In China today, poverty refers mainly to the rural poor as decades of economic growth has largely eradicated urban poverty. The dramatic progress in reducing poverty over the past three decades in China is well known. According to the World Bank, more than 500 million people were lifted out of extreme poverty as China’s poverty rate fell from 88 percent in 1981 to 6.5 percent in 2012, as measured by the percentage of people living on the equivalent of US$1.90 or less per day in 2011 purchasing price parity terms.
Since the start of far-reaching economic reforms in the late 1970s, growth has fueled a remarkable increase in per capita income helping to lift more people out of poverty than anywhere else in the world: its per capita income has increased fivefold between 1990 and 2000, from $200 to $1,000. Between 2000 and 2010, per capita income also rose by the same rate, from $1,000 to $5,000, moving China into the ranks of middle-income countries. Between 1990 and 2005, China’s progress accounted for more than three-quarters of global poverty reduction and a big factor in why the world reached the UN millennium development goal of halving extreme poverty. This incredible success was delivered by a combination of a rapidly expanding labour market, driven by a protracted period of economic growth, and a series of government transfers such as an urban subsidy, and the introduction of a rural pension. Independent studies by Gallup indicate the poverty rate in China fell from 26% in 2007 to 7% by 2012, although World Bank extrapolations suggest that the percentage of the population living below the international poverty line continued to fall to 4.1 percent in 2014.
At the same time, however, income disparities have increased. The growing income inequality is illustrated most clearly by the differences in living standards between the urban, coastal areas and the rural, inland regions. There have also been increases in the inequality of health and education outcomes, and increased attention to unequal outcomes for ethnic minorities. To alleviate the situation, the Chinese government shifted its policy in recent years to encourage urban migration, fund education, health, and transportation infastructure for poor areas and poor households. In addition the government is attempting to rebalance the economy away from investment and exports toward domestic consumption and public services, to help reduce social disparities. Relocation of the poor from poverty stricken regions to more developed urban areas is also being implemented as part of the holistic plan to tackle rural poverty.
Since Deng Xiaoping began instituting market reforms in the late 1970s, China has been among the most rapidly growing economies in the world, regularly exceeding 10 percent GDP growth annually. This growth has led to a substantial increase in real living standards and a marked decline in poverty. Between 1981 and 2008, the proportion of China's population living on less than $1.25/day is estimated to have fallen from 85% to 13.1%, meaning that roughly 600 million people were taken out of poverty. At the same time, this rapid change has brought with it different kinds of stresses. China faces serious natural resource scarcity and environmental degradation. It has also seen growing disparities as people in different parts of the country and with different characteristics have benefited from the growth at different rates.
Starting from the pre-reform situation, some increase in income inequality was inevitable, as favored coastal urban locations benefited first from the opening policy, and as the small stock of educated people found new opportunities. However, particular features of Chinese policy may have exacerbated rather than mitigated growing disparities. The household registration (hukou) system kept rural-urban migration below what it otherwise would have been, and contributed to the development of one of the largest rural-urban income divides in the world. Weak tenure over rural land also limited the ability of peasants to benefit from their primary asset.
Aside from income inequality, there has also been an increase in inequality of educational outcomes and health status, partly the result of China’s uniquely decentralized fiscal system, in which local government has been primarily responsible for funding basic health and education. Poor localities have not been able to fund these services, and poor households have not been able to afford the high private cost of basic education and healthcare.
The large trade surplus that has emerged in China has exacerbated the inequalities, and makes them harder to address. The trade surplus stimulates the urban manufacturing sector, which is already relatively well off. It limits the government’s scope to increase funding for public services such as rural health and education. The government has been trying to rebalance China’s production away from investment and exports towards domestic consumption and services, to improve the country’s long-term macroeconomic health and the situation of the relatively poor in China.
Recent government measures to reduce disparities including relaxation of the hukou system, abolition of the agricultural tax, and increased central transfers to fund health and education in rural areas.
