“Determinants of Income Shares and the Stable Middle in post-Socialist China” with Giorgos Gouzoulis
Abstract: This paper uses Piketty et al. (2019)’s dataset to estimate the key drivers of China’s inter-decile income shares between 1978-2015. The key negative determinants of the bottom 50 percent are government consumption, trade openness, and unemployment rate. The stable middle 40 percent is explained by the positive effects of government consumption, financial liberalisation and public indebtedness that compensate for the adverse effects of trade openness. Further, we find that government consumption; trade openness, and unemployment rate are positive determinants of the top 10 percent. Two policy ideas emerge from these findings. First, China must overhaul its middle class urban-biased fiscal expenditure, and second, the Chinese pension system must be reformed to cover the entirety of its income distribution. Moreover, we argue that the convergence in the interests of the middle class and top incomes might have significant implications for the prospects of China’s democratic transition and theories of democracy.