China’s Middle Class and the Future of the Political Regime (1)

China’s poverty reduction policies have been working very well since the country opened the economy. China’s growth after 1980 is very impressive. In 1981, 99.14% of the Chinese population were living by $3.10 or lower per day (World Development Indicator, 2017). Thirty-two years later, in 2013, only 11.09% of the population were living under $3.10. The poor in 1981 had moved their later generations to the higher income bracket (at least higher than $3.10 a day).

Poverty headcount

Source: World Development Indicator (2017)

Some of those who were poor in the past have jumped into the middle class group. To define the middle class,  McKinsey & Company (2013) used the range of income from $9,000 to $34,000 as the middle class household definition. From their survey results, they estimated that these households account for 68% of the urban households in 2012. Inside the middle-class, there are 54% that can be defined as the mass middle-income ($9,000-$16,000 per year) and 14% that can be defined as the upper middle class ($16,000-$34,000). McKinsey & Company forecast that by 2022, more than 75% of China’s urban consumers will become the middle class.

China Urban income group estimated

Source: Dominic Barton, Yougang Chen, and Amy Jin (McKinsey Quarterly, 2013)

Why do I offer these numbers to you?

I would like the confirm the picture of a growing middle class in China. This class used to be very weak compared to the ruling class during Mao’s revolution. They are now enjoying higher income and growing their power. You can see there are a lot of Chinese tourists traveling all over the world’s destinations and sending their children to get higher education in the western countries. The growing number and wealth of the middle class has been re-defining the power structure in China. According to China Tourism Research Institute, China had 120 million outbound tourists in 2015 compared to 40.95 million in 2007. And the money they spent in 2015 was $104.5 billion!

When people have reached a certain level of wealth they tend to demand non-material values, including freedom to choose political regime. Many people in China are becoming more and more frustrated by the lack of political accountability and transparency (The Economist, 2016). However, voting in China is still considered a distant dream. The poor have been excluded from the political power for a very long time. The re-defined structure of Chinese population by income is stimulating the revolutionary threats to the elite class. Even though the Chinese government policy set is centrally planned, the middle-class group can put more pressure on the government through some forms of threats such as demonstrations, strikes, or being more organized.

Daron Acemoglu and Robinson (2001)’s theory can be used for explaining the transition of the wealth redistribution and the political transition. Their theory was developed using the experiences of Western Europe and Latin America. The main argument is that in the democratic societies the poor impose higher taxes on the rich than in the non-democratic societies. This make the poor pro-democratic while the rich have incentive to oppose. The poor prefer to have higher tax since they do not have to contribute if their income is too low, and they will get the benefit from the tax. The rich prefer the low rate of tax because they are the ones who pay the most (assuming the progressive tax system is working well). How about the middle class? It depends. The upper-middle class might have closer preferred tax rate to the rich. The lower one will be more like the poor.

If the tax rate or the government policy in a non-democratic country is not serving the group which is the majority of the country, the tension will rise and create a higher possibility of that group making a credible threat or revolution to change the regime.

I am using the Three-Class Model of Acemoglu and Robinson (2006) for the framework to analyze this issue. The three-class model assumes that the society has three groups; the rich, the middle-class, and the poor. Whichever group has the largest number will be the dominant group. If the size of the poor group is bigger or equal to 50%, the majority voting will be the poor. Then the most preferred policy will tend to be from the poor.

China’s total population in 2012 was 1,350.695 million. The total poor from both urban and rural areas was around 21.28% of the total population or 287,441,532. The poor are not the majority in China anymore. The median voter is now the middle-class.

What is the preference of the middle class in China? What are factors that make the middle class movement? Will it change the political regime in China? I will continue on the next blog. See you next week!

 

References and Sources:

Acemoglu, D. and Robinson, J.A. (2001). A Theory of Political Transitions. The American Economic Review, 91(4), pp.938-963.

Acemoglu, D. and Robinson, J.A. (2006). Economic Origins of Dictatorship and Democracy, Cambrige University Press, New York, pp.259-260.

http://www.economist.com/news/special-report/21701653-chinas-middle-class-larger-richer-and-more-vocal-ever-threatens

http://www.mckinsey.com/industries/retail/our-insights/mapping-chinas-middle-class

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