Upgraded people skills

China's demand-side management boasts far more significance than merely a series of macroeconomic policies aimed at sustaining growth. Too much emphasis on investment in physical capital is a legacy of the old development pattern. However, in the long run, excessive investment in physical capital will lead to overcapacity, which will squeeze consumption to a certain extent, resulting in inadequate consumer demand.

While transitioning from the old development pattern relying on exports and investment toward the new development model driven by consumption and innovation, China should attach greater significance to investing in human capital, especially public funds to sustain long-term economic growth. Increasing government investment in human capital will also boost consumer spending.

Compared with the old one, the new development pattern takes the development of people as its foundation. The core of the new development mode is that government investment should focus on developing human capital.

Over the past few years, China has improved its investment in human capital, especially in terms of expenditure on education. Government spending on education has increased from over 4 percent of GDP in 2000 to over 5 percent in 2011. Thereafter, however, the proportion has barely changed, and it has even declined slightly since 2012.

One of the biggest reasons behind poor consumption is the slow growth of people's incomes. Inadequate investment in human capital has resulted in slower growth in labor productivity, undermining the growth of the broader economy. Therefore, greater investment in human capital is conducive to increasing labor productivity, and, by extension, people's incomes.

China should increase its investment in human capital to realize the sustainable and long-term growth of people's incomes, instead of only depending on income redistribution policies. Our calculation on the average annual increase in the wage incomes of people from different education backgrounds shows that those with college degrees or above are the only group that has realized sustained and rapid income growth.

It is fair to say that Chinese people understand the importance of investing in the development of human capital. A study by the China Household Income Project found that investment in human capital accelerates growth, especially among higher-income households. High-income households in both rural and urban areas are continuously increasing their investment in human capital, including their expenditure on education.

From 2013 to 2018, education expenditure per student in the top 20 percent of families with the highest income in China's cities and towns, surged 40 percent, while that of middle-income families increased by 25 percent. Chinese people have made increased input in human capital, as they are fully aware of the returns on such investments.

The inequality in educational opportunities and investment will widen the income gap. Several residential income surveys conducted by the China Household Income Project since the 1980s show that education has become an increasingly important driving force for income growth and widening income gaps.

Investing in human capital, therefore, is an effective way of not just promoting growth but also of distributing its benefits more fairly. Promoting equal investment in human capital in rural and urban areas and across different regions has a particularly important role to play in closing the wealth gap and boosting consumer spending.

Savings for preventative purposes, of which that for education takes up a large proportion, is undermining the spending power of Chinese households. Many Chinese families are constantly saving for their children's future education, which inevitably holds back their expenditure on other things.

Therefore, increasing government investment in human capital could to a certain extent be a substitute household savings for education, thereby boosting residential consumption. The government should fully recognize the potential of more human capital investment to boost residential consumption.

Moreover, increasing government investment in human capital could promote equality in education opportunities, create a larger middle-income group, narrow the income gap, and reduce relative poverty, therefore sustaining long-term consumption growth and economic growth. Research by the China Institute for Income Distribution at Beijing Normal University on education expenditure and its growth rate in different families shows that public investment in human capital is, to a certain extent, substitutable for private investment in this area. Greater public investment in education will, to a certain extent, reduce private investment in education. For instance, the public investment in human capital in urban areas is much higher than in rural areas; therefore, rural families' education expenditure accounts for a much larger share of household incomes than it does for their urban peers.

Therefore, increasing public investment in human capital in rural areas could to a certain extent boost consumer spending.

China's 14th Five-Year Plan for National Economic and Social Development (2021-25) calls for more substantial progress in promoting common prosperity for everyone. How can we realize the long-term development goal of common prosperity for our entire society? The premise for that is continuous innovation and continuous enhancement of labor productivity. That entails building a mechanism with policies aimed at distributing the benefits more fairly. Such a mechanism should be based on promoting the comprehensive development of human beings, especially the enhancement of people's capabilities and equal development opportunities for all. This is the most important starting point and strategic choice of realizing common prosperity.

The author is executive director of the China Institute for Income Distribution at Beijing Normal University. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.