No.57, Public Policy and the Long-Term Trend in Inequality in Rural China, 1988–2013

Hoken, Hisatoshi; Sato, Hiroshi
Published: 2016/11/30 21:20:00    Updated time: 2016/11/30 21:20:00

Abstract: This study examines these long-term changes in the distribution of rural income in China from the late 1980s until the mid-2010s. The major findings are summarized as follows. First, contrasting trends are found in the contributions of agricultural income and wage earnings, which reflects structural change in rural income caused by the dual process of economic development and systemic transition in the post-Mao era. Second, it is found that inequality in wealth is becoming increasingly important for understanding rural inequality. Third, there found small but substantial improvements in the redistributive and poverty impacts of public transfers before and after the implementation of pro-rural public policies in the first decade of this century, which has been a historic reversal in the long-lasting urban-biased public policy in contemporary China.
Keywords: rural inequality, inequality decomposition, public transfers, public policy, China

Authors:

Hisatoshi HOKEN (Institute of Developing Economies)

Hiroshi SATO (Hitotsubashi University)

1. Introduction

Rapid and prolonged economic development in China has dramatically changed the economic structure in rural areas. Since the implementation of the “reform and opening-up” policy in the late 1970s, rural households have been released from the control of collective farming and granted autonomy over their agricultural production and marketing, resulting in improved production incentives. Furthermore, the rapid growth of township and village enterprises (TVEs) and manufacturing enterprises in urban areas has offered huge opportunities for the rural labor force to engage in off-farm employment in both rural and urban areas. Recently, the boom in investment in real estate and stock markets has been gradually spreading to rural areas, particularly those areas surrounding large cites. These prolonged and drastic changes in the rural economy appear to influence socioeconomic inequality among rural households. In addition, income inequality in rural areas has been rising with the structural changes in the rural economy, and therefore effective rural public policy for reducing inequality becomes increasingly important for China’s sustainable economic development and social stability.

This study examines these long-term changes in the distribution of rural income in China from the late 1980s until the mid-2010s. It focuses on changes in the redistributive and poverty impacts of public policy as well as the evolution of the structure of rural income and the contribution of major income components to overall inequality. Implementation of a series of pro-rural (huinong) policies during the first decade of the 2000s marked a historical change in the public policy of contemporary China, which had been heavily urban biased in both the Mao and post-Mao eras. Enhancement of the state’s capacity brought about by economic development and systemic transition during the reform era forms the basis of this change of policy.

Therefore, in order to better understand the contemporary Chinese economy, it is valuable to examine to what degree the newly employed public transfers such as production/living subsidies and social security benefits affect rural income distribution. Although pro-rural policies in the 2000s are a common focus of researcher interest, relatively few studies examine the significance of these policies empirically, from the perspective of income distribution. Of these, Wang (2010) examined the redistributive impact of pro-rural policies and found that income redistribution through these policies mitigated rural income inequality and reduced the urban–rural income disparity. Qi (2011) investigated the effects of the newly introduced public medical insurance system on rural income inequality. Lin and Wong (2012) investigated government transfers for rural households and confirmed the significant positive impact of subsidies and reimbursements on rural household income.

Given that it shares a focus with previous literature, this study utilizes more recent, nationally representative CHIP (China Household Income Project) survey data that include comprehensive coverage of income and transfer payments. The working data are compiled from the rural household components of the five rounds of the CHIP surveys, that is, 1988, 1995, 2002, 2007, and 2013. The survey database covers rural households over a 25-year period from 1988 to 2013, which is a period of rapid and prolonged changes in the rural economy in terms of household income structures as well as public policies toward rural households.

Two major empirical approaches are used in this study. First, we will identify the major components of income that affect income inequality in rural China using methodologies of inequality decomposition. Second, we will examine the impacts of public transfers on income inequality and poverty by comparing inequality and poverty measures with and without specific public transfers.

We separate household income into six components: net income from agriculture, net income from nonagricultural self-employment/business, wage earnings, asset income, imputed rental income from owner-occupied housing (hereinafter, imputed rent), and net transfer payments. The first two components are income earned from production or other forms of work, while wage earnings are remittances from family members working outside the home. Asset income includes interest, dividends, and other income from assets. Imputed rent from owner-occupied housing (hereinafter, imputed rent) is estimated based on the rate-of-return approach and is included as an important income component.1 We will principally employ the Gini decomposition method to estimate the contributions of each income component to total inequality.

Our definition of rural household income is basically consistent with the definition used for the entire research project, as described in Chapter 1 (see too the Appendix). However we have adjusted the definitions to allow a comparison of rural income across the various survey rounds, as well as to evaluate properly the effects of public policies on income distribution and poverty.2 More specifically, our definition of transfer payments is restricted to public transfers, and net transfer payments are defined as the sum of public transfers to households (social security benefits/reimbursements and other transfers from the government/collectives) minus transfers from households to the public sector (taxes, levies/fees, social security contribution, and other payments to the government/collectives). However, other miscellaneous private transfers, such as gifts in ceremonial exchanges, are not included in net transfer payments and total income.

By this definition, we can identify changes in public policy easily from the signs of the net transfer payments. If transfers from households exceed payments to households, net transfer payments are negative; such cases occurred in the 1990s and early 2000s when the “peasant burden” of taxes and levies/fees was heavy. We will examine the contributions of positive or negative net public transfers to income inequality and poverty indices by comparing outcomes with and without specific public transfers. This is the second empirical approach used in this study.

It should be noted that there are limitations in our study to the estimation of net transfer payments. First, invisible public transfers through institutional/policy interventions such as the compulsory grain purchase quota at a below-market price (dinggou renwu) are not considered to be invisible taxation on rural households. The interventions in grain marketing were inherited from the Mao era and continued until the beginning of the 2000s (Ikegami 2012, Hoken 2014).3 Second, the subsidies for compulsory education which are targeted at rural households are also not examined in this paper, because it is difficult to estimate the amount of exempted school fees, and moreover, information on boarding students is unavailable in the data.4 Third, although the labor contribution (yiwugong) was a nonnegligible component of rural taxation collections until the early 2000s, here we do not include the monetary value of labor contributions to tax and levy/fee collections because of lack of data, except for the 2002 survey.5

The structure of this article is as follows. Section 2 presents an overview of income inequality in rural China from 1988 to 2013. Section 3 decomposes total income inequality into its major components to capture the structural changes in rural household income during the unique dual process of economic development and systemic transition in China. Special attention is paid in this section to public transfer payments and the changing redistributive effect of these transfers. Section 4, first, summarizes the structure of pro-rural policies in the 2000s, and then further investigates the redistributive and poverty impacts of different types of public transfers. Section 5 concludes and describes the policy implications for improving income inequality in rural China.