Over the past two decades, China has experienced rapid economic growth. This growth has also brought about a rise in social inequality. The nation that once operated under the principle of egalitarianism now struggles with a level of inequality that has surpassed most of its East Asia neighbours. In the 1980’s, poverty was a problem restricted mainly to rural areas, but recently it has forayed into urban areas as well. Since the mid-1990’s, urban poverty has grown at a very fast pace under the influence of globalization (Fulong, Webster, and Yuting 5). The economic restructure of China is a huge contributor to this phenomenon. The Chinese government officially recognized urban poverty as a problem in 2001 through a working report prepared by the State Council (Fulong, Webster, and Yuting 15). It was also an acknowledgement that the nation faced a new challenge on the implementation of social policies.
Urban poverty arises from changes in the institutional models of crucial consumption areas such as housing, healthcare and education combined with loss of urban space rights that occurs when land appropriation is done. Ideally, it is argued that the ability to control food rather than food availability is what can help people understand the poverty and starvation problem (Riskin and Qin 11). Despite the economic progress that China continues to experience, there are some negative externalities that have arisen. First, the income gap continues to widen by the day, there is a reduction in social welfare, and unemployment is on the rise (Fulong, Webster, and Yuting 21). There has been a surge in numbers of urban poor whose primary composition is unemployed individuals, laid-off workers, urban migrants and retired labourers. This marginal group suffers from acute economic inadequacy that is further aggravated by violation of their civil rights and the government’s inability to remedy the social problems in their areas (Fei 17).
The urban poor in China are categorized into two; the old and the new urban poor (Fulong, Webster, and Yuting 21). The two categories have three noteworthy differences. First, the new urban poor are significantly larger in number as compared to the old urban poor. New urban poverty is as a result of a rise in inequality. There is a bigger contrast between the rich and poor in present China as compared to previous times. Also, the old urban poor were mainly comprised of people who were not able to work. This is in stark contrast to the new urban poor as most of them are willing and able to work but lack employment (Fulong, Webster, and Yuting 23). Historically, the huge per capita income disparity between residents in urban areas and their rural counterparts in China meant that poverty was mainly a rural problem (Fei 17). People in rural areas were disadvantaged by government policies that had a bias for the urban populace. The urban area policies imposed restrictions on urban–rural migration. They further provided subsidies to persons living in urban areas while neglecting those in the rural areas. Urban poverty gradually developed into a real problem for China during the 1990s when the government could no longer manage to maintain its subsidy programs and job guarantee schemes (Wanlong and Wong 28).
According to the China Population and Development Country Report there has been a sharp decline in rural poverty in China over the last decade, but urban poverty continues to rise (Fulong, Webster, and Yuting 27). Considering the ongoing changes in China's economic system, the problem of urban poverty is matter of serious concern. Urban poverty is quite different from rural poverty as it is caused by structural changes in the economy which put pressure on the available employment opportunities in an urban area. The western region of China consists of the majority of poor people. Women and children make up the largest proportion of urban poor. The central government continues to invest in poverty reduction projects with the help of local governments. In accordance with this, the Chinese government developed the Western Development Strategy in 1998 aimed at poverty reduction and stimulating economic growth (Fulong, Webster, and Yuting 35). The strategy gives priority the western regions in the funding of projects such as infrastructure, exploitation of natural resources and environmental protection.
The government has made several attempts over the past two decades to encourage a rise in consumption but there has been little success. The earliest of these attempts was by expanding higher education. Although the move succeeded in matriculation, it did not provide sufficient stimulus towards consumption as families opted to save for higher education. The attempt to commercialize the housing market also ended up in a similar scenario as families opted to increase their savings in order to afford the higher prices charged for apartments (Riskin and Qin 25). It is a known fact that urban poverty problem in China arises from the fact that the income growth for its residents is not able to keep up with the growth in social wealth (Fulong, Webster, and Yuting 37). In order to remedy this problem, the government should not develop target policies aimed at only the poor. Rather it should ensure that there exists a resource framework that is not only adequate for people’s needs, but one that is accessible to everyone. A strategic readjustment that ensures commensurate growth in both social and economic wealth would be highly beneficial to the people (Wanlong and Wong 26). The growth in incomes for residents should be strengthened but this should also be accompanied by reforms in state-owned corporations.
One of the ways to remedy this problem is through a rise in income levels and implementation of reforms in monopolized industries to bring about income redistribution. Income redistribution is a government role that can be attained through proper fiscal policies. Tax reforms can ensure that the distribution system is balanced and fair. An increase in domestic consumption can help reduce the wide gap between the wealthy and poor. The nation would also benefit if the social safety net is strengthened in order to rebalance the economy and free up incomes to raise consumption (Wanlong and Wong 31). A recent study on income inequality in China indicated a Gini coefficient of is 0.61 (Li 1). Given that the coefficient ranges from 0-1, this indicates a very high level of income inequality. Economists argue that the key reason for low rate of consumption in China is income inequality. In China, the majority of savings are held by rich individuals. Statistically, 69% of total savings in China belong to the top 10% households (Li 1). These households save at an average rate of 60%. The study also indicated that about 50% of Chinese households do not have any substantial savings (Li 1).
