China: The Long March to Inclusive Growth

Straits TImes  14 March 2011

CHINA's model of state capitalism would have been an exemplary model for other developing economies - except that its sterling economic performance has been achieved to some extent at the expense of its labour force.

 

As a proportion of gross domestic product (GDP), personal income fell from a high of 65 per cent in 1990 to 43 per cent today. Worse, the distribution of that falling proportion of income has grown increasingly unequal. Latest data reveals that the Gini coefficient (a measure of statistical dispersion commonly used to gauge inequality of income or wealth) in China has risen to 0.48. The situation has been made worse by rising living costs caused not only by climbing food and fuel prices but also by vested interests and corruption and speculative profiteering skewing prices.

 

The living standards of low- and middle-income wage earners suffered. In response to mounting discontent, the government is embarking on an inclusive growth strategy which will form the bedrock of the 12th Five-Year Plan unveiled by Premier Wen Jiabao at the National People's Congress and Chinese People's Political Consultative Conference meetings in Beijing.

 

In fact, efforts to mollify the discontent started long before the meetings. Many low-income wage earners, for example, are beneficiaries of a 'minimum living security' subsidy programme extended to urban residents since 1999 and rural residents since 2007. Local governments have raised these subsidies in line with rising inflation. Since last year, the government has also allowed wages to rise at a faster rate and promised that future income growth will be kept at least in line with inflation and GDP growth.

 

Next, policymakers are also working hard to bridge the urban-rural income disparity, which rose steadily between the early 1990s and 2004 to 3.4, and has remained stable since. The disparity could be partly attributed to the policy of 'same labour with different remuneration' which caused rural workers to earn less than those in the cities. Government efforts are beginning to show results. Last year, real per capita net income growth among rural residents was 10.9 per cent compared to urban residents' 7.8 per cent.

 

Policymakers are also looking into the issue of hukou registration that prevents the 170 million migrant workers in the cities from enjoying the same welfare benefits as the locals. Chengdu, for example, has released a plan to allow free migration of its residents between urban and rural areas from next year. More cities, especially those experiencing tightening labour supply, are likely to implement similar measures to attract migrant workers.

 

Besides helping to raise the overall income level, the government has also increased fiscal spending on social welfare and public services.

 

In health care, the government unveiled a three-year 850 billion yuan (S$164 billion) plan to set up multi-layered health insurance policies and reform public hospitals. As a result, individual share of total health-care cost has declined from 52.21 per cent in 2005 to 37 per cent last year.

 

Next, to promote equal access to education, the government increased scholarship funding and subsidies for needy students from 2.05 billion yuan in 2006 to 26 billion yuan last year. In the cities, children of migrant workers may soon have free education. In rural areas, local governments have also increased spending to improve schools and raise teacher quality.

 

The most commendable effort to improve social fairness and build a harmonious society is without doubt the recently announced public housing programme. For most Chinese priced out of the property market, getting a public housing unit at heavily subsidised rates is a dream come true. Over the next five years, 36 million units of public housing will be built across the country to house 20 per cent of the country's urban households. Rural households will receive subsidies for home improvements. This year, the assistance programme will cover 1.5 million dilapidated rural houses.

 

But there is one weakness: Current efforts to foster inclusiveness are built almost entirely on government transfers. With 70 per cent of the population classified as low-income earners, there is a limit to how much government coffers can bear, especially in the long term. With the central government picking up only 70 per cent of the tab for social transfers in urban areas, local governments in the lessdeveloped central and western regions are hard pressed to fund the remaining 30 per cent.

 

The over-dependence on government transfers to foster inclusiveness is un-sustainable. This is why the long-term success of China's inclusive growth strategy hinges on the success of policymakers' efforts to rebalance and restructure the economy.

 

Rebalancing allows the government to shift from investing excessively in industrial activities to investing more in things that improve people's lives: subsidised public housing, health care, better education, and other forms of social welfare. A stronger safety net reduces people's need to build up precautionary savings, freeing household savings for domestic consumption, and spurring the economy.

 

At the same time, as the economy restructures, Chinese companies capture more of the value-add, churning out products using indigenous designs and technology. With the right policies in place, a higher share of that captured value can be apportioned to workers and equitably distributed to low- and middle-income earners.

 

In short, successes in rebalancing and restructuring the economy will help to fuel and sustain the long-term inclusive growth of the economy. It will prevent China from degenerating into a welfare state driven by ever-mounting debt.

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