China has maintained a high growth rate for more than 30 years since the beginning of economic reform in 1978, and this sustained growth has generated a huge increase in average living standards. 25 years ago, China had many characteristics in common with the rest of developing Asia: large population, low per capita income, and resource scarcity on a per capita basis. But in the 15 years from 1990–2005, China averaged per capita growth of 8.7%
The whole reform program is often referred to in brief as the "open door policy". This highlights that a key component of Chinese reform has been trade liberalization and opening up to foreign direct investment, but not opening the capital account more generally to portfolio flows. China improved its human capital, opened up to foreign trade and investment, and created a better investment climate for the private sector.
After joining the WTO China’s average tariffs have dropped below 100%, and to around 5% for manufactured imports. It initially welcomed foreign investment into "special economic zones". Some of these zones were very large, amounting to urban areas of 20 million people or more. The positive impact of foreign investment in these locations led to a more general opening up of the economy to foreign investment, with the result that China became the largest recipient of direct investment flows in the 1990s.
The opening up measures have been accompanied by improvements in the investment climate. Particularly in the coastal areas, cities have developed their investment climates. In these cities, the private sector accounts for 90% or more of manufacturing assets and production. Out 2005, average pretax rate of return for domestic private firms was the same as that for foreign-invested firms. Local governments in coastal cities have lowered loss of output due to unreliable power supply to 1.0% and customs clearance time for imports has been lowered in Chinese cities to 3.3 days.
China’s sustained growth fueled historically unprecedented poverty reduction. The World Bank uses a poverty line based on household real consumption (including consumption of own-produced crops and other goods), set at $1 per day measured at Purchasing Power Parity. In most low-income countries this amount is sufficient to guarantee each person about 1000 calories of nutrition per day, plus other basic necessities. In 2007, this line corresponds to about 2,836 RMB per year. Based on household surveys, the poverty rate in China in 1981 was 63% of the population. This rate declined to 10% in 2004, indicating that about 500 million people have climbed out of poverty during this period.
This poverty reduction has occurred in waves. The shift to the household responsibility system propelled a large increase in agricultural output, and poverty was cut in half over the short period from 1981 to 1987. From 1987 to 1993 poverty reduction stagnated, then resumed again. From 1996 to 2001 there was once more relatively little poverty reduction. Since China joined the WTO in 2001, however, poverty reduction resumed at a very rapid rate, and poverty was cut by a third in just three years.
Taken from the Asian Development Bank, there was an estimated average annual growth rate of 0.5% in China between 2010-2015. This brought the Chinese population to 1.37 billion in 2015. It is important to note that 7.2% of the Chinese population live below the national poverty line.
China’s growth has been so rapid that virtually every household has benefited significantly, fueling the steep drop in poverty. However, different people have benefited to very different extents, so that inequality has risen during the reform period. This is true for inequality in household income or consumption, as well as for inequality in important social outcomes such as health status or educational attainment. Concerning household consumption, the Gini measure of inequality increased from 0.31 at the beginning of reform to 0.45 in 2004. To some extent this rise in inequality is the natural result of the market forces that have generated the strong growth; but to some extent it is "artificial" in the sense that various government policies exacerbate the tendencies toward higher inequality, rather than mitigate them. Changes to some policies could halt or even reverse the increasing inequality. (See List of countries by income equality.)
The Nobel Prize-winning economist Sir Arthur Lewis noted that "development must be inegalitarian because it does not start in every part of the economy at the same time" in 1954. China classically manifests two of the characteristics of development that Lewis had in mind: rising return to education and rural-urban migration. As an underdeveloped country, China began its reform with relatively few highly educated people, and with a small minority of the population (20%) living in cities, where labor productivity was about twice the level as in the countryside.
In pre-reform China there was very little return to education manifested in salaries. Cab drivers and college professors had similar incomes. Economic reform has created a labor market in which people can search for higher pay, and one result of this is that salaries for educated people have gone up dramatically. In the short period between 1988 and 2003, the wage returns to one additional year of schooling increased from 4% to 11%. This development initially leads to higher overall inequality, because the initial stock of educated people is small and they are concentrated at the high end of the income distribution. But if there is reasonably good access to education, then over time a greater and greater share of the population will become educated, and that will ultimately tend to reduce inequality.
