Reform is the only way to tackle China’s economic inequality and to increase the number of middle-income earners, economists and officials said at a recent forum on reform and development in Haikou, Hainan province.
"To achieve this goal, reform is the key. If substantial progress were made in reform, the following decade could see a moderate annual growth of 7 to 8 percent," said Gao Shangquan, honorary president of the China Society of Economic Reform, and a prominent policy adviser.
If the opportunity to reform were to be missed, China could fall into the middle-income trap, Gao warned, adding that "greater political guts and wisdom" were needed to further the reform.
These days, "income distribution" has become a buzzword in China, after the State Council in October said it would draft a plan to reform the current income distribution system. The public’s expectations were further raised when President Hu Jintao said in his speech to the 18th National Congress of the Communist Party of China that per capita income should double by 2020.
"The income should not be doubled on the basis of current income disparity, but to enlarge the middle-income group," said Chi Fulin, president of the China Institute of Reform and Development, which hosted the forum.
But a central problem emerges: How does one define the middle-income group?
Wang Yuan, a fellow researcher with the Institute for Economic Research under the National Development and Reform Commission, said if we divide the income equally into several groups – for example, Group A earns zero to 25,000 yuan ($3,968) each year; Group B, 25,001 to 50,000 yuan, etc – and count the number of Chinese in each group, we would see there are too many low-income people in China and too few middle- and high-income people. In developed economies, this should be a Gaussian curve in which most people are concentrated in the middle.
In China, only 23 percent belong to the middle-income group, whereas in developed economies, the percentage is more than 40 percent.
Another measurement is the portion of household income in the whole national income system. Wang said 66 percent of the national income went to households and the rest went to corporations and the government in 1992. In 2008, households’ portion fell to 57.23 percent. After taxation, households’ portion dropped to 57.11 percent.
"This showed that taxation not only failed to help residents grab a larger portion of the national wealth, but on the contrary, reduced their share," Wang said.
Other researchers pointed out the same inequality exists in other key measurements, such as the income disparity between different occupations, regions and urban and rural residents.
"The inequality of income distribution is basically reflected by ratios. So reform essentially aims to adjust these ratios. It is best to include a quantitative target in reform design," said Liu Hao, deputy director of the employment and income distribution department of the NDRC, China’s top economic planning agency.
More equal society
Despite some disagreements, scholars and officials agree on one thing: Income inequality is hampering the growth of China’s consumption and its shift from an investment-driven economy to a consumption-driven one. Income inequality also has profound political implications: The lack of a sizable middle-income group will affect social stability.
The problem is how to enlarge China’s middle-income group.
An improved tax system has been proposed as a solution. According to some experts, a well-designed tax system assists in wealth redistribution by transferring resources from the rich to the needy.
Gan Li, director of the economics department at the Southwestern University of Finance and Economics, said the Gini coefficient, a measurement of income inequality, was remarkably lower in developed economies with a mature tax system.
"In China, taxation has so far failed to shape a healthy income distribution, which it is supposed to do," Gan said.
But it is not only about how the tax is collected, but how it is spent. Wang Yukai, vice-chairman of the China Society of Administrative Reform, said that education, medical and social security accounts for 56 to 70 percent of government spending in Western countries, while in China, only 28.8 percent is spent on these areas.
Gao from the China Society of Economic Reform said one-third of China’s occupational disparity could be attributed to monopolies, so reform in the railway, petroleum, electricity and telecommunication sectors is urgently needed. Most experts agree that SOEs’ dividends to the government should be raised.
Many other suggestions were raised at the forum, including the development of the service sector, the establishment of a wage negotiation mechanism and increasing the transparency of the public budget and assets.
However, experts warned that vested interests might jeopardize much-needed reform.
"The inequality of income distribution is the result of the twisted interests configuration. To cultivate fairer income distribution, power should be tamed," said Wang Yukai from the China Society of Administrative Reform.
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