Poverty in China

Poverty in China refers to people whose income is less than a poverty line of $1 per day (PPP) set by the World Bank benchmark (see Measuring poverty). Poverty has affected all aspects of the nation’s life, including the environment, health, education, housing, nutrition and agriculture to name but a few. Its has distorted the individual’s value, disrupted families and communities, and sent millions from the poorer regions to the cities in a desperate search for work.

Since the far changing economic reforms were made in the late 1970s, the growth fueled a remarkable increase in per capita income and a decline in the poverty rate from 64% at the beginning of reform to 10% in 2004. At the same time, however, different kinds of disparities have increased. Income inequality has risen, propelled by the rural-urban income gap and by the growing disparity between highly educated urban professionals and the urban working class. There have also been increases in inequality of health and education outcomes.

Some rise in inequality was inevitable as China introduced a market system, but inequality may have been exacerbated rather than mitigated by a number of policy features. Restrictions on rural-urban migration have limited opportunities for the relatively poor rural population. The inability to sell or mortgage rural land has further reduced opportunities. China has a uniquely decentralized fiscal system that has relied on local government to fund basic health and education. The result has been that poor villages could not afford to provide good services, and poor households could not afford the high private costs of basic public services. Ironically, the large trade surplus that China has built up in recent years is a further problem, in that it stimulates an urban industrial sector that no longer creates many jobs while restricting the government’s ability to increase spending to improve services and address disparities. The government has recently shifted its policy to encourage migration, fund education and health for poor areas and poor households, and rebalance the economy away from investment and exports toward domestic consumption and public services, to help reduce social disparities.

Overview

China has been the most rapidly growing economy in the world over the past 25 years. This growth has led to an extraordinary increase in real living standards and to an unprecedented decline in poverty. The World Bank has estimated estimates that more than 60% of the population was living under its $1 per day (PPP) poverty line at the beginning of economic reform. That poverty headcount ratio had declined to 10% by 2004, indicating that about 500 million people have been lifted out of poverty in a generation.

At the same time, the phenomenal rate of change has brought with it different kinds of stresses. China faces serious natural resource scarcity and environmental degradation. It has also seen growing disparities of different kinds 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 coastal urban locations benefited first from the opening policy and as the small stock of educated people found new opportunities, though 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 have 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 and toward domestic consumption and services to improve the country’s long-term macroeconomic health and the situation of the relative 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.

Poverty reduction

China has maintained a high growth rate for more than 25 years since the beginning of economic reform in 1978, and this sustained growth has generated a huge increase in average living standards. China had many characteristics in common with the rest of developing Asia 25 years ago: large population, low per capita income, and resource scarcity on a per capita basis. 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 10%, and to around 5% for manufactured imports. It initially welcomed foreign investment into "special economic zones", but it is important to note that some of these 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 has become the largest recipient of direct investment flows in recent years.

See also

• Digital divide in China