Since 1953, economic policies in Beijing have been made under the Five Year Plan (FYPs) strategy. FYPs carry political and economic strategies that Beijing plans to implement in a period of five years. The 12th FYP (2011-2015) is a very significant one due to the weight in carries with regard to the economy. It is the blueprint for economic rebalancing in China and its main target is to implement a policy shift that will see the country move from an export driven economy to a consumption driven one. The economic growth model will be adjusted to make in more balanced and coordinated. The 12th FYP calls for “inclusive growth.” Under this, the nation seeks to shift its preoccupation from GDP growth toward a policy that will focus on people–oriented growth. The shift is meant to boost social welfare of individual citizens. Beijing is also developing an urbanization policy that involves rural to urban migration of over 300 million people to cities in order to generate natural consumption windfall and drive economic growth. This will be achieved through a relaxation of current restrictions on residency permits and internal migration.
As Beijing develops strategies to increase consumption rates, it has to consider the income inequality study as it indicates consumer behaviour patterns. At present, it is clear that expenditure by the rich is already at their desired level and all their extra income is saved. A majority of Chinese have low rates of saving (Hong 723). This indicates that they lack sufficient income to spend. It is essential that the income levels of these people get raised in order to spur spending and promote a consumer-driven economy. A shift in government expenditure priorities from huge infrastructural developments especially in railroads, roads and airports to social welfare programs such as health insurance and education empowerment can be quite effective in reducing inequality and boosting consumption (Hong 725). Research indicates that expenditure on social welfare often has a substantive impact on how people consume products. If China for instance spends $1 on health insurance, consumption towards rural health insurance would increase by $2.36 dollars while urban health insurance would increase by $4.16 (Li 1). The government should also establish an insurance scheme to cover the unemployed.
According to economic experts, implementation of reforms in health, social security, law enforcement on labour and wages can be a good impetus for social equality (Wanlong and Wong 39). China can also learn and borrow from developing and developed countries which have implemented successful social welfare programs. The United States for instance runs the Earned Income Tax Credits program that assists the employed poor (Wanlong and Wong 39). Conditional Cash Transfer programs in developing countries such as Mexico, Brazil, and India whereby poor families are paid to keep their children in school can also be applied in China to help alleviate urban poverty (Li 1). In China, the government is focussed on geographic rebalancing and urbanization as a means to empower its people. The government believes that urbanization will promote rural urban migration which in turn generates a natural consumption windfall and drives economic growth. As part of its approach to remedying its inequality problem, Beijing developed a new policy for income redistribution. The policy seeks to raise government expenditure on social welfare programs by two percent in five years. This will increase expenditure on social welfare from 12% to 14% (Li 1). The move is progressive but still it is quite low as compared to developed countries such as the United States whose spending on social welfare programs is 37% (Li 1). It would be prudent for the Chinese government to seek out ways to increase its percentage expenditure on welfare programs to a similar level.
A larger scale of expenditure is needed for the Chinese government deal with the problem of income inequality and also boost consumption. The government has number of avenues through which it can source money to support such a program. The nation’s state owned enterprises make tremendous profits as most are monopolies in their industries but less than 10% of these profits go to the government (Riskin and Qin 13). The share of profits to the government can therefore be increased to provide more funds for social welfare programs. China also has a very low budget deficit as compared to a majority of developed countries. It is possible to seek funds through deficit financing. An increase in the budget deficit would provide additional funds which when combined with those acquired from state enterprises can be sufficient to run the social welfare program (Wanlong and Wong 31). In the long run inequality will reduce and so will urban poverty. A strong social safety net reduces the pressure on people to save for emergencies such as illness, job loss and retirement (Wanlong and Wong 37). It will also induce more consumption of goods and services and thus promote a consumption-driven economy.
The suggested restructuring policies under the 12th FYP are quite challenging to achieve. The government’s pledge to refocus its preoccupation from GDP growth toward a policy that will focus on people–oriented growth is a mean feat to achieve. Given the massive nature of China’s industrial economy, it will be difficult for the government to make the shift as it may have serious implications to the economy. The compromise of economic growth versus social net is one that is challenging as both are equally important to the nation. Beijing urbanization policy is unlikely to succeed if the government fails to convince the public to move to urban areas. The lack of employment opportunities and poor social welfare conditions in most cities makes the urbanization policy specifically difficult to implement. The state owned enterprises will also fiercely fight against an increase in their contribution to the state. This means that the success in providing a social net to the urban population is tied closely with the government’s ability to acquire these funds.
The leadership in China faces a huge challenge on how to steer the nation as it transitions from an investment and export driven economy to a consumption-driven economy. The pledge to shift from preoccupation with GDP growth to a people–oriented growth policy requires development of target policies that are inclusive of all people’s needs. It should establish a resource framework that focuses on social welfare programs such as healthcare and education. In this way, the urban poor will be empowered and inequality will reduce. Beijing should strive to ensure its implementation of the 12th Five Year Plan (FYP) goes on successfully. So far, its approach to boosting consumption has been quite successful and may be the key to tackling the rapidly growing problem of urban poverty in China. The transformative nature of this plan if carried out successfully may be the key to reducing inequality in China.
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