Abstract: Productivity growth is an important foundation for achieving common prosperity, and the key is to boost the total factor productivity. The pursuit of common prosperity is a long, herculean and complicated task that needs to proceed in a step-by-step manner with necessary institutional support underpinned by deepened reforms, especially reform of the income distribution system. To this end, China needs to expand the scale of the middle-income group mainly by increasing the wealth of low-income people, improving human capital, and eliminating institutional barriers hindering social mobility especially vertical mobility.
I. A CORRECT AND COMPREHENSIVE UNDERSTANDING OF COMMON PROSPERITY
“Common prosperity” includes two dimensions: common, and prosperity. “Prosperity” is the standard to gauge the level of productivity. A society is more prosperous when it is more productive. Without productivity, “common prosperity” would become a “castle in the air”. Thus, an important premise and foundation for common prosperity is productivity growth.
As a socialist country built upon a weak productivity basis, China has to achieve faster growth with higher quality than capitalist countries if it is to realize common prosperity. The key to this is to boost total factor productivity (TFP). At the moment, China still has a long way to go to reach a similar level of TFP as developed economies.
To understand “common prosperity”, it’s also important to clearly define “common”.
First, common prosperity doesn’t mean that everyone is equally rich or rich at the same time; it is not a Robin Hood-style story either, where the rich is robbed to enrich the poor. While some have become rich, there may be some who have yet to get rich, and we need to allow for a reasonable level of income gap between these different groups. China attached importance to “making some of the people rich ahead of the others” in the early days of reform and opening-up. This proved effective and a necessary stage that China had to experience.
Second, common prosperity doesn’t only indicate higher income and richer material life; more importantly, when we have achieved common prosperity, people are supposed to have a richer mental world and more all-round development. This is the more fundamental dimension of common prosperity. Common prosperity is solid only when people enjoy more comprehensive development and the society boasts a higher level of human capital accumulation.
Third, common prosperity is both achieved and enjoyed by all. It’s not something created by one but benefits the other. Common prosperity will benefit each and every one, and it will have to be created by each and every one with hard work. To this end, we must incentivize our people to work hard and build their own future, and bring all sources for wealth creation into full play.
To achieve common prosperity, it’s also critical to respect the objective laws of economic development.
First, pursuit of common prosperity is a long-term process. Rushing to quick results would be ill-advised. It’s important to understand that this is a prolonged, herculean and complicated task. China has become the second largest economy in the world, but it remains a developing one. In 2020, the per-capita GDP of China calculated at the average annual exchange rate was 10,400 US dollars. That was much lower than the developed economies’ level.
Second, common prosperity can only be achieved in a step-by-step manner. Productivity growth is a gradual process. Production relations need to be adjusted in tandem with the development in productivity, and we should work toward common prosperity in an orderly, step-by-step way.
Third, China should press ahead with its efforts toward common prosperity amid deepened reform — boost productivity with reforms, and build a favorable institutional environment enabling common prosperity with deepened economic reforms especially income distribution reforms.
II. PROMOTE COMMON PROSPERITY AMID HIGH-QUALITY DEVELOPMENT
The tenth meeting of the Central Committee for Financial and Economic Affairs stressed the importance of sticking to the people-centered development philosophy and achieving common prosperity amid high-quality development. High-quality development sets the stage for common prosperity. The ultimate goal of high-quality development is the same as that of common prosperity — to improve people’s life and promote their all-round development.
High-quality development requires not only an efficient production system, but also a more inclusive distribution system. To this end, China needs to improve the primary distribution system, while building a more effective income distribution adjustment mechanism including redistribution and third distribution. It’s important to build an orderly income distribution system and enlarge the middle-income group in order to enable the common prosperity goal.
High-quality development requires stable macro policies. We should stick to the underlying principle of pursuing progress while ensuring stability and maintain policy consistency, stability and sustainability. Currently, it is critical to improve cross-cycle policy adjustment.
As economy gradually returns to normalcy, macro policies will normalize. But it should be done with proper pace and intensity，especially when we are facing complicated domestic and external changes, macro policies should deal with short-term problems while giving leeway to cope with future uncertainty. Meanwhile, it is also important to balance steady growth and risk prevention.
Generally speaking, macro policies mainly focus on balancing short-term aggregate demand and supply whereas cross-cycle adjustment should consider both short-term and medium to long term, making counter-cyclical adjustment in the current stage while also focusing on economic recovery and sustainability of growth in the next stage. Therefore, cross-cycle policy adjustment should strike a proper balance between short-term and medium to long effects.
Improving cross-cycle policy adjustment is essential to cope with three major domestic and external changes.