The large productivity and wage gap between cities and countryside also drives a high rate of rural-urban migration. Lewis pointed out that, starting from a situation of 80% rural, the initial shift of some from low-productivity agriculture to high productivity urban employment is disequalizing. If the flow continues until the population is more than 50% urban, however, further migration is equalizing. This pattern is very evident in the history of the U.S., with inequality rising during the rapid industrialization period from 1870–1920, and then declining thereafter. So, the same market forces that have produced the rapid growth in China predictably led to higher inequality. But it is important to note that in China there are a number of government policies that exacerbate this tendency toward higher inequality and restrict some of the potential mechanisms that would normally lead to an eventual decline in inequality.
Much of the increase in inequality in China can also be attributed by the widening rural-urban divide, particularly the differentials in rural-urban income. A household survey conducted in 1995 showed that the rural-urban income gap accounted for 35% of the overall inequality in China.
In 2009, according to the China’s National Bureau of Statistics, the urban per capita annual income at US$2525 was approximately three times that of the rural per capita annual income. This was the widest income gap recorded since 1978. Urban-biased economic policies adopted by the government contribute to the income disparities. This is also known as the ‘artificial’ result of the rural-urban divide. In terms of the share of investments allotted by the state, urban areas had a larger proportion when compared with rural areas. In the period 1986-1992, investments to urban state-owned enterprises (SOE) accounted for more than 25% of the total government budget. On the other hand, less than 10% of the government budget was allocated to investments in the rural economy in the same period by the state despite the fact that about 73-76% of the total population lived in the rural areas. However, the burden of the inflation caused by the fiscal expansion, which at that time was at a level of approximately 8.5%, was shared by all including the rural population. Such biased allocation of government finances to the urban sector meant that the wages earned by urban workers also include these government fiscal transfers. This is not forgetting the relatively higher proportions of credit loans the government also provided to the urban SOEs in the same period. Meanwhile, the wages earned by the rural workers came mainly from growth in output only. These urban-biased policies reflect the importance of the urban minority to the government relative to the rural majority.
In the period when reforms in urban areas were introduced, the real wages earned by urban workers rose inexorably. Restrictions to rural-urban migration protected the urban workers from competition from the rural workers which therefore also contributed to rural-urban disparities. According to a report by the World Bank published in 2009, 99% of the poor in China come from rural areas if migrant workers in cities are included in the rural population figures. Excluding migrant workers from the rural population figures indicates that 90% of poverty in China is still rural.
Inequality in China does not however only occur between rural and urban areas. There exist inequalities within rural areas, and within urban areas themselves. In some rural areas, incomes are comparable to that of urban incomes while in others, income remains low as development is limited. Rural-urban inequalities also do not only refer to income differentials but include inequalities in areas such as education and health care.
The structural reforms of China’s economy have brought about a widening of the income gap and rising unemployment in the urban cities. The increasing challenge for the Chinese government and social organizations is to address and solve poverty issues in urban areas where the people are increasingly being economically and socially marginalized. According to the official estimates, 12 million people were considered as urban poor in 1993, i.e. 3.6 per cent of the total urban population, but by 2006 the figure had jumped to more than 22 million, i.e. 4.1 per cent of the total urban population and these figures are estimated to grow if the government fails to institute any effective measures to circumvent this escalating problem.
China’s “floating population” has since helped spur rapid development in the country because of the cheap and plentiful labor they can offer. On the flip side, many people who came from the rural areas are not able to find jobs in the cities. This surplus of rural laborers and mass internal migration will no doubt pose a major threat to the country’s political stability and economic growth. Their inabilities to find jobs compounded by the rising costs of living in the cities have made many people fall below the poverty line.
