Cai Fang: Better Safety Net
04 Sep, 2021  |  Source:China Daily  |  Hits:1193

[LI MIN/CHINA DAILY]

Achieving common prosperity is an essential requirement for socialist modernization with Chinese characteristics. While various paths can lead to common prosperity, China's authorities are adopting the following approaches.

First, the government needs to keep economic growth within an appropriate growth rate. The Fifth Plenary Session of the 19th Central Committee of the Communist Party of China held in October 2020 proposed the long-term goal of basically achieving socialist modernization by 2035, including making the per capita GDP reach the level of moderately developed countries. Development is key to achieving this goal.

Based on the growth potential of production factors endowments and productivity, China's per capita GDP is expected to reach over $13,000 by 2025 when the 14th Five-Year Plan period (2021-25) ends, making it one of the high-income countries. Further, it will reach over $22,000 by 2035, which is close to the level of a moderately developed country. If the Chinese government can launch reforms to increase the per capita GDP to $14,000 by 2025, its per capita GDP can reach nearly $23,000 by 2035.The latter figure is equivalent to that of Portugal today and will make China a moderately developed country. Therefore, China needs to achieve the target growth of per capita GDP for common prosperity.

Second, the government needs to improve people's incomes while driving GDP growth. Although the rise in residents' disposable incomes used to fall behind its GDP growth, people have been able to benefit from the GDP growth with rising incomes since the 18th CPC National Congress in 2012. The Chinese authorities need to make the income improvement and GDP growth increase in tandem by enhancing the share of labor remuneration. Efforts are also needed to reform the income distribution system to narrow the wealth gap.

Third, the government needs to improve the income distribution by taking measures in both the primary distribution and redistribution of income. The income gap between Chinese residents has declined since 2012 while leveling off in the following years. China's current Gini coefficient-which is an indicator of income distribution of a country or a region-stands at around 0.46. A figure below 0.4 indicates reasonably even distribution, which means China's income distribution needs improvement.

Since the primary distribution has a limit, it is not possible to make the indicator fall below 0.4.After initial distribution, the Gini coefficient of the Organization for Economic Cooperation and Development countries mostly stands at above 0.4 and that of some even exceed 0.5. However, the countries make the indicator fall to 0.4 or even 0.3 through taxation and transfer payments for redistribution.

Therefore, redistribution is necessary to improve income distribution in China as the country has entered a new development stage of socialist modernization. The lessons of many developed countries show that a redistribution mechanism is needed, as economic growth, technological progress and globalization make the pie bigger while often cannot cut the slices even.

The government also needs to expand social mobility, which was proposed at the 19th CPC National Congress in 2017. As migrant workers, who used to be farmers, go to work in non-agricultural sectors in towns and cities and travel from inland regions to coastal areas, they have seen their incomes rising and social status improving thanks to better jobs. The improvement should also be attributed to the promotion of education, especially the nine-year compulsory education and rapid economic growth.

China has entered a phase of growth at moderate rate, with the flow of rural-to-urban migration slowing significantly. In view of this, the government needs to focus on granting migrant workers with urban resident status, otherwise, social mobility will easily become a zero-sum game, like people crowding in a bus can squeeze others out. That is the key for China to expand the size of the middle-income group.

The government needs to ensure the rise of all residents' incomes by giving policy priority to the low-income ones. Although the income of each household has increased, the income growth of some may become significantly slower than that of others in the future. To expand the middle-income group, it is necessary to make the income of low-income households grow faster.

Moreover, the government should expand the coverage of social welfare. The supply-side growth potential has been slowing down since 2012 as the result of the working age population peaking in 2010. As the total population is approaching its peak, the problems have become increasingly prominent. Therefore, China needs to tap growth potentials through enhancing productivity while boosting domestic demand, for which social welfare needs to be enhanced.

International-wide data suggest that when countries experience a growth of per capita GDP from $10,000 to $25,000, the governments' social welfare expenditure as percent of GDP typically increases from 26 percent to 36 percent. This 10-percentage point hike makes it possible for a country to build a welfare state. China will be within such a period from now until 2035, so China needs to develop its welfare system which can provide a cushion for its people and meet their fundamental needs. This way, when inefficient enterprises and outdated industries exit the market, as the workers and their families are well protected, it will not be necessary to protect inefficient enterprises and excess production capacity.

Social welfare is indispensable for a fully developed country. China's current welfare system has covered a wide range of social security programs, and the government has pledged to ensure people's access to childcare, education, employment, medical services, elderly care, housing and social assistance.

(Cai Fang,  chief expert of the National High-end Think Tank at the Chinese Academy of Social Sciences and member of the Chinese Academy of Social Sciences. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of this platform.)

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