Peking University, March 18, 2021: More public funds needed to adjust primary income distribution and improve well-being of low-income households.

Although Chinese residents' incomes have seen remarkable growth, uneven distribution which has escalated in recent years remains to be addressed.

China's Gini coefficient rose from 0.479 in 2003 to 0.491 in 2008. While it started to decline in 2009 and fell to 0.462 in 2015, it then rebounded and reached 0.474 in 2018.The Gini coefficient is a value between 0 and 1. A higher number indicates a greater level of income inequality.

The causes of the uneven income distribution and regional gaps are as follows.

First, the proportion of wages in residents' income has declined. The share of property income in the total also remains low, especially for rural residents. For different groups, the main income resources which range from wages, business operations, and property to transfer income can differ. The main sources of urban residents' income are wages, while the proportion of per capita wage income of Chinese residents in the nationwide per capita disposable income dropped from 56.9 percent in 2013 to 55.9 percent in 2019.

Due to the gradual increase of asset prices and the accumulation of household assets, the household wealth-to-income ratio in China rose from 114.77 percent in 1978 to 487.35 percent in 2015, with the growth rate higher than those of developed countries such as the United States and France. While the proportion of China's per capita property income in the total per capita disposable income climbed from 7.8 percent in 2013 to 8.5 percent in 2019, it is still largely below those of developed countries. The property income of Chinese rural residents accounted for about 2 percent of the total in 2019 and came in at about 2.6 percent in the first three quarters of 2020.

Second, industrial restructuring, especially the rapid shrinking share of the secondary industry in the national economy in recent years, has affected income distribution. The rapid development of the tertiary industry by promoting de-industrialization has shrunk the employment of low-skilled workers and caused their wages to increase slowly, which has widened the income gap as the income of high-skilled talents continues to rise.

Third, the rapid decline of the proportion of public funds in the government's total expenditure is also an influential factor. Public funds of an appropriate proportion can make the government more capable of adjusting primary income distribution and redistribution. By promoting transfer payments, providing public products and improving social security, the government can improve the well-being of low-income households and narrow the income gap. The increase of the proportion of public funds can make the Gini coefficient decline and address unfair income distribution. But although it remains higher than those of developed countries, in recent years, the proportion of China's public funds in the total expenditure has declined, which has weakened the government's ability to adjust income distribution.

Fourth, income distribution has been affected by the progress of new technologies. The accelerated evolution of technologies, including 5G, big data and artificial intelligence, has changed industrial production and daily life in China greatly. New-generation technologies, such as AI and robots, will lead to the demand for human workers in the manufacturing industry to decline, which will affect the income of low-and middle-income groups. However, employees with technological know-how are more likely to gain higher incomes by riding the tide of internet-based finance and blockchain technologies, which will further widen the income gap.

To increase people's incomes and achieve common prosperity, efforts are needed to make the distribution system more market-oriented for low-and middle-income groups to share the benefits of China's GDP growth. The market-oriented mechanism for the remuneration of production factors, such as labor, capital, land, knowledge, technology, management and data, needs to be improved. In primary distribution, the proportion of labor remuneration in GDP needs to be increased.

The mobility of urban and rural production factors needs to be boosted, as this can help narrow the income gap and optimize the allocation of resources. Related departments are supposed to promote land system reforms to drive the efficient circulation of rural land and improve the property income of rural residents in line with the guideline on improving the market-oriented allocation mechanism of production factors that was issued last year.

The government also needs to promote the application of new technologies, including 5G, AI and big data, to benefit more people and lower the access to technologies for low-and middle-income groups by encouraging them to participate in internet-based finance, e-commerce and livestreaming. It can also promote internet-based finance to support farmers to expand agricultural production and adopt modern agricultural practices to increase their income.

The scale of the secondary industry, especially the manufacturing industry, needs to be maintained during industrial restructuring. In total, the government needs to keep the proportion of the secondary industry above 30 percent, which can improve China's labor productivity and improve employment and raise the income of low-and middle-income groups. While maintaining the secondary industry, efforts are needed to promote high-quality development of the manufacturing industry by advancing breakthroughs in key technologies and improving industrial chains to increase the income of industrial insiders and narrow the income gap.

The government also needs to improve public funds to enhance its capability to adjust income distribution. The proportion of China's public funds in total national revenue fell from 69 percent in 1978 when the reform and opening-up policy was launched to 31 percent in 2015. It should raise the proportion of public funds to the range of 30 to 35 percent to boost its role in income distribution and develop institutions and systems for fair income distribution.

The author is Gong Liutang, professor with Guanghua School of Management at Peking University.

Source: China Daily