Comment on “Income and Wealth Inequality in Asia and the Pacific: Trends, Causes, and Policy Remedies”

Abstract

I agree with Zhuang (2022) in his summary assessments of the negative effects of income inequality. Zhuang (2022) includes a section on the inequality in China, so I would like to focus my comments on this section, and particularly on the working-age households in China.

Most of the inequality measures cited in Zhang's paper and in other studies are from OECD or World Bank calculations. China's measures come from the National Bureau of Statistics (NBS). Unfortunately, it is difficult to decompose NBS' measures since the micro-level data used by the NBS are not publicly available.

Fortunately, there are several large-scale academic household surveys that are available – one of them is the China Household Income Project, led by Zhuang's coauthor on other occasions, Shi Li from Zhejiang University. My analysis here is partially based on another survey, the China Household Finance Survey, that I am the lead investigator for.

Zhuang (2022) discusses income inequality decade-wise since the 1980s. I would like to list the biennial changes of income inequality since 2010. Table 1 lists the P90/P50 ratios between 2010–2018. According to Table 1, inequality decreased slightly, from 3.65 to 3.28, between 2010 and 2018. However, working-age households did not see much change in these ratios, while families with retired people (at least one person in the family is older than 60) see a significant drop in inequality, from 5.09 to 3.21.

To understand the reason for this, we compare government transfers to the elderly in the form of pension payments, and government transfers to working-age households. The former includes payments to retirees covered by both the Basic Employee Pension Insurance and the Resident Pension Insurance. The latter includes payments from all social assistance programs, such as unemployment benefits and Dibao payments.

According to the official statistics, the percentage of pension payments to gross domestic product (GDP) more than doubled from 2.1% in 2010 to 5.4%, in 2019. Meanwhile, the percentage of social assistance to GDP decreased from 0.97% to 0.80%. The increase of social pension payments to GDP is a combination of rising benefits and rising numbers of retirees. The per capita pension payment was RMB 8144 in 2012, and RMB 18,958 in 2020 with an annual growth rate of 11.1%. Meanwhile, nominal per capita GDP only grew 7.74% annually. This is because of the differences in social spending, and the reduction in income inequality among elderly in China while income inequality among working-age families is stagnant.

Figure 1 indicates China's social spending relative to other countries. The left panel plots total pension payments as a percentage of GDP, relative to its GDP per capita. This panel shows that China's pension payments are on par with the projected world average indicated by a regression line. However, the right panel of Figure 1 plots the social spending on working-age households relative to its GDP per capita, and we observe that China's figure is far below the projected world average.

Figure 1 shows that China is aggressively transferring money to the elderly, but not to working-age households. I believe this is largely due to a (mis)understanding of the consequences of the social welfare system. Official documents show that Chinese government is deeply suspicious of “welfarism.” President Xi recently instructed the government in “preventing ‘welfarism’ trap” as one of the key elements in reaching the “common prosperity” (Xi, August 21, 2021, “Qiushi”). Similar statements have repeatedly appeared in many government documents.

However, a large literature has convincingly shown that the “welfare dependent” essentially does not exist if the amount of transfers is not too large. In Banerjee et al. (2017), social assistance in developing countries did not generate disincentives to work since the amount of transfers is only about 10% of consumption. The first Covid-related government program in the US, The CARES Act, raised the unemployment benefit to be 47% higher than the labor income for a median worker. Petroksy-Nadeau and Valletta (2021) find that even such benefits did not generate incentives for people to quit their jobs. This is because the Covid-related unemployment benefits lasted only a few months. Therefore, the present value of the benefit is not large enough to generate disincentives to work.

Yet the literature has documented that transfers to the working-age poor could be effective in stimulating consumption (Gan et al., 2018). Social transfers are also beneficial for households' human capital accumulation (García & Saavedra, 2017). Both effects are critical for China's economy now and in the future.

In conclusion, the key to reducing income inequality in China is to substantially increase transfers to the working-age poor. However, doing so requires demystifying the widely held belief of “welfarism” among government officials.