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It limits the government's scope to increase funding for public services such as rural health and education.

The government has been trying to rebalance China's production away from investment and exports towards domestic consumption and services, to improve the country's long-term macroeconomic health and the situation of the relatively poor in China.

Recent government measures to reduce disparities include relaxation of the hukou system, abolition of the agricultural tax, and increased central transfers to fund health and education in rural areas.

China has maintained a high growth rate for more than 30 years since the beginning of economic reform in , this sustained growth has generated a huge increase in average living standards.

But in the 15 years from —, China averaged per capita growth of 8. The whole reform program is often referred to in brief as the " open door policy ".

This highlights that a key component of Chinese reform has been trade liberalization and opening up to foreign direct investment , but not opening the capital account more generally to portfolio flows.

China improved its human capital, opened up to foreign trade and investment, and created a better investment climate for the private sector.

It initially welcomed foreign investment into " special economic zones ". Some of these zones were very large, amounting to urban areas of 20 million people or more.

The positive impact of foreign investment in these locations led to a more general opening up of the economy to foreign investment, with the result that China became the largest recipient of direct investment flows in the s.

The opening up measures have been accompanied by improvements in the investment climate. Particularly in the coastal areas, cities have developed their investment climates.

In , the average pretax rate of return for domestic private firms was the same as that for foreign-invested firms. China's sustained growth fueled historically unprecedented poverty reduction.

In most low-income countries this amount is sufficient to guarantee each person about calories of nutrition per day, plus other basic necessities.

In , this line corresponds to about 2, RMB per year. This poverty reduction has occurred in waves. The shift to the household responsibility system propelled a large increase in agricultural output, and poverty was cut in half over the short period from to From to poverty reduction stagnated, then resumed again.

From to there was once more relatively little poverty reduction. Since China joined the WTO in , however, poverty reduction resumed at a very rapid rate, and poverty was cut by a third in just three years.

Taken from the Asian Development Bank , there was an estimated average annual growth rate of 0. This brought the Chinese population to 1.

As per China's national poverty line, 8. China's growth has been so rapid that virtually every household has benefited significantly, fueling the steep drop in poverty.

However, different people have benefited to very different extents, so that inequality has risen during the reform period. This is true for inequality in household income or consumption, as well as for inequality in important social outcomes such as health status or educational attainment.

Concerning household consumption, the Gini measure of inequality increased from 0. To some extent this rise in inequality is the natural result of the market forces that have generated the strong growth; but to some extent it is "artificial" in the sense that various government policies exacerbate the tendencies toward higher inequality, rather than mitigate them.

Changes to some policies could halt or even reverse the increasing inequality. The Nobel Prize -winning economist Sir Arthur Lewis noted that "development must be inegalitarian because it does not start in every part of the economy at the same time" in China classically manifests two of the characteristics of development that Lewis had in mind: rising return to education and rural-urban migration.

In pre-reform China there was very little return to education manifested in salaries. Cab drivers and college professors had similar incomes.

Economic reform has created a labor market in which people can search for higher pay, and one result of this is that salaries for educated people have gone up dramatically.

This development initially leads to higher overall inequality, because the initial stock of educated people is small and they are concentrated at the high end of the income distribution.

But if there is reasonably good access to education, then over time a greater and greater share of the population will become educated, and that will ultimately tend to reduce inequality.

The large productivity and wage gap between cities and countryside also drives a high rate of rural-urban migration, which has left millions of children traumatized due to parents who have left them to be raised by other family members, as the Chinese government does not allow parents who move to urban areas to take their children with them.

This pattern is very evident in the history of the U. So, the same market forces that have produced the rapid growth in China predictably led to higher inequality.

But it is important to note that in China there are a number of government policies that exacerbate this tendency toward higher inequality and restrict some of the potential mechanisms that would normally lead to an eventual decline in inequality.

Much of the increase in inequality in China can be attributed to the widening rural-urban divide, particularly the differentials in rural-urban income.

In terms of the share of investments allotted by the state, urban areas were given a larger proportion when compared with rural areas.

