Policy measures to boost household consumption should be coordinated with efforts to build a comprehensive social safety net
In the current global context, China's economic growth this year and in the years to come will inevitably face challenges. When pressing ahead with supply-side structural reform, China should also pay attention to a new trend－economic growth tends to be constrained by weakening demand.
Demand-side reform is an indispensable part of the strategic deployments and policies recently unveiled by the central authorities. Institutional arrangements aimed at building a social welfare system that covers all people throughout their life and immediate measures targeted at meeting people's basic living demands are to be combined in a coordinated manner.
Establishing a social welfare system is not only a long-term task of institutional arrangements, but also a fairly urgent task for the present. China should make the immediate measures aimed at meeting people's living demands an organic part of the institutional arrangements.
The twin demographic shocks of population peaking and the aging of the population are not conducive to boosting household consumption, which ultimately requires the State to guarantee the supply of basic public services so as to weave a more reliable social safety net. From the perspective of stabilizing consumption and cushioning the effect of demand-side shocks, such long-term institutional arrangements could generate remarkable and instant reform dividends.
However, in the context of a rapidly aging society, if the country fails to cope well with the impacts of population peaking and negative growth, the acute problem of weak household demand is likely to turn into a chronic, stubborn one. If the growth of a certain year is less-than-expected－namely, slower than its potential, it may trigger long-term sluggish growth, hindering the process of modernization. Therefore, the emergency measures are not only absolutely necessary, but should also be coordinated with the institutional framework that produces long-term effects.
First, as China marches toward the echelon of "high-income countries", the reference system related to modernization should be updated accordingly. For instance, when we select reference countries for income comparison, the bottom line should be countries with higher per capita GDP than China and the ceiling should be those that have joined the ranks of "moderately developed countries". To achieve its goal of modernization by 2035, China must build a social welfare system that covers all people throughout their life, ensure people's access to childcare, education, employment, medical services, elderly care, housing and social assistance.
In a country's development process, people tend to need a greater provision of public goods and services such as social protection, mutual aid and social welfare, and economic activities have a greater demand for public goods and services including enforcing antitrust laws and other regulations, guaranteeing the performance of contracts, and culture and education. Since the government is the supplier or payer for such public goods and services, there is a positive correlation between per capita GDP and government expenditure. Such a statistical law has been recognized by many as Wagner's Law. World Bank data show that government expenditure as a percentage of GDP grows most rapidly during a period in which a country's per capita GDP increases from $10,000 to $23,000, indicating that this interval is the sprint stage of social welfare system construction.
Second, China will be within such a period from now until 2035, which will provide it a window of opportunity to eliminate the existing dual economy. It requires the country to substantially close the gap between urban and rural areas in labor productivity, residential income, living quality and accessibility of basic public services.
The following three tasks should be advanced in a coordinated manner. The first task is to speed up the equalization of access to basic public services for urban and rural residents. It could start by filling up the shortage of basic public services for rural residents.
The second task is to substantially reduce the share of the labor force employed in agriculture and increase the share of permanent residents and household registered population in urban areas by accelerating the new type of urbanization. The goal is to eliminate the 5.5-percentage-point gap between China and reference countries' average level of urbanization, and the 18.2-percentage-point gap between China and reference countries' average level in the share of labor force employed in agriculture.
The third task is to advance rural vitalization by focusing on modernization tasks for agriculture and rural areas. China should enhance labor productivity in the agricultural sector by increasing the scale of operation and transferring the rural labor force to nonagricultural industries, so as to change the status quo that China's agricultural labor productivity is a meager 30 percent of the reference countries' average level.
Last but not least, with stabilizing household income and consumption as the goal and ensuring people's livelihoods and improving weak links as key measures, China should strive to achieve the growth target set for 2022, thus laying a solid foundation for reasonable economic growth rate in the 10-plus years to come. Small- and medium-sized enterprises, micro businesses, individual business owners, laborers with poor job stability and the low-income group always bear the brunt of a sluggish economy. Because of the COVID-19 pandemic and the prevention and control measures, a large number of such market entities have encountered great difficulties and laborers employed in relevant sectors have been hit harder than others. Therefore, policies aimed at stabilizing the economy should be formulated and implemented on two fronts－protecting market entities with better implementation of supporting policies and spurring household consumption by making policies specific to individuals and families.
These policies will only generate sustainable effects when advanced in a coordinated manner and supporting each other. On the one hand, market entities are constantly changing, expanding or contracting, prospering or withering. On the other side, people's basic living demands drive household consumption which is the prerequisite for market entities' survival. Therefore, protecting market entities requires targeted measures, proper timing and proper limits, while policies aimed at stabilizing household consumption should be inclusive, stable and sustainable.