There are also large numbers of unemployed and laid-off workers from state-owned enterprises (SOEs). These enterprises have since failed to compete efficiently with the private and foreign-funded companies when China’s open-door policy was introduced. In the years 1995 to 2000, the state sector lost 31 million jobs, which amounted to 28 per cent of the jobs in the sector. The non-state sector has been creating new jobs but not in sufficient numbers to offset job losses from the state sector.
SOEs’ roles were more than employers, they are also responsible in the provision of welfare benefits, like retirement pensions, incentives for medical care, housing and direct subsidies and the like to its employees, as such these burdens greatly increased production costs. In 1992, SOE expenses on insurance and welfare took up 35% of the total wages. Therefore, many people not only lost their jobs but also, the social benefits and security that they were once so reliant on. The adverse consequences arising from the market reforms are evidently seen as a socially destabilizing factor.
Lastly, the government provided little or no social benefit for the urban poor who needed the most attention. Ministry of Labor and Social Security (MLSS) was the last line of defense against urban poverty in the provision of social insurance and the living allowance for laid-off employees. However, its effectiveness was limited in scope in which less than a quarter of the eligible urban poor actually receiving assistance.
The Minimum living Standard Scheme was first implemented in Shanghai in 1993 to help supplement the income of the urban poor. It is a last resort program that is meant to help those that don’t qualify for other forms of government aid. The Minimum Living Standard Scheme set regional poverty lines and gave recipients a sum of money. The amount of money received by each recipient was the difference in their income and the poverty line. The Scheme has grown rapidly and has since been adopted by over 580 cities and 1120 counties.
Education is a prerequisite for the development of human capital which in turn is an important factor in a country’s overall development. Apart from the increasing income inequality, the education sector has long suffered from problems such as funding shortages and unequal allocation of education resources, adding to the disparity between China’s urban and rural life; this was exacerbated by the two track system of government’s approach to education. The first track is government -supported primary education in urban areas and the second is family -supported primary education in the rural areas.
Rural education has been marginalized by the focus on immediate economic development and the fact that urban education enjoys more attention and investment by the central government. This lack of public funding meant that children of rural families were forced to drop out of school, thus losing the opportunity to further their studies and following the paths of their parents to become low skilled workers with few chances of advancements. This leads to a vicious cycle of poverty. Because of limited educational resources, urban schools were supported by the government while village schools were provided for by the local communities where educational opportunities were possibly constrained depending on local conditions. Thus, there still exist a huge gap in teacher preparation and quality of facilities between rural and urban areas.
The two track system was then abolished in 1986 & 1992, to be replaced by the Compulsory Education Law and the Rule for the Implementation of the Compulsory Education Law respectively. Despite the emphasis of China’s education reform on providing quality and holistic education, the rural schools still lack the capacity to implement such reforms vis-à-vis their urban counterparts. The rural areas lack the educational resources of the urban areas and the rural areas are considered to be falling below the educational benchmark set in the cities. Teachers are more attracted to urban sectors with higher pay and a slew of benefits. In addition, rural villages have a difficult time finding quality teachers because of the relatively poorer standard of living in villages. As a result, some rural teachers are not qualified as they received college degrees from continuing-education programs, which is not the best type of further education one could receive.
As a result, rural students often find themselves neither competitive enough to gain admissions to colleges nor employable for most occupations. Rural residents are increasingly being marginalised in higher education, closing off their best opportunities for advancement. This is especially prominent in Tsinghua and Peking University where the percentage of rural population studying in the two universities have shrunk to 17.6 percent in 2000 and 16.3 percent in 1999, down from 50 to 60 percent in the 1950s. These numbers are the most recent reliable data that has been published and experts agree that the number might be as low as 1 percent in 2010.
