Transformations and Reforms for Nurturing A Middle-Income Group of 600 Million

Transformations and Reforms for Nurturing

A Middle-Income Group of 600 Million

Chi Fulin

1 Dec. 2012

It was pointed out in the report delivered at the CPC’s 18^th National Congress that China’s GDP and per capita income of urban and rural residents shall be doubled, and that the goal of completing the building of a moderately prosperous society in all respects shall be attained by 2020. This goal, which has become a widely shared expectation among all walks of life, has received wide attention. My understanding is, the essence of this a goal is not doubling of the per capita income along with continuously widening gap between the rich and the poor, but the doubling of the size of the middle income group. With the middle income group taking up 23% of the total population at present, this means that the middle-income group will grow by 2 percentage point every year and reach 40% and the size of the middle-income group shall hit around 600 million by 2020.

Fostering a 600 million-strong middle income group is of great significance for China’s march towards equitable and sustainable development in the next decade, which means unleashing of the huge consumption potential to support a medium growth of 7-8% annually. It also means new breakthroughs in adjusting interest relations thus to lay a solid foundation to develop an “olive-shaped” social structure. And thirdly it means substantial narrowing-down of the income gap between the rich and the poor to march onto the road towards common prosperity.

China is still a large country undergoing transitions and reforms. Its attainment of the goal of doubling the size of the middle-income group by 2020 will largely depend on transformations and reforms in the next 3-5 years, such as population urbanization, substantive breakthroughs in income distribution reforms and formation of an equitable and orderly social ecology with indispensable institutional arrangements.

I. Population urbanization is an important carrier of enlarging the middle income group, and development/transformation of urbanization is to create a huge space for doubling the size of the middle income group.

Due to the fact that income in industrial and service sectors is usually much higher than that in the agriculture sector, the formation of the middle class in developed countries has been mainly attributed to population urbanization and transformation and upgrading of their economic structures. In view of its current situation, the most important basis for China to attain the goal of doubling the size of its middle income group in the next decade is also population urbanization.

1.       Rapid development of population urbanization is the process of fast formation of a middle income group. Generally speaking, the period when urbanization rate is between 30-70% is one when urbanization gains its momentum. In 2011, China’s urbanization rate reached 51.3%, but the population urbanization rate was only 35%, which is far below the average population urbanization rate of 48.5% in middle income countries as calculated by the World Bank. In the next 5 years, on the condition that breakthroughs are achieved in reforms aiming at citizenizing migrant workers, China’s urbanization can well advance at an annual rate of 1-1.2% and its population urbanization at annual rate of 1.3%-1.5%. Thus by 2020, its population urbanization rate can reach 50% to 55% and its nominal urbanization rate can reach 60%. Then around 400 million will be added to urban population. They will make up a new source of middle incomers.

2.       Speeding up the service-oriented economic transformation will create more job opportunities to foster the development of the middle income group. Population urbanization will certainly foster rapid development of service sectors, and thus help increase the number of middle-incomer in general and white–collar ones in particular. Take the United States as an example, during its economic transformation from an industrial-sector domination to a service sector domination, its number of white-collar workers grew from 10 million in 1940^s to 50 million in 1970^s, or by five times in 30 years. In 1980, its white–collar workers accounted for 50% of the total labor force.

From a practical perspective, university graduates are an important source of white-collar workers and later middle-incomers. This year, China’s universities have churched out more or less 6.8 million graduates. By 2020, the total number of university graduates will add up to around 40 million. However, new university graduates now find it difficult to get desirable jobs and even more difficult to become middle incomers. The main cause is the poor development of service sectors. In 2011, service sectors in China took up only 43.1% of the GDP and employed only 270 million people, accounting for only 35.7% of the total labor force. If the consumption-led economic transformation is to be markedly accelerated, service sectors can take up around 50% of the GDP and its employment account for 40% of the total labor force in five years. And in the next 10 years, service sectors may take up 60% of the GDP and its employment may account for 50% of the total labor force. Roughly estimated. China’s total employment will reach 930 million in 2020, then the number of people employed in service sectors would be as large as 450 million. This development of, and this growth of the employment in service sector, will markedly enlarge the total size of the middle income group.

3. Speeding up urban-rural integration will enable a certain percentage of migrant workers and rural residents to become middle incomers. According to the report delivered at the CPC’s 18^th National Congress, if relevant policies for urban-rural integration are effectively implemented, needed institutions are well arranged and per capita income of urban and rural income is doubled by 2020, about 160 million of the newly added urban Hukou population will become middle-income earners. In 2020, China’s total population may reach 1.5 billion, its population urbanization rate may become higher than 50% and its rural population may be still as large as 750 million. If 20% of the 750 million rural residents become middle-income earners, there will be another 150 million middle-income earners adding to the middle income group. Even if we do not count in university graduates who may become middle incomers, the newly added number of middle incomers will be as large as 310 million. Therefore, the total size of the middle income group is sure to reach 600 million people.

