Ch 9. Living Standard: Income, Inequality, and Poverty

Introduction  How to evaluate the living standard (level of well-being) of Chinese people?  What are the benefits of economic growth?  In three aspects: household income (average), poverty, income inequality  Basic trend is clear: much higher income, much less poor (people), much more unequal.  More precise meausring of household income, poverty, & inequality is challenging & complicated task.  Due to distinctive nature of Chinese economy, such as large urban-rural gap, peculiar nature of income, changing composition of income, etc.  Other measures of well-being introduced.

1. Income Growth  Striking evidence of improved standard of living  Improved clothing, eating, and housing observed clearly by frequent visitors.  Confirmed by (official) statistical survey on household income (Table 9.1).  Different between rural and urban households in both initial level and growth rate.  Growth rate have changed over the time periods.  , ,

1. Income Growth (cont’d)  : high growth, particularly for rural  Remarkable growth in rural hshold income.  7% vs 15% (not reliable, due to the use of unreliable rural consumer price index).  Uncertain how much is real & how much is inflated.  : relatively low growth  But higher growth for urban household than rural.  4.8% vs 2.8% per year.  (data more reliable): high growth  Much higher growth for urban household  7.7% vs 4.9% per year (urban-rural gap widen).

1. Income Growth (cont’d)  Other limitations of official (survey) data on household income.  Rural/urban classification based on residential permit (status).  Migrants are not covered.  Different ways in measuring urban and rural incomes.  Method of evaluating in-kind income changed over time.  Comparability is limited (basic trends robust).  Overstate growth of rural income in early period.  Somewhat overstate overall growth in later periods.

2. Poverty 2.1 Rural Poverty  Growth reduced poverty in China. How much?  (1) China’s Official Poverty Line  Success in reducing rural poverty (early period).  Official data: decreased from 250 million in 1978 to 26 million in  Most rapid in the beginning of the reform era.  Poverty numbers cut in half by 1985, due to success in rural reforms & policy discrimination against farmers lowered.  Progress in poverty reduction slowed down later.  As growth in agriculture slowed down since mid-1980s.  Poverty: fundamentally a rural phenomenon, if official data used (disregarding migrants).  Official poverty line: 627RMB per person per year in 2002.

2.1 Rural Poverty  (2) World Bank Poverty Line  Use international standard of US$1 per person per day (on PPP basis).  850RMB per person per year (35% higher).  Makes huge jump in rural poverty ratio.  From 3.2% (with Chinese standard) to 12.5%.  From 29 million to 114 million.  Poverty is still serious problem in China.  Insecurity increased & access to health care reduced (for the rural poor).

2.2 Urban Poverty  Poverty in China has been largely a rural phenomenon (upto recent period).  Different from other developing countries.  In the past, urban bias in development strategy, extensive subsidies for urban people, combined with migration control.  Still (although policy bias weakened), few urban residents under poverty line (excluding migrants).  Applying higher standard for urban poverty (41% higher than the rural poverty line, 1200 RMB), only 0.5% of the urban population are under poverty line in  Few permanent urban residents are in absolute poverty.

3. Inequality  China was a dualistic, but egalitarian society under the socialist economy.  Income was fairly equally distributed within the urban and rural sector, respectively.  Substantial changes have occurred during reform period.  At first, China became less dualistic, with the egalitarian features maintained.  China had most equal distribution in  China had low value of Gini coefficient.  Gini coefficient (between 0 & 1) as a measure of inequality.

3. Inequality (cont’d)  It was quite unusual that China had a low Gini coefficient by the early 1980s.  Big countries & developing countries tend to have higher Gini coefficients.  Then, income inequality in China has increased steadily and substantially.  The changes of Gini coefficient of China in Fig 2 show a dramatic increase (rural, urban, national).  It has reached over 0.45 in recent years.  Higher than Japan, Korea, even the US & similar with Thailand, Philippines, but lower than Brazil, Mexido

3. Inequality (cont’d): economic causes of inequality  Urban-rural gap.  Pockets of modern sectors led economic growth in the early stage of development.  Coastal cities, in Chinese case.  Increased inequality within each of the urban and rural sectors.  Within urban,  Between those who have capital or skills (generating income) and those who do not have them.  Between the growing sectors and the declining sectors.  Within rural,  Depending on new non-agricultural income sources, which have been concentrated in some suburban areas.  Market forces and market distorting factors.

3. Inequality (cont’d):  How about the future prospects? Will China be more unequal or not?  Kuznetts Hypothesis “inequality rise & then decline as an economy develops”  Key question: will economic development spread to the countryside? & will distortions and barriers (eg. u rban-rural) be reduced?  Strongly depend on the government policy.  Began to introduce policies to support weak groups (peasants, migrant workers, workers).  The effects are not clear, yet.

