Discuss China’s Social Inequality and Poverty in the Context of Post-Reform China

Introduction

Poverty and inequality has long been a feature of Chinese society (Li, 2003; Khan, et al., 2002). The long period of economic growth in China after reform has helped many people become richer. With an average annual GDP growth rate of 9.7 per cent since 1980, China “has had the largest and fastest poverty reduction in history” (World Bank 2008: 22). 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 estimates that the poverty rate in China fell from 64 per cent in 1981 to 7 per cent in 2007 using a “cost of basic needs” poverty line (World Bank 2008). A series of research studies in the late 1990s, however, unveiled a disturbing fact that alongside the ‘new rich’, there are people suffering from absolute poverty including urban marginalized groups, such as the long term unemployed (or laid-off workers) and low income households, rural-urban migrant workers, and farmers living in remote rural areas. The economic and social conditions of the poor contrasts sharply with the conditions of the booming middle class.

China 's reform and opening up are always seen as a strong driving force for social and economic development and the country now faces new opportunities and challenges. Over the last thirty years, China has made notable and important progress in the reform of some crucial sectors, such as improving economic structure and the environment for private businesses, and promoting the reforms related to fiscal, taxation and financial systems (Tang & Ren 2003). However, it is never to be over looked that there are also downsides and negative outcomes result from this rapid progress since the great reform in China. For example extreme poverty, extreme polarization and social inequality, fragmentary social welfare system, serious natural resource scarcity and environmental degradation etc. At this point, Chinese government unavoidably comes to a central policy dilemma. Without sufficient financial resources, the state will not be able to handle social problems yet without dealing with the social problems, economic growth cannot be sustained. In this essay, I will briefly review the main elements of China’s economic reform and its impact on per capita income and the poverty level. I will also examine some forms of inequality in China and suggest that there need to be efforts to get the government out of the dilemma.

China’s economic reform and poverty
Poverty may mean different things to different people. Openheim and Harker (1996) state that “Poverty means going short materially, socially and emotionally. It means spending less on food, on heating and on clothing than someone on an average income.” There isn’t an official definition for poverty but it is suggested that if an income is half of the national average then it indicates poverty. (BBC Scotland.)
The World Bank Organisation says that poverty is mostly based on incomes and writes that “A person is considered poor if his or her income falls below some minimum level necessary to meet basic needs.” The minimum level that is referred to in this quote is commonly known as ‘the poverty line’ and varies is different parts of the country.

Poverty usually refers to three different types of poverty; absolute poverty, relative poverty and social exclusion. Absolute poverty is defined as a lack of sufficient resources with which to provide necessary needs for an individual. Relative poverty regards income in relation with the average. Relative poverty is concerned with an absence of materials that may be needed in daily life. Social exclusion is described as a label for what can happen when an individual or area suffers from multiple issues including unemployment, poor housing and low incomes. Often people who are living on benefits such as housing benefit and council tax benefit are classed as living in poverty.

Reform in China enhanced economic efficiency and the growth of the economy lifted a large number of people above the absolute poverty line. However, as the economy continued to grow, it became clear that the pro-growth strategy was not improving the well-being of the lowest income groups. Economic growth tended to reinforce and improve the financial well being of the people that had already become rich rather than remove poverty at the same pace as during the early years of reform (Chen and Wang, 2001). The combination of the economic strategy and the social policy in this era had several implications for poverty and inequality. The result of the fast long-term growth was impressive but not without many problems, as shown by Chen and Ravallion (2004). In the 1980s, the economic growth reduced the number of people living in poverty

(Data sources: China Statistics Bureau, China Statistics Summary Report, various issues. China
Statistics Bureau, China Rural Poverty Monitor Report, various issues.)

