Building an Olive-Shaped Society

Since embarking on a path of economic reforms in the late 1970s, China has achieved two milestones in improving people’s livelihoods. First, China’s per capita income has risen rapidly, from US$156 to US$12,556 between 1978 and 2021, making it one of the fastest growing economies in the world. Second, China’s poverty rate has declined dramatically. In the past 40 years, China has lifted 770mn rural people out of poverty, accounting for more than 70% of global poverty reduction in the same period. Despite China’s socio-economic achievements in development, we believe a sustained effort is still required to raise income levels and address economic inequality, in order to achieve inclusive growth. Currently, China still has a large low-income population, and the income distribution pattern represents a pyramid rather than an olive shape. China’s Gini coefficients in income, consumption, and wealth distribution are at a high level, and inequality is a prominent issue. China’s economy is still subject to urban–rural disparities; in fact, we can attribute nearly half of the income gap attributed to the urban–rural gap. In addition, wealth in China has continued to concentrate over the past 30 years. With housing assets becoming the main component of household wealth, rising urban housing prices are a major driver of wealth concentration in China. Based on the World Income Inequality Database (WIID), we find that based on certain income classification criteria, the shape of China’s income distribution represents a pyramid shape. This contrasts with that of Nordic countries, Japan, and the US, which are closer to an olive shape. The main reason for this difference is that China still has a large number of low-income people, and its middle-income population is not large enough to support the “waist” of the olive shape. In addition, the income level of China’s middle-income population is relatively low, and their weak risk resilience makes this income group vulnerable to a return to poverty. The focus of improving income distribution is not to create an olive-shaped pattern, but to raise the per capita income level and expand the population size of the middle-income group. We believe that China should continue to raise per capita income and deepen reforms and “opening up” policies, while at the same time implementing redistribution policies to reduce inequality.

What kind of labor market does common prosperity actually require? The development of the labor market results from a combination of market forces and institutions. The introduction of an institutional perspective implies strengthening the inclusiveness of the labor market. It should ensure that employment opportunities are open to all workers equally, that labor compensation is not influenced by factors other than job performance, and that workers are given appropriate protection and a voice. Compared with the requirements, there are three more prominent problems in the current Chinese labor market. Firstly, the labor market presents an obvious dualistic structure along many dimensions such as urban and rural areas, regions, and industries, and free flow is hindered. The segregation of the labor market not only widens the wage income gap, but is also not conducive to giving full play to the advantage of the country’s bountiful labor resources. Secondly, the structural contradiction between supply and demand leads to the coexistence of unemployment and labor shortage, and the flexible employment in new industries is likely to impact the effectiveness of the institutional arrangement of the current market. Third, insufficient labor protection restricts the market’s ability to allocate labor resources dynamically. Under the existing social security system, in particular, the unemployment insurance system needs to be improved, and there is still room to amplify the voice of workers. With the goal of common prosperity, China should establish a unified and inclusive labor market. First, by reducing inequality among different groups of people in terms of employment, livelihood, and social security, the barriers in the labor market at the urban–rural, regional, and industry levels should be broken down. Secondly, we can guide employment preferences, strengthen skill training, and promote industrial transformation and upgrading to address the structural mismatch between labor supply and demand. In particular, we can actively explore the institutions of labor protection that are compatible with flexible employment patterns so that the labor market system can keep pace with the development of new business models. Finally, the protection of workers should be strengthened through enhancing employment protection, upgrading the level of social security pooling, strengthening the function of unemployment insurance, and amplifying the voice of workers.

Housing is a basic necessity, and it is essential to properly balance its dual properties as both a consumer product and an asset for investment. However, historically, China’s real estate market has taken the path of excessive financialization in the process of accelerating economic development and urban modernization. The deviation from its attribute as an essential consumer product has negatively affected people’s livelihood, economic growth, and financial stability, and has even limited the effectiveness of counter-cyclical macroeconomic policies, which has hindered, to some extent, the progress towards common prosperity. The financialization of land and the commoditization of housing have caused the excessive financialization of China’s real estate market. They are the core issues on the supply and demand sides of this market, respectively. On the supply side, local governments have been raising financial resources through land asset liquidation and mortgage financing, which has deepened the financial cycle spanning from land prices to housing prices, and to credit supply. The balance sheet of local governments is “tied” to the land market, pushing up land prices and leading to the continuous expansion of hidden debts and real estate bubbles. On the demand side, since the institutional reform of the housing market in 1998, China has created an imbalanced supply structure characterized by a boom in developer-built housing and a shortage of low-income housing as well as long-term rental housing, with the majority of households relying on mortgages and other financial instruments to meet their housing needs. Moreover, the financialization of land and the commoditization of housing are mutually reinforcing, strengthening the dependence of local governments on land, incentivizing developers to raise debt and leverage, and guiding the allocation of bank loans to the housing market. The problem has been exacerbated by the connections between banks and some real estate companies. We believe the real estate sector should reduce excessive financialization, and that housing revert to its primary attribute as an essential consumer product. Therefore, the supply-side reform should be vigorously pursued, whereas speculative demand must be resolutely suppressed. The legislation on real estate tax should be accelerated to revamp local government funding sources. We believe China should expand the supply of high-quality low-income housing, build a multi-tiered and laddered supply system, and vigorously develop the rental housing market with legal protection.

