How China Can Avoid the MiddleIncome TrapWord格式.docx

How China Can Avoid the MiddleIncome TrapWord格式.docx

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Abstract:

In2010,ChinaenteredwhattheWorldDevelopmentBankReportof2010labeledastheupper-middle-incomethresholdwithaGDPpercapitaof$4,396.1China¡

¯

scurrentmomentumwilllikelycarryitthroughsustainedgrowthintheforeseeablefuture,butitremainsunsurewhetherChinawillescapethemiddle-incometrapandgrowintoahigh-incomecountry.TheanswerliesinChina¡

sabilitytorestructureitsindustrialandsocialstructure.¡

Keyword:

middle-incometrap,economicrestructuring¡

JEL:

O11,E66,L16¡

1.ChinaNeedstoRestructureitsEconomyandAdjustitsDemandStructure¡

1.1Chinafacesdualpressurestotransformitseconomicstructure¡

Chinacurrentlyfacesintensifyingcompetitionfromboththehighandlowendoftheglobalsupplychain?

a¡

high-endsqueeze¡

anda¡

low-endsqueeze.¡

Beforetheglobalfinancialcrisis,theworldeconomycouldberoughlydividedintothreecategories:

developedconsumptioneconomiessuchastheUnitedStatesandEuropeancountries;

developingproductioneconomiessuchasChinaandIndia;

andresource-producingcountriessuchasRussia,Brazil,Australia,Canada,andMiddleEasterncountries.Developedcountriessupporteddeficitspendingwithfinancialexpansionwhileexportinghigh-techproductsandimportingalargeamountoflabor-intensiveproducts.Theirsavingsrateswerelow,andresidentsreliedoncreditconsumption.Developingcountries¡

economicgrowthwasexport-oriented,withdomesticproductionfarexceedingdomesticdemand.However,thissupply-demanddynamicbrokedownafterthefinancialcrisisasgovernmentscutfiscalexpenditureandresidentsreducedconsumption.Withthedemandforitslabor-intensiveproductsfalling,Chinafacedgreatchallenges.¡

Theglobalmarketisundergoingtwoprofoundchangesinthewakeofthefinancialcrisis.Forone,theU.S.,Europe,Japan,andotherdevelopedeconomieshaveimplementedre-industrializationpoliciesaimingtorestorenationaladvantages.Theseeconomieshavespecificallypromotedindustriessuchasnewenergy,biofuel,informationtechnology,andaerospacetechnologyinanefforttoboosthigh-techexports.InMarch2010theU.S.governmentannouncedaplantodoubleexportswithinfiveyearsthroughafocusonemergingindustriesandhigh-techproducts.Thisincreasedcompetitionhasledtoa¡

effectonChina¡

sownemergingindustries.¡

Ontheoppositeendofthespectrum,cheaperlandresourcesandlowerlaborcostshavemadeHonduras,Vietnam,Bangladesh,India,SriLanka,Ethiopia,andotherdevelopingcountriescompetitivewithChinaonthelow-tech,labor-intensiveendoftheindustrialspectrum.Thishasresultedina¡

low-endsqueeze¡

onChina¡

seconomy.¡

Chinahastwowaysofcopingwiththesetwocompetitivepressures:

first,itmustfosteravibrantdomesticconsumermarketbyadjustingitsdomesticdemandstructure;

second,itmustpromotestructuraltransformationfromexport-todemand-orientedindustriesatthelow,middle,andhighendoftheindustrialladder.Neithersolutionwillbeeasytoimplement.¡

1.2China¡

sdifficultiesinadjustingdemandstructure¡

Thekeytothefirstsolutionliesinexpandingdomesticdemand,raisingdomesticconsumptionasaportionofGDP.Todothis,Chinamustincreaseincomelevelsforbothurbanandruralresidents,andespeciallyformiddle-andlow-incomeresidents.Toforma¡

consumersociety¡

basedaroundastrongmiddle-class,Chinamustadjustitsincomedistributionstructure.Thiswillinvolvereducingtheamountofincomeallocatedtothegovernment,enterprisesandhigh-incomegroupswhileraisingtheproportiongoingtomiddle-andlow-incomegroups.Butdoingthiswillrequiretwosignificantbreakswithhistory.¡

First,China¡

snationalincomedistributiondynamicshaveconsistentlyputthemiddleandlowerclassesatadisadvantagewhilethegovernmentandenterpriseshavetakenthelion¡

sshareofnationalincome.From1995to2010,innon-budgetaryrevenue,China¡

sgovernmentincomeratiorosefrom24.25%to30.48%.Overthesameperiod,theincomeratioforenterprisesrosefrom9.88%to15.82%.Forresidents,however,thefiguredroppedfrom65.87%to53.35%（seeTable3）.Afterthe2008globalfinancialcrisis,thispatternintensified.From2008to2010,nationalfiscalrevenueincreasedfrom6.133trillionyuanto8.308trillionyuan,anominalgrowthrateof35.5%.Profitsforindustrialenterpriseswithannualbusinessincomesabovefivemillionyuanincreasedby27.1%2while,overthesameperiod,thenominalgrowthratesofurbanandruralresidentialincomeswere21.1%and24.3%,respectively.3¡