Table 2 shows the changing poverty line, used by the Chinese government. Table 2 also shows the percentage of the rural population who were poor. The data suggest that rural poverty had decreased rapidly during the earlier reform period, almost halving from 1978 to 1984, although this change is not based on a consistent poverty line. Rural poverty further decreased, but not as fast as the earlier period, during the late 1980s. However, the trend of poverty reduction was not steady. In the 1990s, China began to use the internationally recognised poverty line of US $2 per day. According to this standard, the number of people who were poor increased dramatically from 730.8 million in 1987 to 824.6 million in 1990. The poverty rate did not start to fall again until 1993. If we look at the very poorest people living below $1 per day, earlier growth did help to lift more than 300 million people out of absolute poverty. However, the number later increased, from 308.4 million in 1987 to 374.8 million in 1990, more than one fifth higher. Although the number fell in the 1990s, unlike the steady reduction of the number of people living under $2 per day, the number of people living under $1 per day did not go down steadily, which suggests a relatively stable number of people who were trapped in poverty. The growth model did not work equally effectively for all groups. As the economy continued to grow, the gap between the rich and the poor also grew. The growth rates of income rose as one moved up the distribution. The annual rate of growth in the 1990s was about three percent for the poorest percentile and nine percent for the richest (Ravallion, 2004).

Social inequality and welfare system in post-reform China
The social insurance and social security system were increasingly incompatible with the growing private sector. Welfare provision was largely dependent on local government and business both to pay for it and administer it. Although the state tried to establish a work-based contribution system to finance a social safety-net, it could no longer force all enterprises to commit themselves to welfare tasks. As a result, the gaps in coverage widened. Many people from the non-state sectors were excluded from the ‘new’ social protection schemes. Although, in the late 1990s, the state took actions to secure contributions from more employers, many enterprises simply could not afford the high rate of contributions (Shang, 2001). But still there are still high levels of social inequality and loop holes in the system to different groups of people, for example migrants. In China, the number of migrants jumped from 18 million in 1989 to 70 million in 1993 and to 150 million by 2004 (Liang 2001; Zhu and Zhou 2005). Migrants now make up 11 percent of the national population and more than 20 percent of urban residents. However, migrants receive virtually no social benefits. They usually do not qualify for rural benefits because they are of working age with earning capabilities. Meanwhile, they are not entitled to any urban social benefits due to the lack of registered local city resident status. In 2002, less than 5 per cent of migrants received any pensions, unemployment insurance, or health benefits (Gao 2006). In fact, the taxes and fees they paid exceeded the subsidies they received (Khan and Riskin 2005).
Inequality between rural areas and urban areas are also unavoidably crucial. The differences between rural and urban areas became greater than ever. The favourable policies to support urban industrialisation, the unquenched demand for urban spending, and the priority given to maintaining urban stability were in part underpinned by the rural tax revenues which deprived rural areas of development opportunities (Gordon and Li, 2002; Pieke, 2002; Li, et al., 1998).

At the same time, the reforms maintained, to a large extent, the rural-urban division forcing rural industrialisation onto a very different path from urban development. In rural areas, township and village enterprises (TVEs) had offered opportunities for farmers to leave farmland and work in industrial sectors. China’s experiences of transforming farmers into industrial workers without forcing them to leave their home town had become a new model for industrialisation and had drawn a lot of attention from international society (such as overseas research interests and international organisations like the World Bank). It was a new model of modernisation in which farmers left their land but not their home and entered factories but not the cities. Qian (2003) and Jefferson and Rawski (2002) attributed this innovation to the lack of clear property rights. However, the phenomena of TVEs raises many questions. Why would farmers prefer to work in TVEs than in private enterprises in urban areas? Why did the urban society welcome the fact that farmers did not need to go to cities to work in factories? When the rural-urban population control mechanism is taken into account, answers to these questions become fairly straightforward. More farmers would like to leave the farmland and work in industries. However, under the old state regulations, they were not allowed to move freely and work in the urban areas. TVEs met the demand for providing jobs in the industrial sectors without having to acquire urban residency. TVEs were a result of the absence of alternatives.

Embedded in the fundamental structural distinctions between urban and rural China, the social benefit provision mechanisms differ substantially across the two areas. The urban social benefit system has undergone significant cutbacks from its comprehensive coverage and generous provision before the economic reforms, while the rural social benefit system has remained minimal (Gao 2006; 2008; Gao and Riskin 2009).
The urban social benefit system was an inherent part of the “full employment” policy in urban China before the economic reforms were launched in the late 1970s. Under the pre-reform regime, almost all working-age urban residents were employed in state-owned or collective enterprises and received various social benefits through their work units (Davis 1989; Guan 2000; Saunders and Shang 2001; Wong 1998). However, these social benefits have been much curtailed since the economic reforms, mainly to facilitate market restructuring and stimulate economic growth (Croll 1999; Gao 2006; Leung 2003).