In the next 40 years, China will need to achieve high-quality development under carbon emission constraints. Among the critical challenges China needs to face is the potential for increased imbalances in regional development. This chapter seeks to answer three questions. First, will carbon emission constraints aggravate the imbalance in China’s regional development? Since the 11th Five-Year Plan period (2006–2010), the government has promoted energy conservation and emission reduction through control of energy consumption and intensity. Under energy conservation and emission reduction policies, the gap in GDP per capita between high-carbon, more-developed and low-carbon, less-developed regions has widened to a certain extent. In the future, will the imbalance in regional development intensify as carbon constraints grow? We conducted multi-scenario analysis using a computable general equilibrium (CGE) model, and the findings show that if carbon neutrality is promoted by prioritizing efficiency of emissions reduction, then regional development imbalances may be the exacerbated, creating significant challenges to high-quality development. Second, why do carbon emission constraints exacerbate imbalances in regional development? Answering this question requires an understanding of who bears the major cost of emissions reduction. High-energy-consuming industries in the midstream of the industry chain may bear the highest abatement costs due to their limited bargaining power over the upstream energy sector and downstream consumption sector. High-energy-consuming industries bear more abatement costs at this stage due to their own transformation and upgrading demand and lower marginal abatement costs compared to other industries. As economic development in less-developed regions is more dependent on these industries, the uniform imposition of carbon emission constraints will exacerbate imbalances in regional development. Third, how can imbalances in regional development be eliminated? On one hand, through “dual control” of carbon emission, a carbon market and carbon tax policies, the costs of emission reduction can be more reasonably shared and more equity issues can be considered while pursuing efficiency. On the other hand, a compensation mechanism could smooth the transition and support less-developed, high-carbon regions through transfer payments and transition finance tools. We compared various policy scenarios using the CGE model, and conclude that in the process of achieving carbon neutrality, dual control of carbon emission, will play a major role in sharing the responsibilities of emission reduction more equitably; that transfer payments are the most effective means to eliminate regional disparities; and dynamically determining the inflow of transfer funds according to the progress of the transition will reduce the decline of national GDP and eliminate imbalances in regional development. Transition finance can also promote equity in regional development at the cost of a potential decline in GDP.

Infrastructure, as a public good, has obvious spillover effects which contribute to economic efficiency while safeguarding the provision of public services. It balances efficiency and equity, and may effectively promote inclusive growth. China has already achieved significant accomplishments in infrastructure development: 5,198,000 km of roads and 146,000 km of railways (ranking No. 3 and No. 2 in the world in terms of total length, respectively), were in use as of end-2020. All the country’s urban and rural areas are connected to power grid, and 4G communication covers 99% of the country’s territory. According to the World Economic Forum, in 2019, China ranked No. 36 globally in infrastructure, which is higher than its ranking for GDP per capita. While production-oriented infrastructure (such as transportation, electricity supply, and communications) is evenly developed across the country, in terms of accessibility and affordability, there is still a gap between urban and rural areas. In contrast, there is a more pronounced regional and urban–rural gap in consumption-oriented infrastructure (such as water supply, gas supply, and environmental protection). Production-oriented infrastructure is attractive to investors, easily yields economic output, and the network effect is stronger, so local governments have greater incentives for investment. Future infrastructure construction should pay more attention to the issues of capital and operational efficiency. China’s future infrastructure construction focuses mainly on toll-free production-oriented infrastructure and consumption-oriented infrastructure, which generally lacks a profit base. Responsibility for investment is mainly borne by local governments, but the gap between local government revenues and expenditures has widened in recent years. Moreover, the government invests in and runs most infrastructure, resulting in a process that usually lacks healthy competition and efficiency. It is better for China to diversify financing and improve the operational quality and efficiency of its infrastructure.

