GRI 2011

1. 中 国 GRI2011 CHINA REAL ESTATE INVESTORS & DEVELOPERS IN CHINA 全球不动产投资者与中国开发商决策层的私人聚会

2. China and Income Inequality June 2nd, 2011 Luca Silipo – Chief Economist for Asia Pacific

3. Income inequality introduced

4. Why inequality? Sources of growing inequality in China - Change in economic structure - Increase in the unemployment rate - Rural/Urban inequality - Coastal areas vs. rest of China inequality - Proper Rural or Urban inequality 4

5. Summary of this conversation • Income Inequality: good or bad? • Income Inequality and China: economic and social consequences • Income Inequality and China: corrective policies

6. Income Inequality: good or bad?

7. Is inequality good or bad? Excessively equal income distribution is unjust - Some people work harder than others - Forced income equality deprives of incentives needed for active participation in economic activities - Slow technical progress 7

8. Is inequality good or bad? Should growing inequality be tolerated: The Kuznets Curve 8

9. Is inequality good or bad? Should growing inequality be tolerated: The Kuznets Curve 9

10. Is inequality good or bad? Excessive inequality is bad - A threat to political stability - Limits the use of market instruments such as changes in prices or fine - Discourage basic norms of behavior among economic agents (trust and commitment) - Economically dysfunctional - “Guard labor” against Robin Hoods (Bowles 2006) 10

11. Social effects of excess inequality Excessive inequality is bad 11

12. Social effects of excess inequality Excessive inequality is bad 12

13. Social effects of excess inequality Excessive inequality is bad 13

14. Social effects of excess inequality Excessive inequality is bad 14

15. Social effects of excess inequality Excessive inequality is bad 15

16. Social effects of excess inequality Excessive inequality is bad 16

17. Social effects of excess inequality Excessive inequality is bad 17

18. Social effects of excess inequality Excessive inequality is bad 18

19. Social effects of excess inequality Excessive inequality is bad 19

20. Social effects of excess inequality Excessive inequality is bad 20

21. Social effects of excess inequality Excessive inequality is bad 21

22. Social effects of excess inequality Excessive inequality is bad 22

23. Social effects of excess inequality Excessive inequality is bad 23

24. Social effects of excess inequality Excessive inequality is bad 24

25. Social effects of excess inequality Excessive inequality is bad 25

26. Social effects of excess inequality Excessive inequality is bad 26

27. Social effects of excess inequality Excessive inequality is bad 27

28. Social effects of excess inequality Excessive inequality is bad 28

29. Income Inequality and China: economic and social consequences

30. Chinese housing and construction

31. Real Estate… identify well the causes Real estate in China is NOT a China-wide bubble

32. Real Estate… identify well the causes It is a problem of LOCAL bubbles

33. Real Estate… identify well the causes … but not generalised bubble.

34. Real Estate… identify well the causes If you don’t believe me… Taken from “Are housing prices rising too fast in China?”, Ahuja et al. 2010

35. Real Estate… identify well the causes If you don’t believe me…

36. Real Estate… a problem of income distribution It is not aggregate affordability but within ‘segments’ affordability that matters Luxury housing leading higher all residential prices Vicious circle: higher house prices also increase income inequality

37. Low consumption ratio C = cY

38. Insufficient consumption: a problem of Income inequality The policy makers must correct the problem of income inequality and not the non-existing real estate bubble

39. Income inequality: corrective policies

40. 1. Income Inequality and Inequality of opportunities Efforts Circumstances Outcome

41. 1. Income Inequality and Inequality of opportunities Inequality in efforts Inequality in circumstances Income inequality

42. 1. Income Inequality and Inequality of opportunities Income inequality reduction policies should be aimed at limiting inequality of opportunities (or compensating for them)! - Easing Access to education - Fighting gender and race discrimination - Limiting position rent - Leveling influence of parental background

43. 1. Income Inequality and Inequality of opportunities Chinese policies in the field of access to education have been dramatic in the last 30 years - “Nine year compulsory education” (1986) - Universal Primary School - Devolution of educational management to the local level - “Special Education” (1985, gifted vs laggard system) - “Law on Vocational School” (1996) - 1986: Scholarships and Student Loan systems - 2001: End of the “Iron Rice Bowl” policy

44. 2. Income Inequality and increase in wages An important source of income inequality is the decline in the share of wages in total income • From 56.5% in 1983 to 37% today • Household income proportion of final income declined by 15% since 1996. • 23.4% of employees have not got a raise in the past 5 years • Worsened by the 2009-2010 fiscal stimulus package

45. 2. Income Inequality and increase in wages Minimum wage policy Effect on household income can be ambiguous but an increase in minimum wage definitely narrows the income gaps

46. 2. Income Inequality and increase in wages Minimum wage policy Ambiguous effect on household income (crowding-out effects on the employment market) Positive effect on reducing income gaps (conditioned to the fact that present wage levels are lower than the market clearing level) Wage hikes are a long term policy and an irreversible trend

47. 2. Income Inequality and increase in wages Minimum wage policy Contrasting with the ‘inflation objective’ China should tolerate a higher inflation than 3-4% as: - Wages are increased in order to increase the consumption to GDP ratio - As China develops further, strong growth leads to increase in the cost of factor of production (Balassa-Samuelson-Penn effect)

48. 3. Income redistribution to a new social security system A Social Security Policy should address: Social insurance and social assistance A mandatory social insurance covering the risk of unemployment, healthcare expenses and retirement Social assistance for labor mobility, employment mobility and continued education Redefining the “Minimum Living Standard Guarantee” system addressing people in both chronic or temporary poverty Currently excludes migrant workers and college graduates on a hukou basis (moral hazard??!?!) Ignore marginally less poor in poor areas

49. 3. Income redistribution to a new social security system A Social Security Policy should address: Health Security “Resolution on establishing the System of Basic Medical Insurance for Workers” in 1998 Currently three types of Medicare systems Worker Basic Medical Insurance Urban Residents Basic Medical Insurance New Rural Cooperative Medical Insurance Several problems: Worker Basic Medical Insurance: high self-contribution makes it difficult for migrant workers or low wage earners New Rural Cooperative Medical Insurance: low reimbursement ratio

50. 3. Income redistribution to a new social security system A Social Security Policy should address: Consumption smoothing Eliminating consumption fluctuation due to income fluctuations typical of rural household causing transient poverty