Chinese government should provide vehicle insurance to delivery drivers

flood

Abstract: Natural disasters such as recent floods have caused huge economic loss to the delivery services in China. Many delivery drivers, also known as riders in China, had their vehicles damaged during these disasters and hence lost their jobs. To help future potential victims of natural disasters recover from their loss, I propose a special kind of vehicle insurance conditioned on natural disasters. I will also argue that this insurance is most helpful to the Chinese economy if it is financed by the government. For readers who can read Chinese, I have also prepared a Chinese version of this post. The Chinese version is intentionally made anonymous, and please feel free to distribute it.

This summer, a great number of provinces in China have experienced excessive rainfall and the consequent floods. Even in developed cities, such as Shanghai, many streets are covered with water because of the dysfunction of sewers. Many riders have seen their vehicles damaged when crossing these flooded areas. It is worth noting that a rider earns in average 3 CNY per order while a typical electric two-wheeled vehicle usually costs 1000 CNY. Given that these vehicles are the riders’ personal properties (instead of being provided by their employers), a rider losing his vehicle can consequently lose his job. Electric two-wheeled vehicle

It is thus essential to provide insurance to the riders. In the current market, there do exist some commercial insurance products protecting one’s vehicle, but they are in effect only when the damage is due to a traffic accident. They do not say a word when the damage is due to natural disasters. Therefore, it is necessary to design a new type of insurance taking into account the natural conditions as well as the rider group’s intrinsic risk.

The remaining issue is then who should finance this insurance. Possible candidates are riders, consumers, platforms, and the government. In the following, I will discuss these candidates one by one, in an attempt to find the most appropriate candidate for this task.

Riders (mutual insurance)

Riders can set up mutual insurance among them by each contributing a fee to a joint account. When one’s vehicle is damaged, he gets reimbursed from the joint account. Then, no one would lose the job merely because they could not afford a new vehicle after losing the old one. This strategy works, but it does not change the fact that riders, as a whole, are losing money because of the natural disasters. In the long run, the rider group’s average revenue decreases, and fewer people are willing to be riders.

This phenomenon is better explained in economic parlance. We say that the aggregate supply (AS) curve is shifted to the left due to the shock caused by the natural disaster. The market moves from one equilibrium (a) to a new one (b). During this process, prices go upward, and the GDP decreases. The economy is then in stagflation.

rider

Consumers (extra delivery fee)

Consumers can buy insurance for riders by paying an extra delivery fee per order. This strategy transfers the loss of riders onto consumers; it does not alter the fact that the industry, as a whole, suffers the loss. In consequence, the purchasing power of the consumers decreases. Consumers will buy fewer goods.

In this case, the aggregate demand (AD) curve is shifted to the left. During the process, prices drop, and the GDP falls. The economy is then in recession.

consumer

Platforms (subsidy)

In the Chinese e-commerce ecosystem, the riders are employed by some platforms. These platforms match consumers and small retail businesses and send the riders to do the delivery work. Instead of providing them with a vehicle, the platforms hire only people already owning a vehicle.

In this background, the platforms can offer to reimburse riders’ loss in order to encourage them to stay in this industry. To finance this insurance, the platforms need to either reduce the expenditure elsewhere or charge higher fees from consumers elsewhere. If the platforms reduce the expenditure, the AS curve will be shifted to the left. If the platforms charge higher fees, the AD curve will be shifted to the left. Therefore, the consequence of subsidies from the platforms is the weighted average of the above two cases. Both cases will reduce the GDP (the movement of prices depends on the detailed arrangement).

platform

Government (subsidy)

Instead of letting the platforms do the work, the government can play a more active role by offering this subsidy. Each time a vehicle is damaged, the government reimburses the rider, and the rider then buys a new one from the vehicle maker.

Although the subsidy takes a monetary form, from the government straight to the riders, it looks as if the government was buying vehicles for the riders. The situation is equivalent to that the government buys vehicles directly from vehicle makers, in the form of government spending, and sends it to the riders.

This policy will shift the AD curve to the right. During this process, GDP rises, and prices rise.

government

Among the above four strategies, the government subsidy is the only one able to raise the GDP and the employment rate. The only inconvenience is the potential consequence of rising prices and fiscal deficit. In the following, I will discuss these two issues.

Strategy AS AD GDP Price
Rider left   Down Up (Retail)
Consumer   Left Down Down (Retail)
Platform Left Left Down Depends
Government   Right Up Up (Industry)

Inflation caused by the government subsidy

First of all, mutual insurance among riders can also lead to inflation. The difference between the degrees of inflation of these two strategies depends on riders’ sensitivity to the revenue. The more sensitive the riders are, the higher the inflation caused by mutual insurance is. Given that riders belong to low-income groups, they are highly sensitive to the revenue. Therefore, mutual insurance will lead to higher inflation, and thus the inflation caused by government subsidies is relatively milder.

Moreover, the inflation caused by the two strategies is reflected in different aspects. Mutual insurance mainly leads to the rise of retail prices, while the government subsidy primarily leads to the rise of industrial product prices (government purchase stimulates the need for industrial products). Given the fact that, in 2020, industrial companies are overproducing, and the industrial product prices are falling, the strategy of government subsidies can offset these adverse effects.

By the way, it is obvious, but it may not be straightforward to non-professional readers, that doing nothing is equivalent to the mutual insurance strategy in the macroeconomic aspect. They both cause inflation.

Fiscal deficit caused by the government subsidy

Although the government subsidy can worsen the fiscal deficit, the government can expect to obtain higher tax income in the next fiscal year thanks to the higher GDP and employment rate.

Besides, it is wiser to judge government subsides by contrasting it with other fiscal policies. That is, to judge with respect to opportunity cost. As far as I can imagine, government subsidies have three advantages:

  1. Direct subsidies from the government to the riders go through less intermediate parties and hence reduce the possibility of corruption. Also, these platforms have more rigorous and transparent management.
  2. These subsidies are unlikely to go into the stock market or the real estate market compared to other stimuli.
  3. These subsidies can efficiently stimulate the economy and increase the employment rate in contrast to investing in hi-tech companies whose risk is substantial.
  Risk of Corruption Inflow into Stock/Real Estate Market Stability of Return
Subsidies to riders Low Low High
Other stimulus High High Low

Conclusion

The government can increase the GDP and the employment rate by providing riders with vehicle insurances. This policy may lead to a (mild) increase in industrial product prices, but it is acceptable and even appreciated in the context of falling industrial product prices. This policy, in contrast to other stimuli, is less likely to subject to corruption and inflow into the stock and real estate market and has higher return stability. Besides the riders, this policy can be further extended to good and passenger transport.

Written on August 8, 2020