Author: Jayati Ghosh
Publications: The Asian Age
Date: January 9, 2005
Introduction: Regional inequality also increased
over the Nineties, in particular, the difference between inland and coastal
China. The three largest cities of Beijing, Tianjin and Shanghai, with high
levels of industrialisation and access to the coast or navigable waters, were
able to reap the full benefits of public infrastructure expansion and export
promotion, and therefore attracted substantial FDI inflows.
There is much international interest in China's
economy, because of its remarkable growth over the past quarter century. Recently,
attention has also focused on the fact that this growth has been associated
with significant increases in inequality in both income and wealth distribution,
which were relatively low during the central planning period.
Two new reports also focus specifically on
this issue of inequality in China, and provide important new information on
recent patterns in this regard: the recently released "China Human Development
Report" (CHDR) 2005 and an OECD report on income disparities in China.
Both of them reinforce the perceptions of
observers and analysts that economic inequalities have increased sharply over
the economic reform period since the early Eighties, and this has been especially
marked since the substantial opening up of the economy since the early Nineties.
By the most popular measure of inequality - the Gini coefficient - consumption
inequality in China is now among the highest in developing countries, at 45
per cent.
Inequality between urban and rural areas has
also increased. The ratio of urban to rural per capita income increased from
1.86 in 1985 to 2.47 in 1997 to 3.11 in 2002. But even this may underestimate
the actual rural-urban income gaps. As the CHDR 2005 points out, "if
public housing subsidies, private housing imputed rent, pension, free medical
care, and educational subsidies were included, the actual per capita income
of urban residents in 2002 would increase by 3,600 to 3,900 yuan, bringing
the urban-rural income ratio to about four-fold instead of the 3.2-fold acknowledged
by official figures" (page 27). This would make rural-urban inequality
in China among the highest in the world.
Regional inequality also increased over the
Nineties, in particular, the difference between inland and coastal China.
The three largest cities of Beijing, Tianjin and Shanghai, with high levels
of industrialisation and access to the coast or navigable waters, were able
to reap the full benefits of public infrastructure expansion and export promotion,
and therefore attracted substantial FDI inflows.
The central region, the agricultural heartland,
reaped benefits from deregulation in the early phase of the reform period
and had a growth rate of 7.7 per cent, higher than the national average, between
1979 and 1984. However, the subsequent period saw growth rates fall as agricultural
expansion reached its limit. With the lack of access to the mainland, compounded
by difficult terrain and lack of mineral resources, western China has lagged
behind average growth rates in the post planning period, especially in the
Nineties.
The disparity between rural and urban areas
has been significantly accounted for by the growing gap between wages in agriculture
which is dominant in rural areas and wages in industry and services which
predominate in urban areas. The ratio of industrial wages to agricultural
wages, which has always been high since 1980, has experienced a rising trend.
This trend was even sharper in the ratio between most of the service sector
wages and agricultural wages. The remarkable rise in service sector wages
and to a certain extent in industrial wages has therefore not benefited the
rural population much.
New agricultural policies that are now trying
to regularise property rights in land in accordance with the structures of
a market economy are likely to have severe adverse impact on the rural population,
since China's egalitarian distribution of land has had a strong equalising
effect on the distribution of farm income. Recently there have been sharp
increases in wealth inequality, driven by land ownership in particular.
While external liberalisation may have facilitated
more rapid growth, it has also been a major factor behind increasing inequalities.
Part of this is due to the basic nature of FDI flows, which choose safe destinations
that are already somewhat developed. That is why foreign investment in the
coastal regions exceeded that in the interior regions by far - in 2000, foreign
investments in the eastern region were more than 85 per cent of total FDI.
Public resource mobilisation has shown an
inequalising tendency and a bias towards richer, coastal areas. Before economic
reform, there was a centralised budget and an equitable distribution of the
resources generated from taxes and the profits of the state owned enterprises.
The rich provinces were required to turn over large surpluses to the government
while the poorer provinces received large subsidies. However, as profitability
of the SOEs declined in the reform era, the system was marked by chaos with
local governments imposing other revenue raising measures. The share of Central
revenues and consequently, the ability of the Central government to spend
on physical and social infrastructure, declined considerably.
Industrial growth in the reform era has been
very high, but even then, patterns of development have encouraged the forces
of inequality. There has been acute capital-deepening in new enterprises,
which have replaced traditional ones, so employment elasticity in manufacturing
has been very low. Service sector employment growth has been inadequate to
meet the needs of the labour force, and also typically service sector employment
has required a higher level of skill which much of China's population, especially
in rural interior areas, has not possessed. Further, reduced subsidies and
greater external competition faced by state-owned enterprises (SOEs) have
reduced their profitability and employment generation potential.
Restrictions on labour movements have been
one important factor behind rural-urban inequalities in China. The origin
of this lies in the Hukou, or household registration system, which was started
during the Central planning era. Individuals were tied to their birthplace
and given a household-based residence status at birth. Only approved urban
registered residents were allowed to live and work in urban areas, and were
entitled to receive certain social benefits such as education, housing and
healthcare.
From the Eighties onwards, some rural migrants
were granted temporary residence permits that allowed them to remain in cities
and enabled them to access some social services, though at excessively high
fees especially when compared to urban residents. The larger part of the migrant
population, however, did not qualify for temporary residence permits, and
had to remain in the informal sector without access to the public utilities
and other benefits available to urban residents.
In addition, rural migrant workers in cities
often face discrimination as a result of local regulations, being charged
various "administration fees." They also face harsher and more unhealthy
and dangerous working conditions. All this has added to inequalities in access
to income and public services among the migrant community and led to severe
poverty among migrants.
Recently, the government of China seems to
have recognised the growing problems of inequality and poverty. There has
been a specific attempt to develop infrastructure and natural minerals of
the interior regions to generate incomes. The recent strategies of developing
the west and revitalising the northeast have involved funding new infrastructure
projects and increasing fiscal transfers to these areas. Other recent efforts
include expanding the security net and providing pensions and unemployment
insurance which was started in the Eighties, allowing some relaxation in migration
norms, the launch of poverty relief programmes (including the aid-the-poor
fund) on a much wider scale than before, and extension and some decentralisation
of the banking sector to make credit accessible to interior and rural areas.
Addressing the problems of poverty and inequality
in China will require wide-ranging and multi-pronged policies. Fortunately,
the government still retains enough control over crucial economic levers to
ensure a redirection of growth patterns in more progressive ways.