Education and healthcare are central to successfully sharing the fruits of economic development and promoting social equity. Both can contribute to human capital accumulation, labor productivity promotion, and economic growth. Improvements in education and health also help to close the gap between human capital and income, promoting social equity. They can also be mutually reinforcing. Achieving the development goal of “common prosperity” requires the establishment of equitable and efficient nationwide systems for education and healthcare. Insufficient funding and incomplete institutional systems are two long-term constraints hindering China’s approach to achieving a high-quality education system. On the one hand, public funding for education in China is insufficient and unevenly distributed. Public funding for early childhood education (for ages 0–3) and vocational education is relatively insufficient in China, with significant regional disparities. Guidance and supervision of the education system is insufficient, particularly in public childcare services, the integration between vocational education and general education, participation of enterprises, and autonomy of universities. Insufficient funding and incomplete institutional systems have led to unequally distributed resources in education, thereby weakening the role of education in promoting economic growth and social equity. The limited financial protection provided by health insurance and the uneven allocation of medical resources are the primary reasons for “kan-bing-nan” (seeking care is difficult) and “kan-bing-gui” (seeking care is expensive) in China. “Seeking care is expensive” is manifested as a heavy burden for patients, which can easily result in catastrophic medical expenditure, and even push them into poverty due to illness. “Seeking care is difficult” results from insufficient high-quality medical resources. Patients often struggle to find good doctors when faced with serious illnesses, and the number of physicians in rural areas is relatively low compared with urban areas. “Seeking care is expensive” in China reveals that there is still a long way to go before the country develops a fully comprehensive healthcare security system, and significant disparities persist between urban and rural areas. “Seeking care is difficult” in China reflects the unbalanced allocation of medical resources, with an excessive concentration of high-quality resources and large differences in clinical quality across different levels of medical institutions. The limited financial protection and unbalanced allocation of medical resources undermine the ability of healthcare to promote economic growth and social equity. To establish an equitable and efficient education system, China needs to increase fiscal investment in education and improve the overall environment for the development of young teachers. China should also clarify the focus of its education policies based on the unique characteristics of each stage of education. The government needs to commit more resources to inclusive childcare services in early childhood, expand the supply of in-school resources for basic education, diversify the assessment system, and modernize the vocational education system. To promote equity in basic medical services, China needs boost its financial resources, improve the efficiency of healthcare spending, and encourage innovation in commercial insurance. China should also develop an integrated, people-centered healthcare system with primary care at the core. This includes strengthening the capacity of community-level healthcare institutions, integrating healthcare and social care services at the community level, and promoting the training and development of healthcare professionals.

This chapter examines how China can collectively leverage the role of public finance and charity to promote common prosperity. China’s fiscal redistributive effect is not salient because of poor progressivity in taxation and the low level of spending on public services and transfers. In terms of the tax system, taxation is dominated by indirect taxes such as value-added tax (VAT), which is mainly levied on consumers. The corporate tax burden is also partly perceived as a burden on employees, so the effective tax rate for corporate owners is lower. Structural tax cuts both raise economic efficiency and help improve the redistribution of the tax system. To this end, China can reduce VAT, reform individual income tax rates on capital and labor income, and introduce a real estate tax while cutting taxes on property transactions. In terms of public expenditure, fiscal spending is biased towards economic development, with room for improvement in the input of public services and transfers targeting specific groups of people to promote both efficiency and fairness. China has a broad fiscal sector that includes state-owned enterprises (SOEs), land finance, and social insurance funds. SOEs should increase their dividends and allocations to the social security fund to provide for redistribution. As the aging population increases and GDP per capita grows, China’s social security levels should and can rise. The basic pension insurance system has two major challenges: Large urban–rural disparities and poor financial sustainability. More fiscal support should therefore be enacted, while parameters should be adjusted. To address the urban–rural disparity, financial resources can be used to revamp the basic pension scheme for rural and non-working residents and to establish a non-contributory minimum pension to provide basic protection for the poor elderly population. To address the issue of financial sustainability, the policy has improved the financial position of the basic pension scheme for urban employees through financial subsidies and transfer of state-owned assets, and fiscal policy can do more in the future. An important variable for parameter adjustment is the setting of the retirement age. At present, the retirement age in China is low, so delaying retirement would significantly improve the financial position of the pension system and reduce the intergenerational gap. This would also increase the total labor supply. The intensity of social giving to charity in China is low. The public’s perception of charity is limited, and charitable organizations operate inefficiently. The root causes of the problem include the unique origins of charity development in China, the current low level of economic development, the imperfect legal and regulatory systems for charity, and the lack of incentives such as taxation. Therefore, China may focus on long-term institutional development, guide social awareness, and encourage corporate social responsibility.