Income inequality between the urban rich and the urban poor increased considerably (Meng, 2002; Guan, 1999; Khan, et. al, 1999; Milanovic, 1997; Knight, and Song, 1991). The officially published Urban Gini Coefficient for disposable income is above 0.30. The trend of growing inequality in urban areas is very clear, as shown in Figure 1. This is a result of the relatively slower income growth of the lowest income groups compared to the highest income groups (Meng, 2004). What is more, the increase of Gini Coefficient rose more sharply at the end of the 1990s.
China’s Income Inequality (1978-2000) The reforms of the urban social benefit system have focused on shifting the financing of social benefits from state-owned and collective enterprises to general taxes and individuals so that the enterprises can concentrate on increased production and efficiency. Housing, which was widely provided at low or no cost before the reforms, has been privatized. Food assistance, a major benefit to urban residents during the pre-reform period, has vanished.
Pensions, health benefits, and other work-related social insurance (such as maternity, sickness, and industrial injury) have become to require individual contributions and have shifted to a wider risk pooling scheme across enterprises. Meanwhile, however, the government has taken a bigger and more direct role in providing a safety net for the very poor. Unemployment insurance and the Minimum Living Standard Assistance (MLSA), the major public assistance program, have been established and enforced since the early-to-mid 1990s to meet the basic needs of many that have been left behind by both the economic and welfare reforms (Gao 2006; Li and Piachaud 2004; Solinger 2002; Tang, Sha and Ren 2003).
The rural social benefits have always been marginal in coverage and minimal in provision, before and since the economic reforms (Gao 2008; Gao and Riskin 2009; Guan 2000; Saunders and Shang 2001). Only about 1.5 per cent of the rural residents have been privileged to have access to pensions due to their prior employment in state-owned or collective enterprises.
Traditionally, there have been three safety-net programs in rural China. The “Five Guarantees” program has existed to provide for the rural elderly, disabled, and minors who had no family support or income sources to meet five basic needs: food, clothing, medical care, housing, and burial expenses. This system, however, has been ineffective in sufficiently serving the target population in many rural areas. Two other public assistance programs – the natural disaster relief system and the collective welfare fund – have also been in place, aiming to protect the vulnerable from natural disasters and human misfortunes (Guan 2000; Saunders and Shang 2001; Zhu 2002).
Before the economic reforms, the Rural Cooperative Medical System (RCMS) provided basic health services and wide coverage to rural residents. It was jointly funded by family contributions, a portion of the collective welfare fund, and sometimes the government. However, this system collapsed after the economic reforms were lauched, leaving many rural residents unable to afford the dramatically increasing health care expenses (Bloom and Fang 2003; Liu 2004; Rösner 2004). To address this gap, the government has gradually restored the RCMS since the mid-1990s and has implemented it nationwide in 2008. The RCMS is a heavily subsidized voluntary health insurance program for rural residents. The government—central and local—is responsible for about 80 per cent of RCMS expenditures. The central government provides subsidies to the less developed provinces in the western and central areas. In 2008, the government contributed 80 yuan for each participant, whereas individuals only contributed 20 yuan. Although the coverage is 100 per cent in principle, it is important to note that actual beneficiaries were only about 30 per cent of all rural residents in 2007 (Mao 2008).

Conclusion
This paper has discussed the relationship between economic development brought by the great reform in China and the outcomes in terms of poverty and inequality. As the economic growth become more rapid, the shortcomings of the pro-urban growth model became clear. Rural areas failed to grow in step with the urban areas. Long term economic growth could not guarantee sufficient job opportunities for the growing urban population and the ever-increasing number of rural-urban migrants. In the beginning of the century, the state shows intention to cool down the overheating economy and target the poorest regions to narrow the gap between rural and urban areas, which is a positive direction in terms of solving ultimate problems instead of solemly focusing on growing economy. For the future, in which Chinese social policy will undoubtedly face many challenges, the livelihood approach within a broad social development model offers an approach to social policy that may best address the problems of poverty and inequality and promote harmonious development in the interests of all, and the sustainability between the booming economy, the people and the nature.

WC 3015
Bibliography

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