First, recurrent outbreaks of the pandemic risk reversing economic recovery. With the spread of the Delta variant, economic recovery constantly switches between expansion and contraction, and major economies might all experience twists and turns in their recovery, making policy shift between countercyclical and cyclical adjustment. Although China has basically brought the pandemic under control, it has also witnessed sporadic outbreaks since the third quarter. After a period of strong recovery, China’s economy now faces downward pressure, which poses higher demand on cross-cycle policy adjustment.
Second, the recovery of major economies has been out of sync since the pandemic. China’s economy is the first and fastest to recover, about three quarters ahead of other major economies. Among Western economies, the US is the first to recover while other economies like Europe and Japan are facing a more sluggish recovery. Compared to developed economies, emerging economies lag behind in recovery, leading to differences in pace and intensity of policy adjustment among countries. Currently, we should pay close attention to the possible earlier adjustment of Fed’s policy and its negative spillover effects on the stability of global economy and finance, while taking this into account in cross-cycle policy adjustment.
Third, the unprecedented expansionary policy of major economies brings potential risks. Since the pandemic, major economies have adopted quantitative easing never seen before, injecting liquidity into the market much more than that of the 2008 global financial crisis. Such excessive liquidity raises leverage ratio sharply. Some argue that if this policy does not bear any cost, economics textbooks might be rewritten. But if existing theories still work, then this round of excessive quantitative easing might result in huge shocks. To cope with the potential hit, we should also improve cross-cycle policy adjustment.
III. REGULATE INCOME DISTRIBUTION THROUGH FINANCE
Consumer consumption is recovering, but slowly. In particular, service consumption in catering, accommodation, tourism and entertainment are still severely affected by the spread of the pandemic, because of shorter travel distance and declined willingness to consume. The average daily number of cross-city travelers in August fell by 40% compared with the same period in 2019, and the travel radius was reduced by 16.7% compared with July. The tourism industry has not yet recovered to its pre-pandemic level.
China's consumption rate has also been generally low compared to international levels for many years. Before 2002, the final consumption rate in China generally remained above 60%. Then it gradually declined to 49.3% in 2010, and has since rebounded but has largely stabilised at around 55% in recent years.
Figure 1. China’s consumption rate in 1978-2018
China's final consumption rate was about 56.02% in 2019, while almost all developed countries are above 70%, with the US and UK above 80%. Even countries with higher savings rates such as Germany and Japan have consumption rates above 72%. Some emerging market economies such as Brazil, South Africa, India and Russia also have much higher final consumption rates than ours.
Figure 2. Final consumption expenditure (% of GDP) in 2019
In terms of structural changes, the growth of government’s final consumption expenditure has outpaced that of the residents in recent years, a trend that is basically in consistent with the change in the proportion of residents' income to national income. If dividing the residents into different income groups, you’ll find the consumption growth of low- and middle-income households is significantly lower than that of high-income households.
Figure 3. China’s Consumption Structure in Recent Years
In short, the recovery of China's consumption is slow currently; China’s consumption rate has remained low for many years. This is related to China's income distribution structure. As the low-income groups have been hit harder by the pandemic, income gap has widened to some degree.
Therefore, I have four suggestions on how to improve income distribution and common prosperity, by the means of finance:
First, we need stable macroeconomic policies, not "currency flooding". International experience has shown that an overly loose monetary policy can induce asset bubbles and then quickly widen the wealth gap. That is why controlling the gates against “currency flooding” is extremely important. A prudent monetary policy must be flexible, precise, reasonable and appropriate and keeps the growth rate of money supply and social financing in line with that of the nominal economy.
Secondly, we should increase support for the weak links. Through policy tools like differentiated reserve ratios and refinancing, we could increase credit support for small and micro enterprises and "three rural issues" (agriculture, rural areas and farmers) areas. A large number of low-income people in China are employed in small and micro enterprises, so supporting these enterprises is crucial to stabilizing the income of low-income group. After the outbreak of COVID-19, the "direct access" policy for refinancing loans has increased support for small and micro enterprises. By the end of June this year, the balance of loans for small and micro enterprises reached 17.7 trillion yuan, an increase of 31% year-on-year. Recently, the central bank has increased the quota of refinancing for SMEs by 300 billion yuan, which benefits the recovery of small and micro enterprises and securing the income of low-income groups.
Third, we should innovate financial products and services. With the rapid development of digitalization, information is more symmetric and credit information is more complete, which creates better conditions for the innovation of financial products and services and the implementation of inclusive services. For example, digital tools are available to increase the inclusiveness of financial services and allow people to have more financial tools to share benefits such as wealth appreciation and income increase. With risks well controlled, credit support policies for different regions can also be formulated in accordance with local conditions to vitalize the local economy and contribute to coordinated regional development.
