Cai Fang: Increase redistribution efforts to cultivate middle-income groups

Cai Fang

　　Chief expert, member and researcher of the National High-end Think Tank of the Chinese Academy of Social Sciences, member of the Standing Committee of the 13th National People's Congress, vice chairman of the Agriculture and Rural Affairs Committee, and member of the Monetary Policy Committee of the Chinese Bank. His main research areas include: China's economic reform and development, population economics, labor economics, economic growth, income distribution, poverty reduction, etc. He has won the China Publishing Government Award, the Sun Yefang Economic Science Award, the Zhang Peigang Outstanding Achievement Award in Development Economics, the China Development 100 Award, and the China Rural Development Research Award. His main representative works include "Cracking the Mystery of China's Economic Development" and "The World Significance of China's Economic Development".

　　The "trickle-down effect" is an important concept in neoliberal economics, emphasizing that in the process of a country's economic development, special preferential treatment is not given to the poor or vulnerable groups, but rather to expand the total wealth of society through economic growth, ultimately benefiting the poor. From historical experience, this concept is based on a series of assumptions and does not hold true in reality. The first is to assume that the "cake" can be enlarged and the total wealth of society can be increased. The second is to assume that primary distribution can substantially narrow the income gap. It turns out that primary distribution does improve income distribution, but it does not achieve a substantial reduction in the income gap, i.e. the Gini coefficient below 0.4. Third, it is assumed that the middle-income group can form and grow with the increase of the level of economic development and per capita income, which is also inconsistent with the actual situation. In our country, in order to solidly promote common prosperity and cultivate and consolidate middle-income groups, it is necessary to increase redistribution.

　　General Secretary Xi Jinping pointed out at the tenth meeting of the Central Financial and Economic Commission that it is necessary to adhere to the people-centered development ideology and promote common prosperity in high-quality development. For our country, to maintain a reasonable range of growth in the next 15 years and promote common prosperity in high-quality development, we must continuously improve the potential growth rate on the supply side, ensure the potential for economic growth on the demand side, and do our best and do what we can. According to the 2035 long-term goal put forward by the Fifth Plenary Session of the 19th Central Committee of the Communist Party of China, China will enter the ranks of high-income countries around 2025 and become a moderately developed country by 2035. Our forecast also shows that China's per capita GDP can basically reach 23,000 US dollars by 2035, and the disposable income of residents will also reach a new level. This shows that the growth of residents' income and GDP growth in China are basically synchronized, and the people can share the fruits of development. However, it should also be noted that both per capita GDP and per capita disposable income are an average and do not involve the distribution of income. Therefore, to achieve common prosperity, we must also narrow the income gap as soon as possible. Since the Eighteenth National Congress of the Communist Party of China, the income gap between urban and rural residents in China has entered a period of wandering after experiencing narrowing, which requires us to seek other ideas to reduce the Gini coefficient of this gap to below 0.4 in order to ensure the substantive promotion of common prosperity.

　　In mainstream Western economic theory, there are two well-known hypotheses about the relationship between economic growth and income disparities. One is the Kuznets curve, whereby the income gap gradually widens as the per capita income level rises, but then begins to narrow after reaching a peak, thus forming an inverted U-shaped curve. If you compare the Gini coefficient and GDP per capita in countries around the world at different times, the curve is roughly present. The other is Piketty's formulation of the inequality r>g, i.e., the growth of capital gains forever greater than the gains in output or labor gains, suggests that the income gap is widening, contrary to Kuznets' "inverted U-shape" hypothesis. Both of these assumptions are based on certain facts that, if unified, are embodied in income redistribution. Judging from the situation of OECD countries, most of the Gini coefficients after primary distribution in these countries are above 0.4, but after the redistribution of income through taxes and transfer payments, the Gini coefficient has dropped by 35% overall, and the Gini coefficient in most countries has dropped below 0.4, and some even below 0.3. It can be seen that redistribution plays a key role in narrowing the income gap.

　　At the same time, without a large middle-income group, it is impossible to achieve a reasonable income distribution pattern. Therefore, redistribution also plays a very important role in cultivating and expanding middle-income groups, increasing the size of middle-income groups, and increasing the proportion of middle-income groups in the total population. According to Liu Yulin et al., the per capita discretionary disposable income between 4,000 and 31,000 yuan belongs to the middle-income group, and the number of middle-income groups estimated from this is closest to the value released by the National Bureau of Statistics. However, the discretionary disposable income refers to personal income after deducting basic living expenses and other fixed expenses. In 2020, the per capita monthly wage of migrant workers in China will be 4072 yuan. Due to the lack of social security and employment stability, it is difficult to call it a middle-income group. Therefore, the middle-income group should be more precisely defined, including reasonable wage income and moderate property income under certain standards, high-quality employment, opportunities for human capital improvement, and basic public services that are met. These basic conditions cannot be fully solved in the primary distribution, and the problem of wages and employment can still be promoted through a series of reforms, but the problem of basic public services must be redistributed through income.

　　Redistribution also raises a range of theoretical and practical problems. The theoretical level lies in how fairness and efficiency are reflected in different periods, while the practical level is faced with "where does the money come from". If redistribution is intended to achieve sustainable economic growth, redistribution can also reduce the burden of social spending, according to the same theoretical logic. According to the so-called Laffer curve, raising tax rates increases taxes, which in turn expands GDP. However, the practical result of this policy is often a widening of the income gap. If the Laffer curve is appropriately modified to reflect the relationship between government social expenditure and the proportion of expenditure to GDP, that is, the more social expenditure, the higher the proportion of GDP of this type of expenditure, but at a certain point in time, by expanding GDP (that is, denominator), this public expenditure ratio can be reduced. Therefore, in addition to the improvement of income distribution, whether redistribution has the effect of increasing the denominator determines whether China's economy can achieve sustainable growth.

　　Judging from the reality of our country, expanding redistribution can achieve the effect of "killing three birds with one stone". The first is the general law. At a development stage in which per capita GDP in developed countries rose from $10,000 to $25,000, social spending as a share of GDP increased from 26% to 37%. And China is also in a period of significant social welfare growth between now and 2035. Second is the special challenge. As China's population enters negative growth after the peak, the demand side has increasingly become an important factor restricting economic growth. This requires expanded consumption to hedge against the dampening effects of aging on aggregate demand, while expanding consumption requires further improvements in income distribution, especially through redistribution to address demand. Finally, there is the "creative destruction" effect. Excessive government protection can easily lead to zombie enterprises, so at the level of business operation or market competition, it is necessary to avoid excessive government intervention or protection of any person, any enterprise, any production capacity and even any position, and ensure that the social expenditure ratio is proportional to productivity through redistribution with the supply of basic public services as the main means to achieve creative destruction.

Source: China Social Science Network - China Social Science Daily Author: Cai Fang