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All of these policies were intended to mitigate the effects of market liberalisation on the poorest and to equip them with the tools to participate in the new market-driven economy, rather than be submerged beneath it. In the next section, we discuss the extent to which this objective has been realised. The preceding discussion has provided an analysis of the rural economy, which, in broad-brush strokes, can be summarised as the consistent expansion of the market through liberalisation, first domestically and then internationally through WTO accession, aimed at reallocating rural labour.

In the last decade, government policy also paid greater attention to the distributional consequences of market expansion. In this section, we examine the evidence and analyse the extent of labour reallocation and the trends in intra-rural income inequality. These provinces are geographically dispersed and contain both coastal and inland areas and areas from the north and the south. The average GDP per capita of the nine provinces was 37, yuan in , slightly lower than the average of 39, yuan for all provinces in China. A multistage, random cluster process was used to draw the sample surveyed in each province; the sample is therefore representative of households in their respective provincial populations.

In terms of the sample make-up, two cities and four counties were selected from each province; two communities in urban neighbourhoods and two communities in suburban areas were selected from each city; one community in the county centre and three village communities were selected from each county; and around 20 households were drawn from each community.

In the latest wave, the survey covers about 4, households and 16, individuals from more than communities. The survey provides rich socioeconomic information on individuals, households, and communities in the sample. In order to focus sharply on rural conditions and rural dynamics, we exclude villages in suburban areas and communities around the county centres.

Our sample is strictly a rural sample and its coverage is therefore reduced to about 2, households in the villages from the nine provinces for the period from to The data from the survey demonstrate the extent to which the structural transformation of the rural economy has taken place over the past two decades, and the acceleration of this process in the s. Column 1 of Table 1 shows that, in the early s, 87 per cent of rural households had members engaged in agricultural activities; by , this had fallen to 69 per cent.

In , 71 per cent of rural households had members who worked only on-farm. By this was the case for only 40 per cent of households. As farm employment decreased, wage employment rose dramatically, fuelled by rising levels of migration. By , 46 per cent of rural households had at least one member working as a waged worker whether in rural agribusiness, rural industry or urban industry. Table 1 Members of the rural population aged between 16 and 64 in specific categories of activity as a proportion of all persons in the age group, rural China, in per cent.

China's Durable Inequality: Legacies of Revolution and Pitfalls of Reform

These patterns are also evident if we look, in Table 2, at the allocation of work hours by rural households. Table 2 Allocation of work between different types of work by rural households in hours per year per household. These labour reallocations have been a rational response by households to differential returns calculated for the various forms of labour shown in Table 3. The dramatic shift of labour out of agriculture and into waged labour and, to a lesser extent, into self-employment is rational given the much lower returns to farm labour than to employment in the other two activities.

Even so, the return to agricultural labour has increased over time, especially after , although the extent to which this is due to rising labour productivity as a result of increased physical investments in infrastructure in the sector or price effects associated with increased farm subsidies cannot be determined from this data.

Strikingly, the returns to all three types of activity went up sharply between and — the period after the global financial crisis. This suggests that the massive infrastructure spending programme introduced by the central government in the wake of the crisis had an immediate and significant effect on rural incomes, despite the expansion of the rural labour force caused by returning migrant workers who had lost their urban export sector manufacturing jobs during the crisis. Table 3 Estimated rates of returns to farm labour, non-farm self employment, and wage labour in yuan per hour.

Notes : Rates of returns are the OLS estimates of the respective labour hours of the household earnings function. Earnings are measured in constant price. In the earnings function we control for average years of schooling and age of the labor force, land, assets, region and time. Heteroscedasticity-robust standard errors are reported in parentheses. A rise in the returns to labour activities and a reallocation of labour to activities that yield higher returns have been behind the growth of rural incomes shown in Table 4.

In real terms, average household total earnings in the survey have increased five-fold over the period , with the annual rate of growth for the period exceeding that for the period by 4. Interestingly, in contrast to its near-stagnation between and , farm income grew at 9. This increase in farm income undoubtedly reflects, in part, the increased rural infrastructure spending designed to increase rural productivity. The higher rates of return offered in waged work in conjunction with the reallocation of labour into that sector has meant that wage income has gone from contributing 23 per cent of total household earnings in to contributing 52 per cent in Table 4 Household annual earnings in rural China.

Note : All earnings are measured in constant price with CPI as the deflator. This dramatic structural transformation of the rural economy has raised average real earnings, as Table 4 showed. With massive rural-urban migration and the resultant decline of the labour force in the rural sector, combined with infrastructure investment, the annual average growth rate in earnings per worker nearly doubled from 6. We can also construct per capita income measures from data provided in the survey to analyse poverty rates. As might be expected both from national trends and from the data on earnings provided above, poverty rates in the sample show a substantial decline.

During the period, however, the poverty rate was relatively stable and a large reduction came after Table 5 Per capita income and poverty rate in rural China. Notes : Per capita income is the sum of labour earnings plus assets income, various subsidies, and gifts and remittances of relatives and friends divided by the number of people in the household. It is deflated by CPI with as base year. Adjusting for purchasing power parity, the poverty line was about 1, yuan per year per person in prices. The picture so far is one of a large change in labour allocation, increasing average real incomes, and declining poverty.