This is in addition to the relatively higher proportions of credit loans the government also provided to the urban SOEs in the same period.

In the period when reforms in urban areas were introduced, the real wages earned by urban workers rose inexorably. Restrictions to rural-urban migration protected the urban workers from competition from the rural workers, [26] which therefore also contributed to rural-urban disparities.

Inequality in China does not only occur between rural and urban areas. There exist inequalities within rural areas, and within urban areas themselves.

Rural-urban inequalities do not only refer to income differentials but also include inequalities in areas such as education and health care.

The structural reforms of China's economy have brought about a widening of the income gap and rising unemployment in cities. The increasing challenge for the Chinese government and social organizations is to address and solve poverty issues in urban areas where people are increasingly being economically and socially marginalized.

According to the official estimates, 12 million people were considered as urban poor in , i. On the flip side, many people who came from the rural areas are not able to find jobs in the cities.

This surplus of rural laborers and mass internal migration will no doubt pose a major threat to the country's political stability and economic growth.

Their inabilities to find jobs compounded by the rising costs of living in the cities have made many people fall below the poverty line. There are also large numbers of unemployed and laid-off workers from state-owned enterprises SOEs.

These enterprises have since failed to compete efficiently with the private and foreign-funded companies when China's open-door policy was introduced.

In the years to , the state sector lost 31 million jobs, which amounted to 28 per cent of the jobs in the sector. The non-state sector has been creating new jobs but not in sufficient numbers to offset job losses from the state sector.

The adverse consequences arising from the market reforms are evidently seen as a socially destabilizing factor.

Lastly, the government provided little or no social benefit for the urban poor who needed the most attention.

Ministry of Labor and Social Security MLSS was the last line of defense against urban poverty in the provision of social insurance and the living allowance for laid-off employees.

However, its effectiveness was limited in scope in which less than a quarter of the eligible urban poor actually receiving assistance.

The Minimum Living Standard Scheme was first implemented in Shanghai in to help supplement the income of the urban poor.

It is a last resort program that is meant to help those that don't qualify for other forms of government aid. The Minimum Living Standard Scheme set regional poverty lines and gave recipients a sum of money.

The amount of money received by each recipient was the difference in their income and the poverty line. The Scheme has grown rapidly and has since been adopted by over cities and counties.

While poverty has been reduced immensely in China over the past decade, it still remains a large problem in rural China.

Even in the heartlands of China where agriculture is used for commercial purposes, the economic boom of China has actually led to a decrease in the price of produce which has resulted in a loss of income for these producers.

Children growing up in poverty are more likely to be undernourished, have less educational opportunities, and have lower literacy levels.

About a third of the left-behind children—20 million—will get involved in crime, while another third will need time in mental health institutions.

The disproportionate amount of inequality in China's rural sector along with correlation between poverty and education shows that children born in rural China are much more likely to score lower on literacy tests and not have the opportunity to pursue higher education.

The implementation of Chinese policy has exacerbated the issue of rural poverty en lieu of increased urban poverty. Typically the urbanization of a country leads to mass migration from the rural areas to the urban.

However, the Chinese government implemented a policy that restricts the migration of people born in rural China from coming to urban China.

In , thousands of migrant workers living in Beijing were evicted because they did not possess an urban hukou. This is a relocation of poverty from the urban sector to the rural sector.

The political response of China's government to the issue of rural poverty has been both lauded and criticized. China has been criticized for its high rate of rural poverty and the policies that the government has put in place to ameliorate the poverty.

In Transformation of Rural China, Jonathan Unger points out that the lack of taxation at the village level restricts the villages from dealing with the problems they face.

Supporters of government policy point out that over the time period of to , China has reduced rural poverty from million people to just over 70 million people.

Education is a prerequisite for the development of human capital which in turn is an important factor in a country's overall development.

Apart from the increasing income inequality, the education sector has long suffered from problems such as funding shortages and unequal allocation of education resources, [40] adding to the disparity between China's urban and rural life; this was exacerbated by the two track system of government's approach to education.

The first track is government -supported primary education in urban areas and the second is family -supported primary education in the rural areas.