In order to achieve the goal of nurturing a middle income group of 600 million people by 2020, it is advised to promulgate an action plan for doubling the size of the middle income group in accordance with the plan for doubling the per capita income of urban and rural residents. For instance, (1) speeding up the readjustment of the education structure for the purpose of human capital accumulation so as to bring into full play the important role of human capital in enlarging the middle income group; (2) a timetable for citizenizing migrant workers should be laid out for supporting them to become citizens and for enabling part of them that have really been integrated into urban areas to become middle incomers through 3-5 years’ efforts; (3) land expropriation institutions should be reformed in a speedy manner to ensure farmers’ position of negotiators, to increase farmers’ share of added value of land and to create more favorable conditions for part of farmers to become middle-incomers.  

II. Making breakthroughs in income distribution reforms with enriching the people first as the orientation so as to create conditions for low and lower middle incomers to become middle-incomers

Increase of the proportion of the middle income group in the total population is a sure result of narrowing-down of the income gap between the rich and the poor and fairer income distribution. In another word, adjusting income distribution relations and narrowing down income gaps are two basic conditions for enlarging the middle income group. In consideration of the current situation, doubling the per capita income without substantially narrowing down the income gap between the rich and the poor would not double the size of the middle income group. So making breakthroughs in income distribution reforms essentially means to reverse the trend of the still gaping income gap between the rich and the poor and to create more favorable conditions and opportunities for the low and lower middle incomers to flow upward in the society.

1. Increasing the real income of urban and rural residents as soon as possible. Per capita income cannot be doubled under the current national income distribution pattern. This goal can be attained only by favoring residents and the labor force when distributing the national income. For instance, (1) we must make it sure that urban-rural residents’ income will grow at the same or a higher speed as the growth of GDP. If the GDP is to grow at the rate of 7-8% annually in the next 10 years, the average annual growth of the real income of urban and rural residents should not be lower than 7.5%; (2) mechanisms for wage negotiation should be established as soon as possible to ensure that labor remuneration will grow at the same speed as the improvement of productivity and that the share of labor remuneration will increase form the current 40% of the GDP to 50%. (3) binding indicators of narrowing down the income gap between urban and rural residents must be declared so as to narrow down the gap from the current ratio of 3.23:1 in 2010 to a ratio of around 2.8:1 in 2020.

2. Promoting equalization of access to basic public services with institutional fairness as a focus. The Chinese government has committed to realize an overall equalization of urban-rural basic public services by 2020. Although historic progress has been made in equalizing urban-rural basic public services in the past few years, there are still many imbalances in allocating public resources between urban and rural areas and among different social groups due to unfair institutional arrangements, thus making relatively heavier the financial burden of low and lower middle incomers because they have to spend much larger proportions of their income to pay for housing, old-age insurance, medical care, education of their children’s education, and etc. Consequently, their real life quality does not improve much in step with the increase of their income. In essence, gaps in real income have been further widened. All this shows that whether rights and interests of low and lower middle incomers can be well protected during the process of equalizing basic public services has become one of the key factors to expanding the middle-income group. Therefore, it is imperative to (1) strictly define beneficiaries of affordable housing and allocate all public housing resources to low and lower middle incomers so as to consummate the housing security system with low-rent housing as the mainstay, and on this basis to further advance market-oriented housing reforms; (2) to push forward unifying institutions for providing basic public services for urban-rural areas as well as for different social groups in general, and those for providing health services and pension schemes in particular; and (3) make more efforts to diminish fiscal investment differences in basic public services for different social groups by developing transparent and compulsory indicators.

3. To promote strategic readjustment of the allocation of state-owned capital for the purpose of universal public benefits. By the end of 2011, the total value of assets operated by state-owned enterprises (SOEs) in China had amounted to Yuan 85.37 trillion. Advancing strategic readjustment of the allocation of state-owned capital to promote universal public benefits has a decisive role in readjusting the overall national income distribution pattern. Therefore, I would like to suggest the following: (1) part of the state-owned capital should exit from competitive sectors to be invested in public goods sectors, making state-owned capital an important support for consolidating the social security system so as to substantially improve the welfare of low and lower middle incomers; (2) rent on use of resources and proportion of dividends of state-owned capital should be raised. In 2011, the total volume of SOEs’ profit was Yuan 2.26 trillion. If the proportion of dividends paid to the government by SOEs is to be raised to about 50%, there will be an additional Yuan 1 trillion to be used for social welfare every year, which can significantly mitigate economic and social conflicts caused by shortage of public goods; (3) the excessively high income of employees in monopolistic sectors should be controlled. This can be done by standardizing and controlling their wage and welfare distribution, and by making their income and welfare distribution standardized, transparent and monetized so as to substantively narrow down income gaps between different sectors.; and (4) a total financial revenue budgetary system should be established, which should particularly include rents for use of resources and dividends from SOEs so as to institutionally ensure the nature of state-owned capital being utilized for universal public benefits.

