Hello everyone!
It's not a happy summer for the PRC. We feel for millions of people trapped in between floods, extreme heat, economic travail and political conflict.
This episode must defer once again the deep interest in ‘new ventures in sincerity and rationality’ with which we started two (2!) years ago. Not to say the writers of these op-eds are anything but sincere and rational; they in fact are in our view great bearers of these values.
What they have to say is, however, for the most part confined to practical polices of today and tomorrow, not the eternal matters of principle inscribed in their values.
Today’s episode brings you a recent opinion by Wang Xiaolu 王小鲁, Deputy Director, National Economic Research Institute, China Reform Foundation. It appears in the wake of major shifts in economic policy announced by the Politburo in late July, 2023, aimed at extricating Beijing from extreme pressures. These arose largely from the COVID lockdowns peaking in 2022 and persisting despite reversal of the settings.
Dr Wang is a go-to expert on income distribution, best known for detailed revelations about the ‘grey incomes’ received by many in the elite. (Disclaimer: Wang is an old friend, having taken his doctorate in economics at the ANU, Canberra, in the late 1980s. We have not corresponded for many years).
Below is my translation of Wang Xiaolu, ‘Alleviating the difficulties of the private economy is to solve urgent needs of the people’, Aisixiang, 8 August 2023 [王小鲁:“纾民营经济之困,在于解百姓之急”,爱思想,2023年8月 8日 (in Chinese).].
This article was top-rated for most of last week on the current affairs aggregator Aisixiang (‘Love Thinking’), implying it was read by many millions.
We shall look into a related op-ed tomorrow, by Hu Xingdou 胡星斗, a professor of economics at Beijing Polytechnic University.
Wang Xiaolu
The private economy’s ‘rocky road’
“Let’s first look at a set of macro data:
Over 2017—22, the p.a. growth rate of GDP will average 5.2 percent. The real growth rate of residents’ income is 5.1, of which urban residents’ has decelerated significantly, with an average growth rate of 4.1 in the past five years, which is lower than the economic growth rate.
This set of data reveals good news: In 2017, urban per capita income was 2.71 times that of rural, and by 2022 it will drop to 2.45 times; the gap between urban and rural residents has narrowed.
But there is also bad news: this narrowing is actually caused by the growth rate of urban residents’ income slowing down. In addition, gaps among urban residents have gradually widened. In the past five years, the gap between high-income families and low-income families, each accounting for 20 percent of urban residents, widened from 5.6 to 6.3 times.
The private economy has made a major contribution to the national economy, and over 80 percent of urban employment is undertaken by the private economy. Therefore, the stagnation of the private economy will inevitably lead to the reduction of employment opportunities and further widen the income gap.
In addition, the different trends between private enterprises and state-owned enterprises are also one of the factors that cause the widening income gap.
Over 2017-22, after the PPI (producer price index) is used to deflate the revenue of industrial enterprises above designated size, the average annual real growth rate will be 1.3 percent. Of this, the revenue of industrial SOEs above designated size actually increased by 3.8 percent. After deducting the revenue of state-owned holding companies from the revenue of all enterprises above designated size, the actual growth of the revenue of the remaining non-state-owned industrial enterprises was only 0.5 percent.
It can be seen that in recent years, the private economy is facing severe challenges, a very rare phenomenon in the past 40 years since the reform.
Non-SOEs are dominated by private enterprises. Numerous difficulties lead to obstacles in the operation of private enterprises, and gradually widen the gap with state-owned holding enterprises.
Such a reality has triggered a ‘rise and fall’ between the state-owned economy and the private economy: In 2022, the revenue of industrial SOEs will increase by 8.4 percent; that of private industrial enterprises will increase by only 3.3 percent, and then the price will be measured by PPI (producer price index). The deflator actually fell 0.8 percent.
In terms of profits, the profits of private enterprises fell by 7.2 percent; total losses rose sharply by 53.7 percent.
Looking at the investment situation again, in 2022, state-controlled fixed asset investment will increase by 10.1 percent, while private fixed asset investment will only increase by 0.9 percent, showing negative growth after subtracting price factors. From January to May 2023, state-controlled investment will increase by 8.4 percent, while private investment will decrease by 1.1 percent.
There is at present a two-way causal relationship between economic growth and household consumption: when growth is weak, income and consumption will be affected, and consumption may be affected even more; when household consumption is weak, the economic stimulus will gradually fade.
The national consumption rate will in 2022 be 53 percent, i.e., combined proportion of household and government consumption to GDP will only be 53 percent, of which household will account for 37 percent of GDP, a ratio rare in the world. This situation has been going on for a long time.
In the past, economic growth was driven by monetary stimulus and investment expansion, but the effect of these measures is ever more limited, because consumption is too low.
In the context of low consumption, it is not realistic to rely solely on monetary stimulus and investment expansion to drive economic growth. It is necessary to improve people’s livelihood and boost consumer demand.
Common prosperity
It is argued that the large income gaps are due to marketisation and reform.
