Introduction to the Special Section: Poverty and Inequality in China

Abstract

Pre-reform China can be characterized as a country with equality of poverty—a largely egalitarian society with very low per capita GDP. In the late 1970s, hundreds of millions of people lived in absolute poverty. Economic reforms that began with the rural household production responsibility system in late 1978, and then spread into other sectors of the economy, have transformed China economically and socially. The annual growth rate has averaged 9% in the last quarter of a century. The 2005 per capita income is almost six times that of 1985. This unprecedented growth rate, coupled with government efforts in reducing poverty which first started in 1980, has led to remarkable poverty reduction, particularly in rural China. According to the World Bank, China lifted 422 million people out of poverty during 1981–2001. This large-scale poverty reduction in China owes a great deal to the rural production responsibility system, which is sometimes termed “second land reform”. Under this system, land was decollectivized and allocated to individual households on the basis of household size and household labor force. This ensured that early economic growth in China was pro-rural and inclusive. As a consequence, rural inequality declined and the urban–rural gap narrowed. Since the urban–rural gap comprises over 50% of China's total inequality, income distribution in China must have improved significantly over that period. This, together with high economic growth, necessarily translated into large drops in poverty. As the impact of rural reform leveled off1 and the reform emphasis was shifted to urban China in the mid 1980s, overall inequality in China stopped declining and started to climb. Since then, little attention had been paid to equity concerns until very recently. In other words, subsequent reforms were primarily targeted at improving economic efficiency, which prompted resource flows to coastal provinces and non-farming sectors. This market-driven mechanism of factor allocation has undoubtedly contributed to the remarkable growth in China, particularly in the relatively affluent areas and urban China, leading to an enlarged urban–rural gap and a growing regional inequality. From this perspective, the rich have gained more than the poor from reforms in China. It is precisely this worsening distribution that has caused the recent slowdown in poverty reduction, even reversal, in China. At present, the Chinese government is confronted with the poverty–growth–inequality triangle. While equity may have to be sacrificed in order to initiate and maintain growth, future poverty reduction cannot be achieved without improved distribution. Conversely, tackling inequality and poverty in China requires more resources for the less efficient rural sector and perhaps less productive regions, which would adversely affect national growth in the short run. However, growth cannot be sustained when inequality is high. This point is worth emphasizing as China's inequality is almost as severe as in some Latin American countries. Such an alarmingly high level of disparity may lead to crime, low investment in human capital, deteriorating work morale, and waste of resources. When reforms in the welfare system and social safety net lag behind as in China, the vulnerable and the disadvantaged are not protected. Under these circumstances, the problems of inequality and poverty are not merely a concern for growth considerations—they may threaten political and social stability, even undermine national sovereignty. The ongoing national campaign of “western development” launched in 1999, and the recent government initiative of “building a harmonious society,” echo well the importance and urgency of the inequality and poverty problems in contemporary China. It should be mentioned that the Millennium Development Goal of the United Nations (MDG)—halving global poverty during 1990 to 2015—would not have been on target today if China had not made astonishing progress in poverty reduction. Likewise, whether the MDG can ultimately be attained also depends, to a large extent, on how the poverty profile of China evolves in the next decade. Today, there are still around 150 million people living on less than US$1 a day in China, accounting for 18% of the global poor. The majority of the poor are rural residents in inland China. It is clear that growth alone is no longer sufficient for significant reduction in poverty as was the case. How to channel growth benefits to the bottom segment of the population is thus of utmost importance. This, in turn, appeals for analytical research to disentangle the poverty–growth–inequality triangle in China. It is against the above background that in 2004 the World Institute for Development Economics Research of the United Nations University (UNU-WIDER) launched the project on Poverty and Inequality in China. The project, directed by myself, aims at providing a more complete account of the inequality and poverty issues in China, including measurement, causes, consequences, and policy implications. Two international conferences were held under this project: one in Beijing in April 2005 (co-hosted by the Institute of Population and Labor Economics, Chinese Academy of Social Sciences) and the other in Helsinki in August 