Zhiwu Chen: China’s Challenge on Economic Transformation


China's Challenge on Economic Transformation

— Institutional Factors Suppressing Consumption Growth

Zhiwu  CHEN

Professor, Yale University

In the last half century, the proportion of household consumption in GDP of China decreased from 69% in 1952 to 35% 2004. In comparison, the share of Chinese government expenditure in GDP during the same period rose from 16% to 30%. These patterns of China are quiet different from other countries. Share of household consumption in GDP of the United States and Brazil rose in the last half century. The share of household consumption in GDP of Russia increased substantially after the dissolution of Soviet Union. Share of government expenditure in GDP for these countries decreases or stabilizes.

China differs from other countries for two institutional reasons. Firstly, China is not following democratic constitution. In countries with democratic constitution, taxation and government budget are restricted by congress and public. In Contrast, taxation is much easier in China. Between 1995 and 2007, tax income of Chinese government increased by six times. During the same period, per capita disposable income of urban households and per capita net income of rural households increased only by 1.6 times and 1.2 times respectively.

Secondly, proportion of stated-owned economy is still high in China. Stated-owned economy squeezes household consumption. Our study on 70 countries using sample between 1980­ and 2003 found that the higher the share of state-owned economy the lower the propensity of consume. While households enjoy both labor income and asset income in a private economy, households hardly benefit from capital gain of stated-owned assets in a state-owned economy.

My suggestions to break the institutional barriers on consumption are the following. Firstly, distribute lands to rural households in rural areas. Secondly, turn state-owned assets into national equity funds and distribute them to all Chinese citizens. Government, however, retains the rights supervising and managing these funds. Finally, deepen democratic reform to restrict administration power.

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