Special studies have however proved that the private economy grew rapidly after reform and opening; its efficiency was significantly higher than that of the state-owned economy. In the process, eastern coastal provinces with higher degrees of marketisation had fairer competition, faster development of the private economy, a higher proportion, a lower Gini coefficient, and a fairer income distribution.
If we promote egalitarianism, rob the rich and give to the poor, and crack down on private capital, there will be no way to bring about fair distribution and common prosperity.
Early in reform and opening, The PRC’s per capita GDP was only US$200; a third of the rural population was in absolute poverty. The per capita annual income was less than CN¥ 100, which was still in a relatively extreme state of poverty. If measured by the 2011 poverty standard, over 97 percent of the rural population lived in poverty before the reform.
This situation also shows that the anti-market distribution system of the past cannot bring about fair distribution.
In the environment of market competition, we have both primary and secondary distribution. Primary distribution depends first on the contribution of factors of production to the economy, including labour, human capital, physical capital and land. The greater the contribution of these factors to the economy, the higher the income they bring.
If administrative power is used to replace market-led primary distribution, it will often lead to money-power transactions, political and business collusion, corruption and unfair distribution.
At the same time, redistribution does not disrupt the basic pattern of primary distribution, but relies on relatively sound systems such as public services, social security, and financial transfer payments to make up for the shortcomings of primary distribution and allow all members of society to share the fruits of development.
Take advantage of the market
To improve income distribution, it is necessary to revitalise the private economy. Fair market competition can ensure the healthy development of the private economy, so we must adhere to market-oriented reforms, adhere to fair competition, and adhere to policies that treat different types of enterprises equally. Moreover, it cannot be a formal policy oath, but should focus on specific roll-out.
During the roll-out, it is very important to maintain the dignity of the Constitution. We must strictly abide by the protection of private property in the Constitution to ensure that the legal rights of the private economy are not infringed; we must also maintain a business environment for fair competition, and ensure that state-owned enterprises and private enterprises are equal to each other and ensure that state-owned enterprises and private enterprises Long-term coexistence and common development.
Policy has long made it clear that the market should play a decisive role in the allocation of resources. Since the market plays a decisive role, it is necessary to avoid the substitution of state for market allocation resources.
In some links, the excessive allocation of resources by the government will have a crowding-out effect on the allocation of resources by the market, and it is necessary to prevent the policy of ‘turning sesame cakes’ from hitting the market.
Back to the origin of people’s livelihood
Adhering to market-oriented reforms and fair competition is a major aspect that cannot be ignored in improving income distribution; there is another such that must constantly improve public services and social security on a market basis.
The PRC is a market economy: the basic duty of the state is not allocating resources, but maintaining a sound rule of law and providing quality services to businesses and citizens.
Hence the state should assume more responsibilities on the basis of market allocation of resources,. It needs to address key livelihood issues and improve income distribution.
Improving social security is a top priority. About 460 million people in the PRC are urban workers, and half of them are new urban workers, that is, migrant workers who have not obtained urban hukou yet are still called ‘migrant workers’. They are already urban permanent residents and have been engaged in construction work for a long time. However, a significant number are not covered by urban social security.
Based on the statistics of the number of employed people in urban areas, in 2021 the proportion not included in the basic pension insurance for urban employees is about 25 percent, the proportion not included in the medical insurance for urban employees is about 24 percent, and the proportion not included in the unemployment insurance is about 51 percent. It should be noted that those who are not covered by unemployment insurance are basically migrant workers.
In addition, workers who have not obtained urban household registration basically have ‘zero coverage’ in terms of housing security. All these problems need to be solved urgently.
In terms of unemployment insurance, the current problem is that the coverage rate of unemployment insurance is low, and the proportion of receiving insurance benefits is even lower. Based on the 2021 Urban Unemployment Rate Survey, the number of urban unemployed is about 23 million, and only 6 million have received unemployment insurance benefits.
On the one hand, it is because unemployment insurance only covers half of the urban workers, and on the other hand, it is because even if they have joined unemployment insurance, they may not necessarily receive unemployment insurance benefits after losing their jobs.
There are after all a series of regulations for receiving unemployment insurance benefits, and it takes a long time to go through various procedures. During this process, if the period for receiving unemployment insurance benefits is long, migrant workers can only give up receiving unemployment insurance benefits; Source of income, many migrant workers can only return to their rural origin as soon as possible.
It is very important to expand the coverage of unemployment insurance to workers in new cities and provide temporary unemployment relief to groups not covered by unemployment insurance.
Solving residents’ medical care, education, pension, unemployment insurance, housing security and other issues will greatly improve the rationality of income distribution. To solve this problem well, it is necessary to change the structure of government functions and government expenditure.
In the past, China’s financial expenditure was largely used for supporting people and government investment, or for government administrative expenditure. The main direction of government spending in the future should focus on solving people’s livelihood issues.
The resolution of these problems may play a positive role in improving income distribution and boosting consumer demand. It not only solves the urgent needs of ordinary people, but also provides more impetus for future economic growth.