Pre-reform China had a system that severely restricted people’s mobility, and that system has only slowly been reformed over the past 25 years. Each person has a registration (hukou) in either a rural area or an urban area, and cannot change the hukou without the permission of the receiving jurisdiction. In practice cities usually give registration to skilled people who have offers of employment, but have generally been reluctant to provide registration to migrants from the countryside. Nevertheless, these migrants are needed for economic development, and large numbers have in fact migrated. Many of these fall into the category of "floating population". There are nearly 200 million rural residents who spend at least six months of the year working in urban areas. Many of these people have for all practical purposes moved to a city, but they do not have official registration. Beyond the floating population, there are tens of millions of people who have left rural areas and obtained urban hukous.
So, there is significant rural-urban migration in China, but it seems likely that the hukou system has resulted in less migration than otherwise would have occurred. There are several pieces of evidence to support this view. First, the gap in per capita income between rural and urban areas widened during the reform period, reaching a ratio of three to one. Three to one is a very high gap by international standards. Second, manufacturing wages have risen sharply in recent years, at double-digit rates, so that China now has considerably higher wages than much of the rest of developing Asia (India, Vietnam, Pakistan, Bangladesh). This rise is good for the incumbent workers, but they are relatively high up in China’s income distribution, so that the wage increases raise inequality. It is hard to imagine that manufacturing wages would have risen so rapidly if there had not been such controls on labor migration. Third, recent studies focusing on migrants have shown that it is difficult for them to bring their families to the city, put their children in school, and obtain healthcare. So, the growth of the urban population must have been slowed down by these restrictions.
Though, it should be noted that China’s urbanization so far has been a relatively orderly process. One does not see in China the kinds of slums and extreme poverty that exist in cities throughout Asia, Latin America, and Africa. Nevertheless, urbanization goes on: the urban share of China’s population has risen from 20% to 40% during the course of economic reform. But at the same time the hukou system has slowed and distorted urbanization, without preventing it. The system has likely contributed to inequality by limiting the opportunities of the relatively poor rural population to move to better-paying employment.
Just as Chinese citizens are either registered as urban or rural under the Hukou system, land in China is zoned as either rural or urban. Under Chinese property law, there is no privately held land. Urban land is owned by the state, which grants land rights for a set number of years. Reforms in the late 1980s and 1990s allowed for transactions in urban land, enabling citizens to sell their land and buildings, or mortgage them to borrow, while still retaining state ownership. Rural, or “collectively owned land”, is leased by the state for periods of 30 years, and is theoretically reserved for agricultural purposes, housing and services for farmers. Peasants have long-term tenure as long as they sow the land, but they cannot mortgage or sell the use rights. The biggest distortion, however, concerns moving land from rural to urban use. China is a densely populated, water-scarce country whose comparative advantage lies more in manufacturing and services than in agriculture. The fact that many peasants cannot earn a decent living as farmers is a signal that their labor is more useful in urban employment, hence the hundreds of millions of people who have migrated. But, at the same time, it is efficient to allocate some of the land out of agriculture for urban use.
In China, that conversion is handled administratively, requiring central approval. Farmers are compensated based on the agricultural value of the land. But the reason to convert land – especially in the fringes around cities – is that the commercial value of the land for urban use is higher than its value for agriculture. So, even if China’s laws on land are followed scrupulously, the conversion does not generate a high income for the peasants. There are cases in which the conversion is done transparently, the use rights over the land auctioned, and the revenue collected put into the public budget to finance public goods. But still the peasants get relatively poor recompense. One government study found that 62% of displaced peasants were worse off after land conversion.
Secure land tenure is recognized as a powerful tool to reduce poverty, and the central government has begun guaranteeing all farmers 30-year land rights, strictly limiting expropriations, documenting and publicizing farmers’ rights, and requiring sufficient compensation when farmers’ lands are expropriated. A 2010 survey of 17 provinces by Landesa found improved documentation of farmer’s land rights, but much room for improvement: 63% of farming families have been issued land-rights certificates and 53% have land-rights contracts, but only 44% have been issued both documents (as is required by law) and 29% have no document at all; farmers who have been issued these documents are far more likely to make long-term investments in their land and are financially benefiting from those investments.
