity, China has experienced periods of worsening income inequality.
Prior to 1997, China’s income distribution was relatively equitable, as the reforms of the time were more focused on improving market incentives – something called breaking the ‘iron-rice bowl’, where , in the absence of a strong private sector, people competed for scarce public sector jobs.
In 1997, however, urban household incomes were on average 83 percent higher than those of rural households. This figure rose to 167% in 2009 and had fallen slightly to 132% in 2019. The Gini coefficient of income inequality in 1997 was 0.398 and reached a peak of 0.491 in 2008. It had only decreased. slightly to 0.465 in 2019.
The leaders’ reiteration of common prosperity as the main political objective is therefore timely for three reasons.
First, it is a logical continuation of the long-term task of eradicating poverty and nurturing the low to middle income group. From 2012 to 2020, China lifted 99.9 million rural people out of poverty, with poverty measured at a daily income of US $ 2.3 in purchasing power parity.
While eradicating absolute poverty is the goal of building a well-being society by 2020, achieving common prosperity is the next goal of building a modern socialist country by 2049.
Second, there is a need to address the challenges facing China’s economic development and social cohesion. The economy is increasingly constrained by weakening demand as its population ages rapidly. Growing the pie and dividing it fairly is the key to increasing the contribution of household consumption to economic growth.
Existing income inequalities and the associated entrenched social immobility cause discontent among low-wage workers, young people and the less educated. The reaffirmation of common prosperity is both a credible solution to their problems and a clever response to a public opinion favorable to action to combat income inequalities.
Third, it is in line with international experience and common practice. The three areas of distribution have their specific functions and appropriate tools to help reduce inequalities in income, asset ownership and access to public services.
The logical conclusion of China’s use of the market as a decisive mechanism in resource allocation is that primary distribution retains its place, ensuring that efficiency and incentives remain intact. A more dynamic economy will in turn improve productivity and social mobility simultaneously.
China’s real GDP per capita is expected to rise from US $ 10,687 in 2020 to US $ 23,000 ($ 31,750) in 2035. In such a period of development, according to cross-country data, the average proportion of public expenditure to to GDP goes from 26 percent to 36 percent. This indicates a huge leap in the expansion of the welfare state which can significantly narrow the income gap.
The 19th CPC National Congress proposed a master plan for the provision of basic public services. This included equal provisions for feeding minors, raising children, a living wage of working age, health care, support for the elderly, housing and assistance to vulnerable members of society.
By using mainly tools of redistribution – supplemented by charity and social responsibility – the level of social protection, social mutuality and social protection will be enhanced. Inequalities will be reduced as common prosperity is achieved.
Cai Fang is the former vice president and now cchief researcher within the National High Level Think Tank at the Chinese Academy of Social Sciences. This article is one of a series by East Asia Forum (www.eastasiaforum.org) at the Crawford School at ANU College of Asia and the Pacific.