2005. Some 40 papers (written in English) were selected from over 300 submissions, and presented at these conferences.2 This Special Section represents part of the output of this project. The Special Section starts with the contribution of Osberg and Xu, focusing on how to set or choose the poverty line and poverty indicator. The authors argue that growing nations such as China should adopt the relative poverty line (i.e. equivalent incomes less than half the median) rather than the absolute poverty line (e.g., incomes below US$1 or $2 per day). Using the relative poverty line and Chinese data, the huge urban–rural gap in the incidence, depth, and inequality of poverty is confirmed. The authors then utilize alternative poverty measures to rank provinces according to the level of rural poverty. It is found that the ranking based on the average poverty gap ratio or FGT1 (the Foster–Greer–Thorbecke index of order 1) is remarkably consistent with that based on the benchmark SST (the Sen–Shorrocks–Thon index). It is thus concluded that the FGT1 can capture most of the information content of higher-order FGT or Sen family of poverty indices. In the second study, Wan and Zhang seek to explain why poverty is more severe in inland than in coastal China. Towards this objective, they propose a new decomposition methodology which can be used to attribute spatial differences or temporal changes in poverty, measured by any poverty index, into contributions made by determinants of poverty. Applying this method to China yields three major findings. First, the impact of globalization on poverty differs, depending on the indicator of globalization used, time period under consideration, and particular regions examined. Second, inequality and domestic capital were the two most important contributors to the poverty difference between inland and coastal China. Consequently, policy measures to assist poor regions in accumulating physical capital and tackling within-region inequality are urgently needed. Finally, globalization is found to work along and interacts with other poverty determinants. Therefore, the challenge is to keep close tabs on the circumstances on the ground and to ensure that globalization serves the poor. Turning to the theme of inequality, the third study, by Wang and Cai, addresses the issue of gender discrimination in urban China in the post-reform era. Based on a set of survey data at the individual level, the authors find that females are treated unfavorably in terms of employment and promotion opportunities, as well as wage payment. Decomposition of the male–female wage gap reveals that the main source of lower earnings for females lies in the unequal pay within sectors—a clear indication of sex discrimination. Human capital and other personal characteristics explain about 14% of intra-sectoral earnings disparity, 39% of the inter-sectoral earnings gap, and 16% of the overall earnings differential between male and female workers in urban China. Although these results do not imply huge gender gaps in the endowment of human resources (i.e. education and health), they are by no means negligible. It is noted that the earnings gap due to differences in sectoral attainment is relatively small. Needless to say, the three studies included here only touch on some aspects of the poverty–inequality–growth triangle in China. Many issues remain unexplored. For example, there is an urgent need to study the impact of incomplete reforms on inequality and poverty. Sector segregation was rather minimal in pre-reform China in terms of wage structure. As wage setting has decentralized while monopoly power has developed in some sectors due to incomplete reform or lack of second-generation reform, salary gaps across sectors have increased significantly. It would be important and interesting to analyze this kind of impact and its role in poverty and inequality outcomes. Also, the consequences of rising inequality seem to have been overlooked by the research community. This is rather disappointing given the increasing coverage of inequality-related incidents in the public media. For example, rural migrants are being blamed for crime increases in urban China. However, few realize that a main root cause of this is the unacceptable inequality in income and access to school, healthcare, and many other benefits between urban residents and migrants. Moreover, the size of the middle class in China is considered to be crucial for the stability of the country, and its dynamics may impinge on political reforms. Yet, analytical studies have not appeared which provide an assessment of the middle-class population, its composition, and relevant dynamics. Finally, it is imperative to evaluate policy recommendations in terms of feasibility and results. As one example, the campaign of “western development” has been in full swing with tremendous inputs, financial or non-financial. However, its impact on regional inequality is yet to be properly analyzed. Another example relates to the hukou or household registration system which has been blamed for the persistent urban–rural gap. And this is not a minority view. However, it is not clear how eliminating this restriction would help close the rural–urban or regional gap. An obvious counter example is the persistent gap in India where such administrative restriction is not instituted.