Income Distribution and China's Economic “New Normal”

The following sections are included:

• Preface
• About the Authors
• Contents
• Introduction

The following sections are included:

• Introduction
  • Scope of the study
    • Focus on only the economic “New Normal”
    • Focus solely on large-scale income distribution
  • Study approach
    • The one-way relationship between the economic “New Normal” and resident income distribution
    • The “new” situation in terms of resident income distribution under the economic “New Normal”
  • Study content
• Literature Review: Understanding the Meaning of Income Distribution Under the Economic “New Normal”
  • Debate on the characteristics of the economic “New Normal”
    • Debate on the basic characteristics of the “New Normal” in the economy
    • Debate on whether the Chinese economy has entered a New Normal
  • The meaning of the economic “New Normal” in terms of income distribution
• New Issues in Personal Income Distribution That Have Emerged Under the “New Normal”
  • Anemic growth
    • Broader economic trend established
    • Lack of fuel for income increase among residents
  • Swift decline in income for vulnerable groups
    • Effective demand from low-skilled workers decreases
    • Increases in structural unemployment among vulnerable groups
    • Shrinking share of labor income for vulnerable groups
  • Poverty alleviation becomes more challenging for those still below the poverty line
    • New challenges for poverty alleviation efforts in the “New Normal”
    • New issues brought on by multiple approaches to poverty alleviation
    • The growth elasticity of poverty (GEP) declining
  • Wealth gap becoming a new factor to entrenching the income gap
    • Property in residents’ possession grows at a high rate
    • Property income becoming a bigger factor in entrenching the income gap
    • Relationship between wealth gap and income gap becoming swiftly stronger
  • Class mobility on rapid decline
    • Income mobility on the decline
    • Increasing class solidification in society
    • Urban polarization becoming more salient
• New Opportunities in Personal Income Distribution Under the “New Normal”
  • Capital market constraints providing an opportunity for narrowing the income gap
  • Rural–urban integration providing an opportunity for narrowing of income gap
  • Slowdown in the growth of surplus rural labor providing an opportunity for the narrowing of income gap
  • Consumption-driven growth mode can help to narrow the income gap
  • Government narrowing income gap by shifting focus from the economy to social security
• New Challenges in Personal Income Distribution Under the “New Normal”
  • Income growth among low-skilled workers is affected by industrial restructuring
  • Decline in fiscal revenue leads to decline in ability to redistribute income
  • Various social safety net mechanisms more tested than ever
  • Effect of tertiary income distribution on weakening path
  • Income gap also widened due to innovation
  • Tolerance for the income gap decreasing among the public
• Trends in Personal Income Distribution as a Whole Under the Economic “New Normal”
  • Rural income growth rate declining quickly, greater pressures on poverty alleviation efforts in the rural areas
    • Some room for growth in terms of property income among rural residents
    • Rural wage income and transfer income on path of significant decline
    • General slowdown in the growth of rural income
  • Increase in urban resident income set to slow down significantly under the economic “New Normal”
  • Social security mechanisms may not change the situation of unbalanced income distribution in short term
    • Systemic fragmentation leading to inequality between urban and rural areas, between groups, and between regions
    • Inadequate mechanisms for setting standards on social security benefits and adjusting them leading to imbalances in intergenerational distribution
    • Institutional supply lacks flexibility, leading to lack of social risk-sharing under the economic “New Normal”
  • Persistently large income gap could threaten social stability
    • Structural employment is more pronounced than ever
    • Issue of relative poverty becomes more pronounced
    • New urban binary becomes a more direct form of polarization
    • Formation of “olive-shaped” society becomes more difficult
    • Exogenous risks are transmitted even more quickly
• Working Actively to Adapt to the “New Normal” as a Means of Regulating Personal Income Distribution
  • “Adjusting excessive incomes”: Tax collections must increase and anti-corruption efforts strengthened
    • Reform of the tax collection system
    • Reform and introduction of a system of estate tax as soon as possible
    • Implementation of salary caps at state-owned enterprises (SOEs)
  • Increasing the proportion of middle-income earners: Need to diversify property investment channels to increase resident property income
    • Broader array of property investment channels
    • Reforms on all fronts to increase the proportion of middle-income earners
    • Establishing targets for the proportion of middle-income earners
    • Promotion of harmonious codevelopment between incumbent urban residents and new arrivals
  • Increasing income for people on low incomes: Increase government spending on areas which are important to the people’s well-being
    • Improvement of systems and mechanisms aimed at helping those in vulnerable groups
    • Improving the system of social security
    • Implementing targeted poverty alleviation policies
    • Increase in spending on areas which are important to the people’s well-being
    • Optimizing government expenditure
  • Need to rebuild information and monitoring systems at the “infrastructure” level
    • Restructuring the various income distribution roles of various agencies
    • Developing information monitoring mechanisms for income distribution
    • Establishing a simulation center of income distribution policies
    • Enhancing mechanisms for regular policy assessment
    • Carrying out assessments of social stability and risks
• References

