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How Socialist Is Chinese Economy?

Economist Barry Naughton uses four criteria to assess how socialist Chinese economy is: capacity, intention, redistribution, and responsiveness.

Naughton, B. (2017). Is China socialist. Journal of Economic Perspectives, 31 (1), 3-24.

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Picture source: https://mitpress.mit.edu/sites/default/files/9780262640640.jpg

China has been transformed since Deng Xiaoping broke dramatically with Maoist ideology and the Maoist variant of socialism and introduced market-oriented economic reform and opening policy. Spectacular growth, powered by the expansion of markets, has made urban China into a mainly middle-class society and lifted hundreds of millions of rural residents out of poverty.  China’s economy has grown faster for longer than any other economy in history. Growth of per capita GDP at the rate of 7–8 percent per year for almost 40 years has meant 2014 GDP per capita is 20 times what is was in 1978.

Throughout these enormous changes, China has always officially claimed to be socialist. Since 1992, China has called itself a “socialist market economy.” The government in China has much more influence over the economy than in virtually any other middle-income or developed economy. State firms and state banks remain prominent. Government five-year plans command attention, both domestically and internationally.

What is the relationship between China’s government and the economy? And, thus, to what extent is it reasonable to think of China as a form of socialism ? In his recent paper “Is China socialsit ?” published in the Journal of Economic Pespectives , Barry Naughton, a Chinese economy expert, professor and Sokwanlok Chair at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego, attempts to answer this question. 

Barry Naughton is the author of The Chinese Economy: Transitions and Growth (MIT Press).

Naughton proposes four criteria to assess a socialist system: capacity, intention, redistribution, and responsiveness. First, a socialist government controls a sufficient share of the economy’s resources that it has the capacity to shape economic outcomes. One traditional definition of socialism includes “public ownership of the means of production,” but “capacity” is here broadened to include the ability to control assets and income streams, through taxation and regulatory authority. Second, a socialist government has the intention of shaping the economy to get outcomes that are different from what a noninterventionist market would produce. Third, because a socialist government typically justifies itself as benefitting those citizens who are less well off, it is natural to look for evidence of whether such policies are succeeding in the outcomes involving growth, social security, and pro-poor redistribution. Fourth, a socialist government should have some mechanism through which the broader population can influence the government’s economic and social policy, so that policy shows at least some partial responsiveness to the changing preferences of the population.

Based on the official statistical data, Naughton first assesses the Chinese government’s capacity to shape economy through the control over national income and national wealth. Then he analyzes the pro-growth incentive system for officials and China’s national-level Five-Year Plans to show how Chinese government intentionally steer the economy. Third, he evaluates the redistribution by showing the widening income inequality since economic reform and the record-breaking achievement in poverty reduction. Finally, he analyzes how responsive China’s government to popular demand is.

Capacity: control over national income and sovereign wealth

China’s government controls an unusually large proportion of national income flows, and these income streams have grown dramatically as a share of GDP since the mid-1990s. Figure 1 shows an expanded concept of government revenues that includes four main components: 1) budgetary revenues (not including social security ); 2) social insurance premiums; 3) land revenues; and 4) net income from state-owned enterprises. The first two components can be placed in both international and temporal context, while the final two can be traced over time in China, but lack clear international comparisons.

Generally, fiscal revenues as a share of GDP increase as an economy becomes richer. Low-income countries on average raise 14.5 percent of GDP in taxes; middle-income countries, 18.7 percent; and high-income countries, 32.5 percent. Thus, China was well below the low-income average in 1996 with 11 percent of GDP in fiscal revenues; and subsequently increased to well above the middle-income average at 21.8 percent of GDP in 2015.

In 2012, 30 OECD countries collected on average 22.4 percent of GDP in taxes, plus 10 percent of GDP in social security contributions. China’s fiscal revenue of 21.8 percent in 2015 excluding social security is thus already equal to the OECD average (and also above the US level of 18.9 percent).

This pattern is surprising not only because of China’s overall level of development,but also because China relies very little on personal income tax, the adoption of which is highly correlated with an increasing share of taxation in the economy. Personal income tax was only 1.3 percent of GDP in China in 2015, and property taxes are also small. Instead, taxes on goods and services (especially the value-added tax at 4.6 percent of GDP) and enterprise income taxes (4 percent of GDP) are the largest categories, along with a dizzying array of transaction taxes.

Social insurance contributions in China were 6.8 percent of GDP in 2015.While lower than the level for OECD countries, this is high for a middle-income country.

Adding ordinary budgetary revenues and social insurance contributions together gives 28.6 percent of GDP, which is clearly higher than China’s expected level as a middle-income economy.