Rural education has been marginalized by the focus on immediate economic development and the fact that urban education enjoys more attention and investment by the central government.

Because of limited educational resources, urban schools were supported by the government while village schools were provided for by the local communities where educational opportunities were possibly constrained depending on local conditions.

In addition, rural villages have a difficult time finding quality teachers because of the lower standard of living in villages.

As a result, some rural teachers are not qualified as they received college degrees from continuing-education programs, which is not the best type of further education one could receive.

As a result, rural students often find themselves neither competitive enough to gain admissions to colleges nor employable for most occupations.

This is especially prominent in Tsinghua and Peking University where the percentage of rural population studying in the two universities have shrunk to These numbers are the most recent reliable data that has been published and experts agree that the number might be as low as 1 percent in Pre-reform China had a system that severely restricted people's mobility, and that system has only slowly been reformed over the past 25 years.

Each person has a registration hukou in either a rural area or an urban area, and cannot change the hukou without the permission of the receiving jurisdiction.

In practice cities usually give registration to skilled people who have offers of employment, but have generally been reluctant to provide registration to migrants from the countryside.

Nevertheless, these migrants are needed for economic development , and large numbers have in fact migrated. Many of these fall into the category of "floating population".

There are nearly million rural residents who spend at least six months of the year working in urban areas.

Many of these people have for all practical purposes moved to a city, but they do not have official registration. Beyond the floating population, there are tens of millions of people who have left rural areas and obtained urban hukous.

So, there is significant rural-urban migration in China, but it seems likely that the hukou system has resulted in less migration than otherwise would have occurred.

There are several pieces of evidence to support this view. First, the gap in per capita income between rural and urban areas widened during the reform period, reaching a ratio of three to one.

Three to one is a very high gap by international standards. Second, manufacturing wages have risen sharply in recent years, at double-digit rates, so that China now has considerably higher wages than much of the rest of developing Asia India, Vietnam, Pakistan, Bangladesh.

This rise is good for the incumbent workers, but they are relatively high up in China's income distribution, so that the wage increases raise inequality.

It is hard to imagine that manufacturing wages would have risen so rapidly if there had not been such controls on labor migration.

Third, recent studies focusing on migrants have shown that it is difficult for them to bring their families to the city, put their children in school, and obtain healthcare.

So, the growth of the urban population must have been slowed down by these restrictions. China's urbanization so far has been a relatively orderly process.

One does not see in China the kinds of slums and extreme poverty that exist in cities throughout South Asia, Eastern Europe, Latin America, and Africa.

But at the same time the hukou system has slowed and distorted urbanization, without preventing it. The system has likely contributed to inequality by limiting the opportunities of the relatively poor rural population to move to better-paying employment.

Just as Chinese citizens are either registered as urban or rural under the Hukou system, land in China is zoned as either rural or urban.

Under Chinese property law , there is no privately held land. Urban land is owned by the state, which grants land rights for a set number of years.

Reforms in the late s and s allowed for transactions in urban land, enabling citizens to sell their land and buildings, or mortgage them to borrow, while still retaining state ownership.

The biggest distortion, however, concerns moving land from rural to urban use. China is a densely populated, water-scarce country whose comparative advantage lies more in manufacturing and services than in agriculture.

The fact that many peasants cannot earn a decent living as farmers is a signal that their labor is more useful in urban employment, hence the hundreds of millions of people who have migrated.

But, at the same time, it is efficient to allocate some of the land out of agriculture for urban use. In China, that conversion is handled administratively, requiring central approval.

Farmers are compensated based on the agricultural value of the land. But the reason to convert land — especially in the fringes around cities — is that the commercial value of the land for urban use is higher than its value for agriculture.

So, even if China's laws on land are followed scrupulously, the conversion does not generate a high income for the peasants.

There are cases in which the conversion is done transparently, the use of rights over the land auctioned , and the revenue collected put into the public budget to finance public goods.

But still the peasants get relatively poor recompense. There have been reports of cases where peasants complain and demonstrate because the conversions have not been done in a transparent way, and there have been accusations of corruption of local officials.

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