Fourth, we need to promote inclusive finance. Inclusive finance will play a greater role in implementing the rural revitalization strategy and consolidating the achievements of poverty alleviation. During many regions’ poverty alleviation process, it has been found that most farmers only have current bank accounts with an annualized return rate of less than 1%, while urban residents, especially the high-net-worth individuals, can easily get at least 4% to 5% return. Therefore, it is necessary to continue to strengthen the construction of rural financial infrastructure and financial service system, unblock farmers' investment channels, and increase farmers' property income. This will greatly improve the inclusiveness of financial services, allow farmers to share the benefits of financial services, and enable inclusive finance to play a greater role in implementing the rural revitalization strategy and consolidating the achievements of poverty alleviation.
IV．EXPAND THE MIDDLE-INCOME GROUP TO PROMOTE COMMON PROSPERITY
At the current stage, an important way to achieve the goal of common prosperity is to expand the size of the middle-income group.
When China started to implement the reform and opening up, it encouraged part of its people and regions to get rich first through honest labor and business. Now this has been achieved. Since the 18th National Congress of the CPC, China has made poverty alleviation as the country’s top priority to lift the poor in the rural regions out of poverty. This goal has also been met with the achievement of an all-round well-off society.
As China embarks on a new journey of building a socialist modern country in all aspects, in the next stage, the country needs to gradually shift its focus to expanding the size of the middle-income group, and realizing common prosperity of all people.
When studying the income distribution curve of Chinese residents, people can find that 80% of the Chinese population is around the lower limit of the middle income standard. It is necessary to create a favorable institutional environment for these people to enter the middle-income group, and accelerate China’s transformation to an olive-shaped social structure.
According to National Bureau of Statistics, currently there are 400 million people in the middle-income group in China. If the number can double in 15 years, that is to expand this group to 800 million people, the proportion of middle-income group in China’s total population will be close to 60%, basically forming an olive-shaped social structure.
When the number of China’s middle-income group reaches 800 million, it means the number of Chinese middle-income group will exceed the sum of that of developed countries in Europe and America. People of the middle-income group are often well-educated and engage in highly professional and technical works with relatively stable income and strong consumption capacity. This will greatly increase China’s human capital accumulation, improve the overall quality of people’s lives and economic development, and further enhance the appeal and influence of the socialist system with Chinese characteristics.
To expand the middle-income group, China needs to take more targeted measures with focus on key groups and prominent problems.
First, the main work is to promote the low-income people to enter the middle-income group. The most efficient way to expand the middle-income group is to promote the low-income people, especially those with income close to the middle-income threshold, to enter the middle-income group.
The low-income group with income close to the middle-income threshold mainly includes three groups of people:
The first group is industrial workers. Efforts are needed to increase their work skills through vocational training and improve employment quality and remuneration through the accumulation of human capital.
The second group is rural migrant people. The most important task is to ensure equal access to public services so that rural migrant people can get rid of their worries, and live their life like urban residents. In this way, rural migrant workers are more likely to enter the middle-income group. Studies have shown that if equal public services are provided for rural migrant people, their consumption level will increase by 27%. This will also play a positive role in releasing people’s consumption potential and expanding consumption.
The third group is farmers, especially those around the cities. It is essential to improve their income from property through the reform to put rural collective construction land into the market and the reform to separate rural land ownership rights, contract rights, and use rights.
Second, the major goal is to improve human capital. It can be found from the research and analysis of household survey samples that there is a significant correspondence between education level and the proportion of middle-income people. For people with master’s degree, the proportion of middle income people is higher than that for those with bachelor’s degree, followed by the proportions for those with junior college degree, and those with vocational school education and technical secondary school education, while the proportion for those with junior high school education or below is lower than the national average level. This shows that improving human capital is vital to raise income and expand the middle-income group, and it is also beneficial for the people’s overall development.
Third, the important solution is to remove institutional barriers to social mobility. On the whole, the institutional barriers to horizontal mobility have been gradually removed, making the labors’ cross-regional mobility smoother. The existing problems are still mainly the lack of equal public services. However, the vertical mobility is still hindered and may be further narrowing. The main reason is that vested interests constrained the vertical social mobility, which means that those entering into the middle-income group do not want those left to further join in. Therefore, we should create more opportunities for low-income people to join the middle-income group, with focus on smoothing the upward mobility channels and offering ladders for vertical development.
To ensure that “all Chinese people sharing the opportunity to realize their dreams and live a brilliant life”, institutional reform is needed.
This is the speech the author made at the 27th Pu Shan Lecture themed “Understanding Common Prosperity: Connotation and the Path Toward It”. The viewpoints expressed herein are the author’s own and do not represent those of CF40 or other organizations.