There has been some debate in recent years about ongoing trends in income distribution, and this debate has in turn led to great disagreement on the proposed orientation of social policy. Various income distribution indicators had shown that the income gap in China prior to 2009 was widening, which was why the government, scholars, and the public continued to call for the establishment of redistribution policies that are more oriented toward the poor. However, after 2009, there have been significant differences between the various indicators used for measuring the income gap, and the results of the diverse studies have been contradictory. This has led to disparities on how public policies should be oriented: some scholars who believe the level of income disparity to be still high call for continued efforts to focus on the poor and to increase the share of secondary distribution received by ordinary workers, while others, who believe that the income gap has narrowed significantly, call for amendments to the Labor Contract Law, the reduction of wages, and more protection for entrepreneurs and capital. Discussion on whether wages are too high and whether to increase the proportion of secondary distribution received by workers is meaningless if we are not able to clarify the basic issue of the income gap. We will base our commentary on current issues in studies of the measurement of income gap on and then examine the changing trends in income distribution in China before drawing our conclusions.

The following sections are included:

• Various Definitions of the “Middle-Income Earners”
  • Absolute and relative criteria for “middle-income earners”
  • The issue of the upper and lower limits for the middle-income range
  • The three definitions
• Proportion of Middle-Income Earners to China’s Total Population and Changes According to Different Standards
  • Current proportions of middle-income earners to the total population of China
    • International standards
    • Domestic standards
  • Changes in the proportion of middle-income earners in China
    • Using the USD10–100 standard to define the middle-income range
    • Using 66.6%/300% of the median income across more than 230 countries around the world to define the middle-income range
    • Using China’s relative domestic standard
• Recommendations for the Definition to Be Used for the Middle-Income Earners in China
  • The USD10–100 range is not appropriate for the current situation in China
  • The 66.6% and 300% of domestic median income standard is not compatible with current state of development
  • The “60% and 300% of median income worldwide” standard to define the middle-income range is recommended
• Description of China’s Middle-Income Earners
  • A basic review of the proportion of middle-income earners in China at present
  • Extremely low proportion of middle-income earners to the total population at present
  • Proportion of middle-class earners in China rising very fast
  • A majority of middle-income earners hovering at the average level
  • Position of middle-income earners within income distribution not stable
  • Middle-income earners generally proving younger, more educated, and being newer arrivals to the city
• Key Issues Encountered with Efforts to Expand the Size of Middle-Income Group in China
  • Lack of balance in distribution of middle-income earners between urban and rural areas and between different regions
  • Fairly challenging for low-income earners to make it to the league of middle-income earners
  • Subjective identification by middle-income earners lower than their objective identification
  • Consumption potential of middle-income earners not yet fully unleashed
• Policy Focus for the Expansion of the Size of Middle-Income Group in China
  • “Increasing income for people on low incomes” rather than “limiting the high-income” is the right approach to expand the size of the middle-income group
  • Migrant workers remain the main source of new additions to the middle-income class in the future
  • Need to prevent middle-income earners from dropping into the low-income group
  • Further enhancement of the contributions of middle-income earners
  • Raising of property income is the key means for middle-income earners
  • Promoting the expansion of the middle-income class through reforms on all fronts
• Appendix
• Reference

The following sections are included:

• Introduction
• The Scale and Profile of Social Security Expenditures in China
  • Rate of increase in social security expenditures yet to outstrip that of the total government expenditures
  • Relatively low spending on social security in China
• The Effect of China’s Social Security Expenditure on Income Distribution
  • Income distribution effect of social security expenditure greater with urban residents
  • Resident income gap widened by social security expenditure
  • Income gap widened by payments of pension funds
  • Income gap significantly narrowed by expenditure on minimum living allowances
• References

The following sections are included:

• Introduction
• Data Collection
• Current State and Development Trend of Income Gap Across the Globe
  • Current income gap across the globe
  • Development trend of income gap across the globe
• Income Gap Between China and Other Countries
  • Income gap between China and other countries
  • Comparison of index of poverty incidence between China and other countries
• Determinants and Mechanisms That Change the Income Gap
  • Economic growth and income gap
  • Population structure and income gap
  • Urbanization and income gap
  • Market economy and income gap
  • Government expenditure and income gap
• Conclusion and Policy Recommendations
  • Conclusion
    • The upper middle-income countries see the widest income gap
    • Income gap is on the rise again across the globe
    • Economic development and urbanization may not lead to a narrowing income gap
    • Market-oriented economy and economic opening-up do not widen the income gap
    • Regulatory public policies are the main factor to narrow the income gap
    • China sees income gap widening at an unusual pace
  • Policy recommendations
    • Employ public policy to regulate the widening income gap
    • Adhere to market-oriented reform
    • Implement pro-poor growth economic approaches
    • Strengthen the monitoring system on income distribution
• Appendix

The following sections are included:

• Introduction
• The Proportion of Residents’ Property Income Increasing Rapidly
  • The individual’s property income on a rapid upward trend
  • Unreasonable property income structure
  • Wider income distribution gap among people
• The Rapid Growth of Property in Residents’ Possession
  • Rapid growth of property in residents’ possession in China
  • There is a big difference between the growth of subitems of property
  • The increasing wealth gap between the urban and rural residents
  • Wealth highly concentrated in real estate
• The Rapid Expansion of Wealth Gap
  • The increasing share of the affluent class in the total wealth
  • The wealth gap widening rapidly
  • The extremely affluent population as a major factor in increasing wealth gap
• Structural Changes in the Residents’ Wealth
  • Increase in property shares is the main reason for the widening property gap
  • The widening wealth gap mainly driven by the difference within urban and rural areas
• Housing Prices Significantly Increasing Wealth and Widening Wealth Gap
  • The sharp increase in property value driven by rapid rise in housing prices
  • Wealth gap significantly widened by housing prices
• Policy Recommendations

The following sections are included:

• Introduction
• The Current Administrative Coordination in Managing Income Distribution in China
  • High-level meeting mechanism
  • “Coordination team” mechanism
  • “Joint Statement” mechanism
  • Cross-departmental cooperation mechanisms in local governments
• Governmental Agencies’ Failure in Coordination on Income Distribution
  • Ineffective coordination of departments and commissions under the central government: Multi-authority management, overlapping functions, “fragmented” policymaking
  • Ineffective coordination of the “Coordination Team”: Insufficient leadership in policy networking
  • Failed coordination on the policy framework: Insufficient coverage and supporting policies
  • Unclear division of responsibilities between central and local governments: Unmatched financial and administrative powers
  • Ineffective coordination among local governments: Broken joint-action mechanism between departments and regions
• To Improve the Government’s Coordination Mechanism in Policymaking
  • To improve the legal framework for income distribution
  • To establish higher-level cross-departmental coordination team
  • To fully utilize the current inter-departmental joint deliberation mechanism
  • To reconstruct the functions of different departments
  • To promote integration between different income distribution policies
  • To balance power and responsibilities between the central and local governments
  • To establish information-sharing platforms
  • To establish a third-party evaluation mechanism
• References

The following sections are included:

• Introduction
• General Thoughts on Increasing Personal Income in Step with Economic Development
  • General direction
  • Policy model
  • The sequence of distribution
  • Institutional framework
    • Matching industry and income policies
    • Long-, medium-, and short-term macroeconomic policy coordination
    • Primary, secondary, tertiary distribution system coordination
    • Policies for middle-, high-, and low-income groups at the same time
  • Objectives for policy-making
    • To increase residents’ income growth
    • To narrow the income gap
    • To eliminate unfair distribution
  • Indicator design
    • Growth indicators
    • Synchronization indicators
    • The difference indicator
    • The distribution indicators
    • The social mobility indicator
• Long-Term Strategies: Institutional Mechanism Adjustment
  • Institutional issues in the current income distribution
    • The government has too many administrative departments involved in income distribution and decentralized functions reduces the administrative efficiency
    • Some departments having nil or unclear descriptions regarding their functions in income distribution makes it difficult to implement objectives effectively
    • Too many government functions are related to income distribution, leaving less space to utilize social organizations
    • The description of trade unions’ organizational functions does not fully demonstrate their importance in economic development, and provides insufficient protection to workers’ wages growth
  • Ideas and suggestions to optimize and adjust functions
    • To integrate macroeconomic development with economic development departments
    • To establish an anti-monopoly agency to safeguard fair trade
    • To establish a unified national finance and tax management department
    • To streamline the labor market and wage management functions
    • To restructure the Ministry of National Social Security for social management purposes
    • To entrust trade unions with the function of wage negotiation on behalf of workers
    • Clarify the division of responsibilities for income distribution between the central and local governments
• Medium-Term Strategies: Regulatory Scheme for Policy-Making
  • To increase employment opportunity
  • To foster residents’ income growth
  • To strengthen labor protection
  • To regulate the distribution order
  • To secure the expenditures on meeting people’s basic needs
  • To guide the public to have reasonable expectations on revenue growth
• Short-Term Strategies: Specific Regulatory Measures
  • Policy to adjust excessive incomes
    • Reform tax regulation system
    • To regulate high-income in monopoly industries
  • Policies to expand the size of middle-income group
    • To increase the proportion of middle-income groups
    • To increase expenditures for people’s living standard
  • Policies to increase income for people on low-incomes
    • To improve the social security system
    • To implement targeted poverty reduction and alleviation measures
    • To abolish policies involving discrimination against migrant workers

The following sections are included:

• Introduction
• Three Classic Phenomena
  • Rural residents of the county seeing more drastic declines in income growth compared to rest of the country
  • Rural residents of the county also seeing a faster drop in income growth compared to county GDP growth rate
  • Drop in rural resident income growth at the county level even more obvious in towns with rapid industrial development
• Four Structural Realities
  • Little development in services industry, providing not many employment opportunities for rural population
  • Resource-dependent enterprises, the mainstay, do not have much demand on labor resources
  • Inadequate factor concentration and low degree of relevance to rural households
  • Lack of labor-intensive industries and employment structure that can provide adequate opportunities for rural surplus labor
• Five Causes Rooted in Policy
  • Development models that enrich the government and leave the people worse off
  • County/township leadership tenures that typically do not make it to the five-year mark
  • Policy shortsightedness caused by “GDP-ism” on the part of government
  • Lack of support for rural areas in the “new-type urbanization” wave
  • Government unable to invest in basic infrastructure, thus impeding rural resident income growth
• Six Policy Recommendations
  • Central government needs to pay even more attention to basic economic issues at the county level
  • Central government needs to place a stronger emphasis on rural resident income growth in performance assessments
  • Central government must raise job ranks at the grassroots level to mitigate the issue of the divergence between economic growth and rural resident income growth
  • County governments should work to establish distinctive brands based on their specific competitive advantages
  • County governments must use building of critical infrastructure as basis for congregating factors of production
  • County governments should develop labor-intensive industries that are friendly to rural residents

The following sections are included:

• Introduction
• Growth Rate of Residents’ Wages Continuing to Decline
• Proportion of Wage Income to the Total Income Significantly Decreasing
• Income Gap Between Urban and Rural Areas Narrowing Down
• Wage Income Gap Widening Between Regions
• Personal Income Gap Widening Across Industries and Economy Types
• Residents’ Wage Income Gap Also Widening Between Various Income Brackets
• Acknowledgments
• Reference

The following section is included:

• Index