Abstract: In this paper, the author analyzes three approaches to common prosperity, i.e., making the pie bigger and distributing it better, promoting and expanding social mobility, and realizing universal coverage and equal access to social welfare.
Realizing common prosperity for all is a basic requirement of socialist modernization with Chinese characteristics. There are multiple paths to common prosperity. Given challenges facing China today, we can take the following three paths to achieve the goal.
I. MAKING A BIGGER PIE AND DISTRIBUTING IT BETTER
To make a bigger pie and distribute it better, we need to work on the following tasks.
First, keeping economic growth within a reasonable range. The fifth plenary session of the 19th CPC Central Committee put forward a set of long-range objectives for China to basically achieve socialist modernization by 2035, including becoming a medium-level developed country in terms of per capita GDP. To this end, development is the key and foundation for solving all problems.
According to some forecast of China’s growth potential, to achieve the aforementioned goals, China needs to maintain an average annual growth rate between 14.7% and 14.9%. Based on current development trend and growth potential of production factors, human capital and productivity, it is estimated that by the end of the 14th five-year plan period, China’s per capita GDP would stand between $13,000 to $14,000, placing China among the high-income group; by 2035, China’s per capita GDP would reach $22,000, very close to yet still slightly lower than the level of a medium developed country.
If potential growth rate could be improved through necessary reforms, China’s per capita GDP could be pushed to $14,000 by 2025 and around $23,000 by 2035, equivalent to the level of today’s Portugal, which will propel China into the rank of medium developed countries. This is the goal that we must achieve and that will lay the foundation for common prosperity.
Second, keeping income growth in sync with economic growth.
Historically, household income does not grow in parallel to GDP. But since the 18th National Congress of the CPC, China’s GDP growth and growth of household disposable income have shown strong synchronization, which means an increase of per capita GDP can translate into a rise in household income. In other words, every household can enjoy the fruit of development.
Going forward, we should continue to adjust the structure of national income and raise the proportion of household income and labor remuneration. Meanwhile, we should reform the income distribution system in order to narrow various income gaps.
Third, combing primary distribution and redistribution measures. China’s household income gap as measured by the Gini coefficient declined after the 18th CPC National Congress, but the curve started to flatten out a few years later. Gini coefficient represents wealth distribution within a country or region and a lower number indicates lower wealth inequality in the population. A Gini coefficient greater than 0.4 is often indicative of a dangerous level of income inequality.
At present, China’s Gini coefficient is hovering around 0.46. This means our income distribution needs to be improved. In fact, primary distribution of income cannot do much to reduce income inequality, certainly not enough to narrow the gap to below 0.4. Based on the experience of OECD countries, the Gini coefficient after primary income distribution tends to be over 0.4, sometimes even above 0.5. Only through redistribution via taxation and transfer payments can the number be driven below 0.4, even to 0.3.
Therefore, we must rely on redistribution to improve the structure of income distribution. As China has entered the new development stage of socialist modernization, redistribution should play a more important role. In addition, the experience of many advanced countries shows that, although economic growth, technological revolution and globalization can help grow a bigger pie, there is no mechanism that can automatically slice the pie fairly. Thus we must harness redistribution measures.
II. PROMOTING AND EXPANDING SOCIAL MOBILITY
The 19th National Congress of CPC explicitly put forward the goal to promote social mobility. Historically, mobility often refers to horizontal mobility, such as migrant workers migrating from villages to non-agricultural sectors, small towns, medium-sized cities, big cities and coastal areas. But there is also vertical mobility in the horizontal one, like the rise of household income and social status and job promotion. This is attributed to two factors. First, the quality of education is improving rapidly. With the universalization of nine-year compulsory education and expansion of higher education, more people can receive education. Second, the economy is growing fast which makes the pie much bigger.
But today, as China has entered the development stage with medium-to-high or medium growth rate, labor mobility has significantly slowed down. At this stage, we should focus more on vertical mobility that enables upward movement. Without concrete methods, social mobility can easily turn into a zero-sum game, just like the case where people cram into a crowded bus and squeeze out others. Such a zero-sum scenario is entirely possible, and will result in social conflicts. Thus the key of the proposal to expand the middle-income group is to speed up social mobility.
