China’s War on Inequality

BEIJING – A major new target in the “Five-Year Plan for Economic and Social Development” that China just unveiled is to boost the growth rate for household (disposable) income so that it equals the growth rate of the country’s GDP. The reason is simple: over the past 10 years or so, China’s household income grew more slowly than GDP, making it a smaller and smaller proportion of total national income.

Many important structural problems have resulted from this trend. Lagging household income has held back private consumption, even though the economy has the capacity to produce more consumer goods. It has also driven up corporate savings, because firms’ earnings are growing faster than household income and (and, for that matter, faster than overall GDP). That, in turn, may cause higher investment or asset bubbles, as businesses seek to reinvest their savings somewhere. And lagging household income clearly contributes to China’s trade surplus, because low domestic consumption tends to keep exports higher than imports.

But there are even more problems related to China’s disproportionately small household income, particularly growing income disparity. Indeed, not all of China’s “households” have benefited alike from rapid GDP growth. Some social groups, such as skilled workers, engineers, and financial-sector employees, have seen their wages rise strongly. Urbanites – people with formal registration as urban residents – have recorded income gains as well, owing to their coverage by the government-run education system and social safety net. And, as corporate profits have grown, those who share the capital gains in one way or another have also seen their incomes increase faster than the national average.

Those with less education, however, such as migrant workers and farmers, have fared much worse. The former earn an annual salary (including fringe benefits!) totaling $2,000; the later may earn only half that. They comprise, in roughly equal parts, the low-income workers who account for up to 65-70% of the total workforce. Their average income has grown, but more slowly than the 8-10% annual GDP growth rate of the past 20 years.