Understanding the Pattern of Growth and Equity in the People’s Republic of China

Understanding the Pattern of Growth and Equity in the People’s Republic of China Minquan Liu No. 331 December 2011 Asian Development Bank Institute Minquan Liu is a senior research fellow at the Asian Development Bank Institute (ADBI), Tokyo. The author would like to thank Min Yu, Narayan Poudel, Yue Wang, Xin Wu, Zhihai Xie, Yuming Cui, and Chiho Hasegawa for assistance with the tables and figures, and Shi Li for sharing with him his most recent work in progress. An earlier version of the paper was given at the 2011 PEGNet Conference, Hamburg, in September 2011, and privately circulated among some of the author’s present and past colleagues, and he would like to thank them and the participants at the PEGNet Conference for their comments and suggestions, in particular Jiantuo Yu, Qingjie Xia, Milo Vandemoortele, Kate Bird, Peter Morgan, and Mario Lamberte. However, the author alone is responsible for any error and omission. 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ADBI Working Paper 331. Tokyo: Asian Development Bank Institute. Available: Please contact the author for information about this paper. Email: ; ADBI Working Paper 331 Liu Abstract There are likely to be many factors which have together shaped the current pattern of growth and equity in the People’s Republic of China (PRC). Among them are the foundations laid in the pre-1978 era, especially in respect of land-related institutional reforms and social sector investments. These factors successfully complemented the subsequent export and foreign direct investment promotion strategies the PRC followed in the post-1978 years. However, given the large size of the PRC, while these strategies have helped to kick-start its economic take-off, the long-run growth of the country cannot depend on it. It will be important for the PRC in the forthcoming decades to expand its own domestic demand and renew social sector investments. Among other things, it will need to improve on its current income distributions. In particular, as well as wage increases, it will be important for the PRC to expand its social protection programs. This will help not only to boost its domestic demand, but also, more importantly, to contribute to a renewal and expansion of its human capital accumulation. In the long run, there is nothing more important than this if the PRC is to continue on its growth track, to modernize, and to catch up with today’s developed nations. Superior pre-1978 human capital accumulations have helped the PRC to compete with and outperform other similarly positioned economies in the decades before; continued growth of the economy and continued improvements of the living standards of its people in the forthcoming decades will require vast amounts of new investment in human capital. And to this, increased investments by the government, whether through direct spending or increased levels of social protection, may well prove to be of special importance. JEL Classification: O15, O53, F14, N35 Asian Development Bank Institute Kasumigaseki Building 8F 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: Fax: URL: E-mail: © 2011 Asian Development Bank Institute ADBI Working Paper 331 Liu Contents 1. Introduction ..................................................................................................................... 3 2. Recent Pattern of Economic Growth and Equity ............................................................. 4 3. Pre-1978 Origins ............................................................................................................ 6 4. The Post-1978 Reforms .................................................................................................11 5. The Burden of “Size” ......................................................................................................14 6. Implications ....................................................................................................................19 6.1 Growth and equity .................................................................................................19 6.2 Social sector investments and middle-income trap ...............................................21 6.3 Land and urbanization ..........................................................................................23 7. Conclusion .....................................................................................................................24 References