By Gong Sen，Zhang Wenkui & Chen Changsheng

Research Report No 122, 2010

Ensuring and improving people's well-being involves employment promotion, income distribution, education, health care, housing guarantee, social assistance and social insurance, and the liable entities include individuals, families, employing units, communities and the State. This paper is focused on the basic social security provided by the State in terms of education, health care, housing, basic living allowances and old-age life. Of these security types, the first three are basic public services and the following two are related to social security in the narrow sense.

I. Strengthening and Enhancing Basic Social Security Is a Realistic and Effective Way for Expanding Domestic Demand

1. During 2010~2015, the domestic demand needs to be increased by an annual average of 1.2 trillion yuan to make up for the loss of the added value caused by the slowdown of export growth.

It is hard for China to keep its export growth at a fast pace as it did over the first 30 years since reform and opening up, though the world economy is beginning to revive slowly. Let's assume that the annual average export growth rate is 12% or so between 2010~2015, being 5.3 percentage points lower than that during 1978~2008 period. If China's annual average economic growth rate should remain around 8.5% during 2010~2015 period, then according to the preliminary calculation made at constant prices of 2008, the decline of the export growth will give rise to an insufficiency of the actual exports worth of 0.45 trillion yuan in 2010 and the insufficiency will reach 5.3 trillion yuan in 2015. And the annual average insufficiency during 2010~2015 period will amount to 2.2 trillion yuan. Given other conditions remaining unchanged, the reduction of exports will result in a reduction of added value of 0.22 trillion yuan in 2010 and the added value will reduce by 2.7 trillion yuan in 2015, incurring an average reduction of 1.08 trillion yuan each year before 2015. To make up for the demand insufficiency caused by the declining exports, based on the differences in added value rates of both domestic and foreign demand, the domestic demand needs to increase by 0.25 trillion yuan and 3 trillion yuan in 2010 and 2015 respectively and the domestic demand needs to increase by an annual average of 1.20 trillion yuan each year before 2015.

2. Proportion of expenditure spent by the Chinese Government on basic social security and the household consumption rate are both on the low side, which can be an option for expanding domestic demand.

In terms of the relationship between investment and consumption in China's domestic demand, investment has grown highly, while consumption has been crawling ahead for long. Moreover, the improvement of the investment efficiency is dependent on the growth of consumption. Therefore, to further tap the latent potentialities for the growth of the Chinese domestic demand calls for the accelerated growth of consumption.

According to the internationally current size of government revenue and expenditure inclusive of social insurance fund, the proportion of expenditure on basic social security (including education, health care and housing) in total expenditure spent by the governments of countries with their per-capita GDP reaching 3000~6000 US dollars in 2007 was 54.0% on an average (IMF.2008. Government Finance Statistics Yearbook, 2008.Washington, DC.), while such a proportion in China registered 38% or so in 2008 (figured out according to China Financial Yearbook, 2009, China Social Insurance Yearbook, 2009 and statistical bulletins on development of social undertakings). Comparing the two percentages, China has 16 percentage points less. In terms of the proportion of financial expenditure on basic guarantees in GDP, China is also distance away from countries with similar revenues. In terms of education, health care, housing security, social assistance and old-age life, the proportions reflected by countries with similar revenues are 4.5% (Wang Shanmai, "Giving Priority to Developing Social Security Requires Urgent Input", www.jyb.cn-China Education Journal, January 13, 2009), 2% (WHO, International Health Organisation.2006. World Health Report 2006. Geneva.), 1% (Liu Zhifeng, "Developing Low-rent Housing Is a Move for Improving the Urban Housing Security System", www.cppcc.people.com.cn, May 25, 2008), 1.4% (Weigand,C.and Margaret Grosh.2008.Levels and Patterns of Safety Net Spending in Developing and Transition Countries. Social Protection Discussion Paper. Washington, DC: World Bank.) and 1.4% [Asher, M. 2008. Chapter 6: Social Pensions in Four Middle-Income Countries. In Holzmann, Robert, et al. (eds.) Closing the Coverage Gap: The Role of Social Pensions and Other Retirement Income Transfers. Washington DC: World Bank.] respectively, with the five percentages adding up to 10.3%, while proportions of five types of financial expenditure spent by China in 2008 (figured out according to China Financial Yearbook, 2009, China Social Insurance Yearbook, 2009 and statistical bulletins on development of social undertakings) reached 3.48%, 1.2%, 0.1%, 0.63% and 0% respectively, adding up to 5.41%. Comparing the percentages between China and the aforesaid countries, China has 1.02, 0.8, 0.9, 0.77 and 1.4 percentage points less respectively, with a total of 4.89 percentage points less.

In terms of the per-capita GDP and the relationship between cultural factors and the household consumption rate, the household consumption rate of the East Asian countries with their per-capita GDP reaching 3000 US dollars or so should be around 60% (World Bank. www.worldbank.org/WDI.), while that of China was only 35.3% in 2008. Comparing these percentages, China has 25 percentage points less.

3. It is hard to depend mainly on changing the pattern of the primary distribution of national income to increase household consumption rate during the 12th Five-Year Plan period.

Payment for labor is proportioned much less in China's primary distribution of its national income, the absolute income level of residents grows slowly and the average trend of consumption has declined. Moreover, the income gap between regions, rural and urban areas, industries and social groups is widening. The overly concentrated household income is not conducive to the enhancement of the average consumption trend. Seemingly, some problems that crop up in the primary distribution have affected the consuming ability of residents and their consumption trend. Nonetheless, China is facing a growing world issue. The declining trend of China's labor share is basically in line with the "U Curve" (In the course of the economic development in various countries, the change of labor share in primary distribution shows the U Curve, namely, the labor share declines before it rises, with the turning point being approximately 6000 US dollars of GDP. Li Daokui, Liu Linlin & Wang Hongling: "U Curve of Labor Share Evolution in GDP", Economic Research, 1st Issue of 2009) supported by international statistics, and the widening income gap between Chinese residents also tallies with "Kuznets Curve" (Wang Xiaolu & Fan Gang: "An Analysis of the Trends of the Income Gap in China and the Influencing Factors", Economic Research, 10th Issue of 2005). According to Kuznets' analysis (Kuznets, S.1955.Economic growth and income inequality, American Economic Review, Vol.45.) of the changing income gap, a similarity exists between China and the countries of mature market economy, namely, industrialization and urbanization will initially cause and aggravate the low ratio of the labor share in income distribution and the growing disparity and will yet improve the income distribution in the long run.

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