Whenenjoyinghighrevenuegrowth,governmentandenterprisestendtoinvestmore,whereaswhencurrentexpendituresarelessthancurrentincomethenthegovernmentandenterpriseswillnaturallyincreasesavings.From1998to2010,thesavingsdepositsoffinancialandgovernmentalbodiesinChinaincreasedbyafactorof25.4,risingfrom347.08billionyuanto9.163trillionyuan.Asaproportionoftotalsocialsavingsdeposits,thisreflectsanincreasefrom3.63%to12.76%.Corporatedepositsincreasedbyafactorof6.53,from3.248trillionyuanto24.449trillionyuan,orfrom33.95%to34.04%.Despiteasubstantialincrease,theproportionofhouseholdsavingsdepositsintotalsocialsavingsdroppedfrom55.8%to42.22%inthesametwelve-yearwindow.4Thisdisproportionateincreaseinsavingsfromthegovernmentandenterpriseshasfurtherincreasedtheirabilitytospendoninvestment,exacerbatingtheproblemofmedium-andlong-terminvestmentovercapacity.¡

Thesecondhistoricalpointtoconsiderhereisthatnationalincomeconsistentlytiltstowardhigh-incomegroups.AccordingtosampledatafromtheNationalBureauofStatistics,incomesforhigh-incomegroupsincreasedby264.3%between2000and2009.Overthesametimeperiod,incomesformiddle-andupper-middle-incomegroupsroseby174.7-209.7%andthoseforlow-incomegroupsroseby142.8%.5Theproportionofnationalincomeearnedbylow-incomegroups,whoaccountfor20%ofthetotalpopulation,droppedfrom11.11%to8.78%,whilethatofthemiddle-andupper-middlegroups,whoaccountfor40%ofthetotalpopulation,droppedfrom34.35%to31.48%.Incontrast,theproportionofnationalincomeearnedbythe20%ofthepopulationwhocomprisethehigh-incomegrouprosefrom31.86%to38.4%.In2009,thistop20%earnednearlytwo-fifthsofallurbanrevenue（seeTable4）.¡

Thesituationinruralareasissimilartothatinurbanareas.In2009,thetop40%ofearnersinruralareasearned63.02%ofthetotalrevenue,whilethebottom60%earnedonly36.98%（seeTable5）.6Theincomepolarizationseenhereisamajorobstacleforestablishingastrongmiddleclass.AccordingtotheestimateofInstituteofSociologyattheChineseAcademyofSocialSciences,only12.1%ofChina¡

spopulationbelongstothemiddleclass.7EvenifbyAsianDevelopmentBank（ADB）¡

scalculation（38.8%）,China¡

smiddle-classpopulationisstillverylow.8Internationalexperiencesuggeststhatthemiddleclassmustbecomethemajorityinorderforasocietytotransitfromproduction-orientedtoconsumption-oriented.Thisisbecausemiddle-andlow-incomegroupspreferspendingtosaving,whiletheoppositeistrueforhigh-incomegroups.Increasingtheincomesofhigh-incomegroupswillonlyleadtomoresavings;

itisonlywhenlow-incomegroupsbecomemiddle-incomegroupsthatcanChinasuccessfullystimulateconsumptiongrowth.¡

AconsensushasbeenreachedinChinathatitisnecessarytoincreasemiddle-andlow-incomegroupincomesbyadjustingtheexistingincomedistributionstructure.However,institutionalarrangementsanddistributionchannelshavehamperedtheflowofincometotheseresidentsinfourways.First,thefinancialandadministrativepowergiventothecentralandlocalgovernmentsisenormous.Localgovernmentsinparticularseizerevenuesforthemselvesattheexpenseofurbanandruralresidents.Second,Chinahassofarfailedtorespondtorampanttaxevasioninhigh-incomegroups.Third,localgovernmentsfavorenterprisesoverindividualsasthesegovernmentshavesingle-mindedlypursuedhigherGDPfiguresandfiscalrevenues.Thishasledtoabusesofpowerandpublicresources.Aflawedlegalsystemandrubber-stamptradeunionshavefailedtoprotectworkers¡

rightsandhaveactuallycontributedtowagestagnationandlowworkerwelfare.Fourth,China¡

ssocialsecuritysystemisnotconducivetoincreasingtheseincomelevels.InChina,residentsmainlyrelyonfamilymembersforsocialsecuritybecausetheofficialsocialsecuritysystemhaslowcoverageandoffersminimalbenefits.OneofthereasonsthatChinesesavingsratesaresohighisthatmuchmoneyisputasideforprecautionarypurposes.Thiscanonlybereversedwhenasoundnationwidesocialsecuritysystemisputinplacethatthepeopletrust.¡

Afteryearsoftrying,Chinahasnowestablishedbasicsocialsecuritysystemscoveringchildbirth,pension,sickness,disabilityandunemployment.However,thesysteminitscurrentstateisflawedandcannotfixthecomplexproblemathand.Developedregions,mainlycities,enjoybettersocialsecuritybenefitswhileneedygroupsinruralareasandmedium-andsmall-sizedtownsreceivefewerandpoorerbenefits.Therateofcoverageingeneralisfartoolowaswell.9Thegovernmentquitesimplydoesnotinvestenoughintosocialsecurity.InWesternEuropeandNordiccountries,50%offiscalexpendituresgotosocialsecurity.Thisfigur