Poverty and Income Inequality in China

Another Inquiry on the Economic Welfare and Poverty in China The trade-off between economic growth and redistribution has become one of the major notes concerning the emerging economies of post-Cold War world. Adding to this struggle the urge to integrate into the international system while keeping the balances right at home has been another macro-level concern. In conjunction such liabilities not only necessitates the examination of fiscal and structural reforms but also the international trends as well within an historical framing. For that matter the case of China is fascinating in terms of blending these elements of economic and political changes in the last 30 years. However this attempt is not without a cost.

This paper aims to present a brief analysis of China’s struggle to achieve a balanced line of path given the necessities of our century. Following an historical account of the country’s last thirty years, the fiscal and structural flaws of the Chinese system will be analyzed in order to provide answers for rural and urban poverty that still haunt the Chinese people. The socialist China was in fact one of the late bloomers of the post-Cold War era. While the world was adopting the new values of the emerging internationalism of 1980s, China couldn’t let go of her western paranoia for about a decade. As economic self-reliance began to prove wrong Chinese leadership cautiously stepped out with the initiation of Deng Xiaoping’s “Open Door” speech of 1992 .

Thus began the 25 years of market-oriented reform in the country . The objective was rapid economic growth which unfortunately came at the expense of social inequality. The former socialist system was alien to social stratification apart from the one determined by the party membership. In that regard up until very recently the social inequality was not recognized as a problem that could even impede the attempts at growth.

The Annual Growth rate of GDP in China

The Inward FDI to China The initial objective, in Deng Xiaoping’ words, was to “let some get rich first” . The following institutional and industrial changes of the early 1990s emphasized the growth while neglecting the increasing poverty. The decreasing role of the state in economic activities seems to be the major cause of this unbalanced trend.

These changes cover a decrease in state-owned enterprises, the increasing number of laid-off workers and the structural deficiency of the government to provide anti-poverty programs . On the international scale Fulong Wu & Ningying Huang argue that the industrial shift from labor-intensive to very competitive capital and technology-intensive sectors was another reason for China to fail achieving the balance between growth and redistribution .

The consequences of these changes are the increasing rates of unemployment in the late 1990s and the inability of the working class to rapidly adapt to the demands of the employment market. The rapid economic growth was perceived as an airbag against the threat of urban poverty. However the gradual alienation of a particular segment of the unemployed alarmed the officials about the irreversibility and respective social tension in the society. Fulong Wu & Ningying Huang defines those as the “outsiders” of the Chinese society who are living in the poverty line of $1 (PPP) as determined by the World Bank.

Those outsiders have no hope of returning to the labor market. For that matter there is defined a new urban poverty in China that could even impede the economic growth if remained neglected. In such circumstances without the rapid growth China would suffer a lot with no macro-level economic improvement that could compensate the redistribution problems.

Besides a chronic and irreversible unemployment problem would cost so much in the long run to achieve a good pace of growth again. In that respect China does not have the favorable conditions of a post-socialist system which provided her the initial advantages of rapid economic growth. “Letting the few get rich first” is not a good policy to pursue today. That’s why the Chinese leadership envisions another path to economic power: growth with redistribution. This change certainly justifies the international consensus of 1970s on growth with redistribution since growth alone is not sustainable in the long run.

The problem of poverty first arose as a rural problem in China . The corruption of the local authorities and the anti-migration policies of the state left the rural poor without protection. The government officials intervene to this trend in the early 1990s by launching anti-poverty programs. However as Fulong Wu & Ningying Huang argues the economic growth was more of help to those in comparison to the help they could get from these programs. In the second half of the 1990s the poverty problem spread to the urban population. With migration permitted the number of the urban poor began to increase .

The urban poor consist of five major groups under poverty line: the people who get support from Ministry of Civil Affairs; the unemployed; the poor employees, laid-off workers, pensioners and the early retirees; people who are unemployed because of illness or alike; the poor students . The new urban poor is a direct consequence of the transition to market-oriented economy. To handle this problem, Chinese officials launched a program called “Minimum Living Standards Support (MLSS). This program was exclusively for the urban poor. However MLSS proves to be insufficient to cover the problem. Within the urban household registration, the population estimates for urban poverty is between 15 to 31 million of people. That makes % 4-8 of the total population .

The characteristics of the urban poor can be summarized as: low employability, low education levels and low skills, poor health and the increasing population of aging poor . For that matter one can argue that the lack of a social security system combined with the social transition in general left those people unprotected in times of personal economic crises. The future provisions for “growth with redistribution” necessitate national and international measures together. The failure of anti-poverty programs has been the widely accepted reason why China experiences high levels of poverty population. An extended and more inclusive kind of a social security system seems to be a must for the Chinese officials to provide within their structural transformation project.

As MLSS proves insufficient, a better program is necessary to keep the poor above the poverty line. In that respect resolution seems to be a structural one that encourages sustainability accompanying growth. This new plan has been reported as: “stable and rapid economic growth while urging a number of "strategic adjustments" to avoid economic swings” during the presidency of Hu Jintao in 2005 . On the other hand there is also a bright side to the matter.

Simon Appleton, Lina Song & Qingjie Xia argues that the poverty trend in China was escalating until 1995. The CHIP surveys after 1999 does not indicate an increase in the urban inequality . The widening of the problem remained whereas the increase in numbers stopped in the early 2000s. This explanation is much more optimistic in terms of providing a more stable picture for us to consider. Another optimistic view is of World Bank’s.

Within the project of MDG (Millenium Development Goal) which aims to reduce world poverty by %50 until 2015, China is a leading host of poverty with 135 millions of new poor out of 468 million. World Bank reported China successful in meeting the MDG estimates of $1.25 poverty line. The statistics show that the poverty rate in the country declined to %7 in 2005 and %4 in 2007. This estimate makes about 53 million people living under poverty line. In conclusion there are indicates that China is coming out of poverty.

The national and international attempts to provide sustainable growth in China are not only vital for the Chinese people but also for the global economy. From a broader perspective the massive changes China have been through in about 30 years are very informative of the necessity of redistribution and social inequality as inherent elements of growth and stability.