PRESS CONFERENCE BY UNITED NATIONS UNIVERSITY TO LAUNCH NEW STUDY

ON POVERTY, GROWTH, INEQUALITY IN CHINA

 

Urbanization was the only solution to the problems of poverty and inequality in China, including the country’s trade imbalance with other countries, Guanghua Wan, Senior Research Fellow at the United Nations University’s World Institute for Development Economics Research and director of the study “Poverty, Growth and Inequality in China”, said today at Headquarters.

At a press conference to launch the study, alongside co-author Terry Sicular, professor of economics at Canada’s University of Western Ontario, Mr. Guanghua said it had been undertaken between 2005 and 2007, and involved many economists from inside and outside China.

He said that, in order for China to complete the urbanization process, it needed to move about 550 million people from the rural to the urban sector, a number greater than the country’s current urban population.  Although dramatic, such a move was possible.  The two main concerns had to do with the availability of jobs and housing in the urban areas.  The study showed considerable room for manoeuvre on both counts.

The Chinese economy had been growing very fast over the last 30 years, averaging about 10 per cent annually, he said, noting that the growth rate had actually been accelerating.  It had risen to 11.1 per cent in 2006 and 11.6 per cent in 2007, which showed that the economy was, by and large, very healthy.  Many people were concerned about when China would become the largest economy in the world, the kind of projection that depended on certain variables.  Based on purchasing power parity, however, the Chinese economy was about half that of the United States as of last year.  Basing projections on the estimated United States 4 per cent economic growth rate of the last 60 years, and a Chinese economic growth rate of about 9 per cent, it would take about 13 years for China’s economy to catch up with that of the United States.  That meant that the catch-up time would be between 2025 and 2030.

As remarkable as China’s growth record had been, it had brought about many problems in the country, particularly fast-rising inequality, he said.  Since the mid-1980s, inequality in China had been growing fairly fast and had been traumatic, causing particular concern among the people and the Government.

He said the situation had implications for other issues, particularly in the border areas since China’s poor regions were mainly in the remote areas bordering the Russian Federation, Viet Nam, Cambodia and other countries.  Although the country had achieved dramatic poverty reduction since the late 1980s, progress in poverty reduction had slowed down considerably in the mid to late 1990s and in some cases, the trend had been reversed.  Poverty was a function of two variables -– economic growth and inequality -– and because the economy had been growing, the reverse in poverty reduction could only be related to increasing inequality.

Addressing inequality was the key to solving China’s poverty problem, but the economy was also facing a trade imbalance, particularly with the United States, he said.  That was because the country exported a lot, largely due to a lack of purchasing power inside China and a core lack of domestic demand.  The Government was aware of that problem, but had difficulty working out a proper solution to that situation, which was related to inequality, particularly at the regional level.  The study had found that the main cause of inequality was the urban-rural income gap; narrowing that would not only reduce regional inequality, but also help increase the purchasing power of rural residents, helping relieve the pressure to export, which was directly related to the trade imbalance between China and its trading partners.

The Chinese Government had recently launched a new countryside socialist campaign aimed at addressing inequality, he said, warning, however, that the campaign could be wrong, according to the study’s findings.  While the campaign intended to invest in the rural areas to improve the living standards of farmers and reduce the pressure on them to move to cities, any policy that helped to improve rural living standards should be supported, since the rural or agriculture gross domestic product was only about 10 per cent of the national one, while the rural population accounted for 60 to 65 per cent of the national population.  Thus, about 50 per cent of the urban-sector gross domestic product would need to be transferred to rural areas in order to bridge the income gap.  Since that was not possible, the problem could not be resolved merely by investing in rural areas.  Instead, investment in rural areas must emphasize education or investment in human capital rather than infrastructure.

Ms. Sicular said her own aspect of the study, covering the urban-rural gap, had found that, while inequality had gone up, there had been some moderating factors.  In parts of China, inequality had increased early in the reform period, because growth had begun in certain cities and provinces, which had grown much more rapidly than others.  Since 1995, however, the fastest growing provinces, particularly in eastern China, had started showing slower growth, while those that had initially been left behind were beginning to catch up.  Thus, inequality in eastern China was beginning to decline.

She went on to point out that one of the factors contributing to earlier inequality had been the growth of the non-agricultural employment industry and the service sector, which had given farmers an opportunity to earn higher incomes.  However, those jobs had not been spread equally around China, but had tended to develop in particular regions, particularly the east.  Non-agricultural employment had spread much more widely since 1995, creating a moderating force in overall inequality.

The study had found big regional differences in urban-rural income gaps, she continued.  In eastern and central China, the ratio of the gap was 2:1, which was much lower than the national average, while the largest gap was in western China, where urban incomes were close to four times those in rural areas.  That suggested that any policy to address the situation must be targeted to the western region.  In eastern China, the gap had begun to decline.

Almost half of the urban-rural gap had nothing to do with labour income or income earned from paying jobs and self-employment, she explained.  Instead, half of it was associated with non-labour income such as Government subsidies, taxes, pensions and housing-related incomes, among others.  The two biggest components of that non-labour income were pensions -- to which many urban, but not rural, residents had access -- and housing-related income, which reflected the fact that houses owned by rural residents were worth less that those of urban residents.

Part of the gap was explained by differences between urban and rural households, she continued.  The former were smaller and better educated and, as such, had fewer dependents and more working members.  In per capita terms therefore, they tended to have higher incomes.  They also tended to have more members belonging to the ruling party, enjoy better access to health care and include fewer minorities.  Of all the observable facts, education had the greatest effect on the income gap.  It was associated with about 20 to 25 per cent of the measured urban-rural gap.  The study had found that the returns from whatever education people had had were much higher in urban areas than in rural areas.

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