We now turn our attention to various dimensions of income inequality. Measuring income inequality in China is fraught with methodological issues see Knight for an overview. In reporting our results, we therefore note where they are consistent with, or differ from, results reported in selected other studies. To start with, consider the inequality of earnings. The Gini coefficients reported in Table 6 suggest that earnings inequality increased from 0. Table 6 Earnings inequality in rural China.

Inequality and Development Challenges

Note : Inequality indices are calculated based on earnings per worker in constant price. To examine this point further, we decompose the Gini coefficient by earnings source. This indicates, as shown in Table 7, that inequality was positively correlated with incomes from non-farm self-employment and wage employment over the period and negatively with farm incomes.

Non-farm household income, typically derived from self-employment in the retail and service sectors, remained very unequal and an income source available mainly to those rural households with considerable assets that they could invest in these activities. In contrast, the de-equalising effects declined over time as wage employment became more accessible. Table 7 Decomposition of Gini coefficient by source of earnings in rural China. The share of each type of earnings in this Table is different from that in Table 4, where the earnings composition is based on total household earnings.

The Gini coefficient and its decomposition reported in Tables 6 and 7 provide insights into the changing dynamics of rural income inequality and its sources. However, as a summary measure, it does not provide evidence of what is happening in the tails of the income distribution, which is a matter of policy significance and important for any assessment of inequality trends. These results for per capita income deciles for , and are presented in Table 8 and provide some startling evidence on the different fortunes of the richest and poorest households in rural China over the period.

Table 8 Per capita income by decile in , , and in rural China in constant prices. Note : Income is the sum of labour earnings plus assets income, various subsidies, and gifts and remittances of relatives and friends. Income per capita is measured in constant price.

The results show that between and , the real income of all deciles increased, with the rate of increase uniformly rising as income level increases except for the top decile.

Inequality and Development Challenges

This suggests a clearly rising trend in intra-rural income inequality. In the post period, income growth accelerated for all income deciles and the rates of growth became more even across deciles.


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The post period corresponds to the large shift in labour allocation from farm to wage labour, itself a result of the structural transformations induced by globalisation. More households were able to benefit from the higher incomes provided by the expansion of wage labour; this was the case for all deciles.

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In addition, this period is also the one in which government policy was particularly active in pursuing redistributive policies, such as the abolition of the regressive agricultural taxes and investing in education and infrastructure in less-developed western regions. This combination of globalisation and redistributive policies seems to have led to an increase in the average real incomes of each income decile, although the poorest decile still saw the lowest income growth rate, indicating that, on this measure, income inequality worsened, with the incomes of the top decile increasing twice as fast as the bottom decile.

In absolute terms, the incomes of the top decile increased by more than forty times the increase in the incomes of the bottom decile during the s. The government policies discussed above, such as the central government infrastructure spending projects, were designed not only to increase rural productivity but also to reduce inter-regional inequalities by being disproportionately targeted to the poorer provinces see Fan, Kanbur, and Zhang As an indicator to gauge the success of this strategy, we report average earnings per worker by region in Table 9. Table 9 Regional earnings disparity in rural China in yuan per worker per year.

The results show that real earnings per worker were higher in rural areas in coastal provinces than in the rural areas in provinces in the other three regions.


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However, earnings per worker in the latter three regions all moved to convergence with the coastal provinces up to , while the regional disparities increased in Nevertheless, overall, rural inter-regional inequality declined significantly over the period, and much of the decrease between the coastal region and the central and western regions occurred after Since then, liberalisation and an increasing role for the market have, as in the urban sector, been the consistent reform programme.

Accession to the WTO in pushed this liberalisation further and had a direct impact on the rural economy by depressing the relative price of land-intensive crops, such as grain, and encouraging the shift into other crops and earnings activities; at the same time, the rise in manufactured exports following WTO succession increased the demand for migrant labour, which the rural areas provided. And yet, at the same time as this unleashing of the market has been facilitated and encouraged, the central leadership has also sought to constrain its most deleterious social effects.

This has been most evident since the early s, when the rural economy again ranked highly in policy priorities, and the Hu-Wen leadership sought to ensure that the rural population enjoyed the benefits of economic growth. Thus, policies to invest heavily in the poorer regions, to abolish agricultural taxes and fees, to increase tenure security, and to continue with grain subsidies, all point to ways in which the central government sought to address distributional issues. To assess the changes over the past two decades of policy reform we have used data from the rural areas of nine provinces from the period to This data set has the advantage of enabling us to focus on rural trends over a twenty-year time period.

The transformation of the rural economy is strikingly clear from the data. We find that there was a dramatic shift in labour allocation out of agriculture and into industrial wage employment.

go here This trend accelerated in the post period, and by , 84 per cent of rural households had at least one member engaged in wage labour. This structural transformation shifted labour out of relatively low-productivity agriculture and into higher productivity industrial wage employment.

The Point: What's going on with China's economy?

Summary measures of income inequality, such as the Gini coefficient, indicate that the distribution of rural earnings around this rising trend became more unequal in the s but that this trend was reversed in the s.