If we divide households into five income groups, we could see the income of each group has been increasing which must be sustained. Otherwise, it is impossible to expand the middle-income group. From a micro perspective, the income of each household has also steadily increased; but from now on, we might see a zero-sum scenario where some households’ income may grow much slower than others. From a meso perspective, many households can climb the ladder from low-income or lower-middle income group up to higher ranks. The rise of this group is key to achieving social mobility and expanding the middle-income group.
Therefore, we suggest taking measures to multiply the size of the middle-income group which mainly involve three groups.
1. Low-income rural population lifted out of poverty
Since the 18th CPC National Congress, about 100 million rural population have been lifted out of extreme poverty but stay in the low-income group. According to OECD standards, the relative poverty line is set at half the median household income. In 2019, China’s median household income of rural population was 14,389 RMB, 50% of which was 7,195 RMB. The number slightly increased in 2020.
Suppose that 30% of rural households meet the standard, then there will be 153 million people classified as relatively poor, a considerably large number. If these people could move into the middle-income group, we will create another miracle of common prosperity.
2. Citizenization of rural migrant workers
In 2020, the average wage of rural migrant workers was 4,549 yuan, at the bottom of the middle-income range. Although most migrant workers can be classified as middle-income group, they still face an “invisible wall” that hinders them from getting sufficient social security and enjoying basic public services. Thus they won’t become middle-income group in the real sense until they are citizenized. Otherwise, their middle-income status would be very unstable. For example, in 2020, due to the pandemic, the number of migrant workers who work outside their hukou areas and that of those who live in cities and towns both dropped by 3%.
So far, China has 291 million rural migrant workers. If these people can be turned into middle-income group, it will greatly expand the middle-income group, a very meaningful change.
3. Enabling the elderly to live a middle-income life
The seventh national population census shows that China’s elderly population is larger and the country is aging faster than expected. At present, there are 190 million people aged 65 and above, and 270 million people aged 60 and above, two groups that can be transformed into middle-income class. Enabling the elderly to live a middle-income life is essential to ensuring the senior people receive sufficient care, and a basic requirement of common prosperity. It is also a basic prerequisite for expanding the middle-income group and ensuring that consumption demand can continue to sustain China’s economic growth.
III. REALIZING UNIVERSAL COVERAGE AND EQUAL ACCESS TO SOCIAL WELFARE
In his book Competitive Advantage of Nations, Michael Porter identifies four sequential stages of economic growth: first, factor-driven stage that relies on resources and labor; second, investment-driven stage that combines large-scale investment with resources; third, innovation-driven stage that depends on improvement of technology and productivity; fourth, wealth-driven stage. According to Porter, economic growth goes upward in the first three stages; whereas in the fourth stage, economic growth slows down and tends to stagnate easily.
As China’s economic development has passed through the factor- and investment-driven stages, what it needs to do now is to closely combine the innovation-driven stage with the wealth-driven stage.
For a long time, especially since 2012, the supply side has been constraining China’s economic growth, or to be specific, the growth potential. But today, with China’s population growth close to zero, the demand-side constraint has become more evident. This means that China is facing double constraints. Using Porter’s classification, China needs to combine the innovation- and wealth-driven stages and take measures on both the supply side and the demand side, in order to maintain necessary growth while harnessing accumulated wealth to achieve economic growth.
At this stage of development, one unavoidable task of modernization is to build China into a welfare state with its own characteristics. If per capita GDP is between $10,000 and $25,000 and the proportion of government expenditure on social welfare can increase from 26% to 46%, then this 10 percentage point increase would be enough to basically turn China into a welfare state.
From now to 2035, China will be at the third and fourth stages of development, during which a welfare system must be built. In addition, the establishment of a welfare state also ensures basic demands of people are met, thus enabling social policies to shore up creative destruction. Without such support on a macro level, micro-level efforts that try to stabilize employment, production capacity, enterprises and industries might fail to phase out outdated capacity and inefficient enterprises.
Welfare state is the path a country must take when it develops to a certain stage. Indeed, China’s approach has its own features, providing for the welfare of an individual in almost all phases of life and ensuring people’s access to childcare, education, employment, medical services, elderly care, housing, and social aid.
Therefore, at this stage, we should not only focus on the supply side to maintain growth potential, but also stress the demand side and common prosperity so as to boost consumption and realize growth potential.