4. To accelerate structural tax reduction. Structural tax reduction is a crucial move to break institutional constraints and to enrich the people first. This is instrumental not only to strengthening economic vitality but also to reduction of the financial burden of low and lower middle incomers. In the next few years, structural tax reduction should focus on the following: (1) small and medium-sized enterprises create most job opportunities. Reducing their tax burden not only will encourage enterprising to prevent capital outflow but also will create conditions for raising labor remuneration; (2) In the next 3-5 years, all business taxes in service sectors should be changed into value-added taxes to substantially reduce tax burdens of service sectors and enable white-collar workers in service sectors to become middle incomers as soon as possible; (3) In view of inflation and the need to improve the living standard of low and lower middle incomers, it is also imperative to further raise the personal income tax threshold and lower the personal income tax rate to reduce the tax burden of low and lower middle incomers.

III. Open and transparent basic institutions for rationalizing income distribution should be established.

A healthy income distribution order is a fundamental guarantee for enlarging the middle-income group. It is also an important precondition for middle incomers to gradually identify themselves as such. At present, prevailing grey income, rampant corruption and unfair income distribution have become focused concerns of the whole society and many middle incomers, most of whom are wage earners, do not accept their social and economic status as such.  Against this background, it is imperative to accelerate the establishment of basic institutions for income distribution with openness and transparency as the priority for the purpose of streamlining interests relations and forming a fair income distribution order.

1. Taking advantage of the reform aiming at putting a total financial revenue budgetary management system in place to make all the budgets of the government open. Expanding the middle income group objectively requires a low cost and clean government, which in turn requires making the public finance budget open. It should be recognized that conditions for including all the revenues of the government into budgetary management, for ridding off all extra-budgetary funds and for exercising a total financial revenue budgetary system have become ripe. So it is suggested here that（1）More efforts should be made to open the “three kinds of public funding” (funding for government officials to go overseas, for purchasing and using business vehicles and for public receptions. Now that the three kinds of public funding in all the departments of the central government and all the central public service units have been made open, their detailed accounts also need to be transparent. Meanwhile, with 3-5 years’ efforts, the three kinds of public funding within all levels of the government should be made open; (2) areas for opening public financial budgets should further be widened to cover public finance, governmental funding budgets, state-owned assets operational budgets, social security budgets and land expropriation revenue budgets; (3) amendment of the budget law should be speeded up to legally justify scrutiny and supervision of the total public finance budget.

2. Gradually establishing property registration institutions covering the whole population with transparency of the income and assets of government officials as the focus. At present, making income and assets of government officials transparent has become a critical issue for all walks of life, for it is an important measure to get rid of rent-seeking and other types of corruptions and to strengthen the confidence of the general public. So I would like to suggest the following: (1) the internal reporting and registration of assets of leading government officials should be made open as soon as possible to the whole society; (2) leading government officials to be promoted, newly elected people’s representatives and new members of the CPPCC should be required to register their assets; and then (3) the assets reporting and registration system should extended to cover all government officials in about 3 years and an assets registration system that cover the whole population should set up within 5 years. Meanwhile, a sound national data bank of income distribution should be also established.

3. Establishing a dynamic monitoring system for public officials’ income and assets. Monitoring the income and assets of public officials is a key to preventing grey income, ridding off illegal income and streamlining income distribution order. So it is suggested that, in constructing a government in the sunshine, a monitoring system for income and assets of public officials should be well established by the following measures: (1) the monitoring system for income and assets of public officials in areas which have seen most corruptions should be further strengthened to make new breakthroughs in combating corruption and upholding integrity; (2) the role of the people’s congress in supervising the income and assets of government officials at the same level should be strengthened; and (3) social supervision and supervision by the media should also be strengthened and at the same time a sound system for reporting illegal income and assets should be established.

In the past 30 years or so through development and reforms, China has successfully reduced the size of the poor population by over 200 million and enabled 300 million people to become middle incomers. In the next decade, nurturing a 600 million strong middle-income group will be an important landmark for China’s equitable and sustainable development. It will also be an important landmark for China’s successful transition from a big investment and production country to a large consumption country. With these changes, China will make great contributions to expanding the consumption market and economic recovery of the whole world. For this, we are all responsible.