3. Inequality (cont’d): accounting for all income sources  Additional income exist for both urban & rural people, other than the ‘cash income’.  In earlier period, benefits & subsidized services for urban people  food coupon, housing; 55% up for urban hshold  Re-valuation of home grown food & imputed value of owned housing for rural people (40% up).  Less egalitarian than ‘cash income’ distribution.  In later period, ‘informal’ incomes & imputed value of housing.  29% up for urban & 33% up for rural.  Similar level of inequality with ‘cash income’ distribution.  Gini coefficient climbed less quickly using the comprehensive income data.  Inequality reached its peak in mid-1990s, then level off.

4. Physical Quality of Life Indicators (PQLI)  Worthwhile to look at other indicators of living standard  Considering the complexities with income data.  Reflecting the health, physical security, and quality of life factors.  Physical quality of life indicators (PQLI) considered.  (1) Life expectancy  Summarize the impact of health/nutrition on human being  Environmental & other hazards due to underdevelopment.  China’s life expectancy (70.9 in 2002), right in the middle of the middle income countries (Latin America).  Continue to increase (slowly) during reform period, showing net positive effect of economic growth.  But much more slowly than the income growth.

PQLI (cont’d)  (2) Other health related indicators  Infant mortality of 30 per thousand in  Not high for developing countries’ international standard.  Somewhat higher considering statistical omission.  Changes in the nature of mortality.  Reduction in deaths due to infectious disease by improved sanitation & preventive health care.  Challenges of the “second health revolution”, which requires much larger investment.  Chronic diseases like cancer, heart or lung disease or other kinds of diseases like SARs, AIDS, etc.  Related with aging, pollution & life style (smoking, sex,- )

PQLI (cont’d)  (3) Education  Relatively high literacy rate 91% of adult population (2003).  Slightly above the middle-income country average, 90%.  Literacy rate negatively correlated with age.  High enrollment rate at primary school  Legacy of the previous policy emphasizing “basic needs” (basic health care, basic education, etc)  Recent progresses are not impressive here.  Growing but moderate enrollment rate in secondary & higher education.  Remarkablely rapid growth.

Human Development Index (HDI)  HDI devised & computed by UNDP.  Average of many indices (life expectancy, literacy and school enrollment, PPP GDP per capita, etc).  China has improved its HDI, reaching just below the middle- income countries, Brazil, Thailand, Columbia  Around the 100 th in the world (Table 9.2).  Substantial variation among provinces.  Highest one is Shanghai, comparable to Hong Kong, Korea, or Argentina (around the 30 th ).  Lowest one Tibet comparable to Myanmar, next lowest one Guizhou below Vietnam & comparable to Honduras (around the 140 th ).

5. Income, GDP per capita, and Purchasing Power Parity (PPP)  GDP: “market value of all final products produced in a country”  Initially computed in domestic currency.  Need to convert into common units (usually, US$), for international comparisons.  Simplest way: convert to dollar value using the official exchange rate.  Often unsatisfactory, due to imperfectness of exchange rate in evaluating relative purchasing power of different currencies.  Price differences in non-traded goods (much higher than in traded goods) not reflected in exchange rate.  Exchange rate fluctuate substantially.

PPP based GDP per-capita (cnt’d)  An alternative way: calculate PPP (Box 6.1).  Calculate how many RMB needed to purchase a given basket of goods & services.  Compare this figure with the US$ cost for the same basket of goods & services in the US.  Use this ratio to value the purchasing power of RMB.  Then express China’s GDP in PPP-adjusted dollars.  PPP-adjusted GDP per capita of poor countries are higher than the one based on the exchange rate. (Table 9-3).  For China, the difference between the two is even larger than expected.  A large number of non-traded goods have especially low prices in China (urban housing, health care, basic food,- ).

< Table : Comparison of per capita GDP (2003) Country PPP based per capita GDP (A) Exchange rate based per-capita GDP (B) A/B Malaysia Mexico Brazil Thailand Turkey Colombia China Philippines Guatemala Indonesia India Vietnam 자료 : World Development Indicators Database, World Bank, Sep. 2004

6. Conclusion  China’s GDP per capita (at exchange rate) rank it just below a middle-income country.  Underestimates the living standards of Chinese people.  Adjustment is made by introducing the PPP-adjusted GDP.  China moves up in the international ranking & the gap with higher level countries reduced (in terms of GDP per-capita).  Also, HDI (reflecting some PQLIs) is measured & compared internationally.  China belongs to middle income countries level, (even higher than the PPP-adjusted GDP per-capita ranking)  Partially reflect legacy of the egalitarian past.  However, the inequality has been expanding for the past two decades, even tearing off the social cohesiveness.  The future is uncertain, but important for sustaining growth.