Land revenue and SOE profits represent important dimensions of government control of the economy’s resource. Together they reached a peak in 2010 ,when land revenues accounted for 7.1 percent of GDP and after-tax profits of state-owned financial and nonfinancial enterprises were 6.1 percent of GDP. Since 2010, both have drifted down with the cooling of China’s economy, and they totaled 9.5percent of GDP in 2015.

Summing all four components, the Chinese government had direct or indirect control of 38 percent of GDP in 2015. Overall, the Chinese government is large, well-resourced, and potentially highly intrusive. This is both a distinctive feature of the Chinese economy in comparative context, and a dramatic change from the China of 20 years ago. China is a predominantly market economy in which government is unusually large, powerful, and intrusive. Moreover, government ownership remains substantial and concentrated in strategic, large-scale, and capital-intensive sectors of the economy.

In terms of the ownership of the means of production, China’s industry and agriculture have both become predominantly private and market-driven. But substantial government ownershi was retained in capital-intensive sectors: resources, utilities, and several heavy industrial sectors including steel, nonferrous metals, and transportation equipment. 

State ownership is more prevalent in the service sector than in industry. The government controls at least 85 percent of banking sector assets; the entire telecommunications and transport network; and essentially all education and scientific and technological services. In addition, the Communist Party owns and controls virtually all public media. Small-scale and labor-intensive services, such as retail and restaurants, are of course predominantly private, but government ownership and control is evident in the more capital-intensive and the more human capital-intensive sectors.

While the Chinese government owns a relatively small share of overall productive assets, the assets that it owns often give it a monopoly position (land, natural resources, transport, and communication), or are strategically positioned upstream in the production system.

Government assets in China are about three times GDP, and net assets (after accounting for debt) are almost one-and-a-half times GDP. The four primary government asset holdings are land, assets in nonprofit “public service units,” state-owned enterprises, and state-run banks and other financial enterprises. Public service units are government-owned nonprofit entities: they provide services for payment, and dominate the health care, environmental services, education, and cultural services sectors.

The value of government assets in China, relative to GDP, is much higher than in other countries. The US government has nonfinancial assets worth about 34 percent of GDP (12 percent of which is land; while 22 percent is made up of structures, equipment, and intellectual property assets)

Government debt in China is substantial, although not as large as in developed countries. The right-hand column of the table shows government debt in four main categories summing to 71 percent of GDP; in addition, state-owned enterprises have debt equal to 81 percent of GDP. These numbers are not small, but they are much less than gross assets. 

Redistribution: income inequality and poverty reduction

According to the widely used Human Development Index, which includes data on income, health, and education, China has improved from the “low human development” level of .42 in 1980 to the “high human development” level of .73 in 2014. This extraordinary improvement in overall living standards must be the starting point for any discussion of well-being and redistribution in China.

During the same period that incomes grew explosively, China’s income inequality substantially worsened. From being one of the most equal large-population societies in the world in the early 1980s, China has become a relatively unequal society.

The figure below shows China’s income Gini coefficient according to official household survey data. The Gini peaked at .49 in 2008–2009, and since then has drifted down slightly. The national Gini is much higher than both the within-urban and within-rural Gini because of the large gap between urban and rural incomes in China. 

China’s record in poverty alleviation since the start of the reform period has been excellent. According to World Bank data, the reduction in the absolute number of those living in poverty in China between 1981 and 2010 accounted for 95 percent of the total reduction worldwide of those in poverty.

1989–1992 when there were on average 260 million rural people below the poverty line, still finds a reduction of more than half to 114 million a decade later in 2001. By 2015, this total had again dropped by more than half, down to 56 million as of 2015. Agricultural and rural growth are the main drivers of poverty reduction in China, not government antipoverty programs.

Poverty reduction in the world and China Source: Angus Deaton, 2013

The government’s direct contribution to social welfare benefits is still strikingly small. In 2014, budgetary outlays for education by China’s government were 3.6 percent of GDP; for health, 1.6 percent of GDP; and for public housing, 0.8 percent of GDP. These are all strikingly low by comparative international standards. The limited scope of the effort is striking, especially when set against China’s massive physical asset investment effort.

Naughton concludes that China today clearly fulfills our first two criteria: the government has the capacity and intention to shape economic outcomes. On the third and fourth of our criteria—redistribution and responsiveness—China scores less highly than on the first two. China cannot be considered a socialist country until it makes much greater progress fulfilling its own declared policy objectives of universal social security, modest income redistribution, and amelioration of environmental problems.

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