Public Goods Provision and Chinese Economic Development

Abstract

The provision of more and better public goods is part of the Chinese efforts to emphasize the quality rather than the quantity of economic growth. Provision of public goods such as education, public health, elderly care, environmental preservation, protection, and restoration, basic research, infrastructure, social safety net, and alleviation of poverty has been vastly expanded in China since the establishment of the People’s Republic of China in 1949, with significant positive results in all these areas. The provision of public goods has also raised the potential GDP of the Chinese economy through its effects on increasing the aggregate demand for investment and consumption, the productivity of the labor force, and the rate of return on other fixed-asset investments. Public goods are by their very nature mostly “local”, and their provision is consistent with the Chinese “dual-circulation development strategy” with primary focus on domestic circulation. The provision of public goods also constitutes a form of redistribution in kind, e.g., clean air and water, which can be enjoyed by everyone, and hence also directly advances the goal of ”common prosperity”. Despite significant increase in the degree of income inequality in China since the mid-1980s, the welfare of all Chinese people has improved significantly. However, the provision of public goods frequently results in negative value-added at market prices, and therefore reduces, rather than enhances, the rate of growth of measured GDP. Finally, increasing the provision of public goods can be a significant source of growth of the domestic aggregate demand for both consumption and investment, over and above what increases in household income alone are able to provide. Maintaining an adequate growth of aggregate demand is essential for continued Chinese economic prosperity.