There have been reports of cases where peasants complain and demonstrate because the conversions have not been done in a transparent way, and there have been accusations of corruption of local officials. The government has published statistics on violent protests involving more than 100 people, and that number grew steadily up to 84,000 in 2005, before dropping a reported 20% in 2006. Up until 2006, the way in which agricultural land was being converted to urban land probably contributed unnecessarily to increasing inequality. It has been noted that compared to other developing countries, virtually all peasants in China have land. If that asset could be used either as collateral for borrowing, or could be sold to provide some capital before migrants moved to the city, then it would have been helping those who were in the poorer part of the income distribution. The administrative, rather than market-based, conversion of land essentially reduced the value of the main asset held by the poor.
Market reform has dramatically increased the return to education, as it indicates that there are good opportunities for skilled people and as it creates a powerful incentive for families to increase the education of their children. However, there needs to be strong public support for education and reasonably fair access to the education system. Otherwise, inequality can become self-perpetuating: if only high-income people can educate their children, then that group remains a privileged, high-income group permanently. China is at some risk of falling into this trap, because it has developed a highly decentralized fiscal system in which local governments rely primarily on local tax collection to provide basic services such as primary education and primary health care. China in fact has one of the most decentralized fiscal systems in the world.
China is much more decentralized than OECD countries and middle-income countries, particularly on the spending side. More than half of all expenditure takes place at the sub-provincial level. In part, the sheer size of the country explains this degree of decentralization, but the structure of government and some unusual expenditure assignments also give rise to this pattern of spending. Functions such as social security, justice, and even the production of national statistics are largely decentralized in China, whereas they are central functions in most other countries.
Fiscal disparities among subnational governments are larger in China than in most OECD countries. These disparities have emerged alongside a growing disparity in economic strength among the provinces. From 1990 to 2003, the ratio of per capita GDP of the richest to poorest province grew from 7.3 to 13. In China, the richest province has more than 8 times the per capita public spending than the poorest province. In the US, the poorest state has about 65 percent of the revenues of the average state, and in Germany, any state falling below 95 percent of the average level gets subsidized through the "Finanzausgleich" (and any receiving more than 110 percent gets taxed). In Brazil, the richest state has 2.3 times the revenues per capita of the poorest state.
Inequalities in spending are even larger at the sub-provincial level. The richest county, the level that is most important for service delivery, has about 48 times the level of per capita spending of the poorest county. These disparities in aggregate spending levels also show up in functional categories such as health and education where variation among counties and among provinces is large.
These differences in public spending translate into differences in social outcomes. Up through 1990, there were only modest differences across provinces in infant survival rate, but by 2000 there had emerged a very sharp difference, closely related to the province’s per capita GDP. So too with the high-school enrollment rate: there used to be small differences across provinces. By 2003, high-school enrollment was nearing 100% in the wealthier provinces while still less than 40% in poor provinces.
There is some redistribution within China’s fiscal system, but not enough. Poor areas have very little tax collection and hence cannot fund decent basic education and health care. Some of their population will relocate over time. But for reasons of both national efficiency and equity, it would make sense for the state to ensure that everyone has good basic education and health care, so that when people move they come with a solid foundation of human capital.
China’s highly decentralized fiscal system results in local government in many locations not having adequate resources to fund basic social services. As a consequence, households are left to fend for themselves to a remarkable extent. The average hospital visit in China is paid 60% out-of-pocket by the patient, compared to 25% in Mexico, 10% in Turkey, and lower amounts in most developed countries. Poor households either forego treatment or face devastating financial consequences. In the 2003 National Health Survey, 30% of poor households identified a large health care expenditure as the reason that they were in poverty.
The situation in education is similar. In a survey of 3037 villages in 2004, average primary school fees were 260 yuan and average middle-school fees, 442 yuan. A family living right at the dollar-a-day poverty line would have about 900 yuan total resources for a child for a year; sending a child to middle-school would take half of that. Not surprisingly, then, enrollment rates are relatively low in poor areas and for poor families.