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

2. 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.

3. 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.  1978-1985, 1985-1991, 1991-2004.

5. 1. Income Growth (cont’d)  1984-1985: 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.  1985-1991: relatively low growth  But higher growth for urban household than rural.  4.8% vs 2.8% per year.  1991-2004 (data more reliable): high growth  Much higher growth for urban household  7.7% vs 4.9% per year (urban-rural gap widen).

6. 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.

7. 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 2004.  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.

8. 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).

10. 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 2001.  Few permanent urban residents are in absolute poverty.

11. 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 1983-1984.  China had low value of Gini coefficient.  Gini coefficient (between 0 & 1) as a measure of inequality.

13. 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

14. 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.

15. 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.

16. 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.

17. 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.

18. PQLI (cont’d)  (2) Other health related indicators  Infant mortality of 30 per thousand in 2003.  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,- )

19. 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.

20. 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 ).

21. 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.

22. 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,- ).

23. < 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 9512 9168 7790 7595 6772 6702 5788 4321 4148 3361 2892 2490 4187 6121 2788 2305 3399 1764 1274 989 2009 970 564 482 2.3 1.5 2.8 3.3 2.0 3.8 4.5 4.4 2.1 3.5 5.1 5.2 자료 : World Development Indicators Database, World Bank, Sep. 2004

24. 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.