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China's New Urban-Rural Divide andPitfalls for the Chinese EconomyQunjian Tian PhD a ba Cornell Universityb Connecticut College , New London, ConnecticutPublished online: 15 Feb 2011.

To cite this article: Qunjian Tian PhD (2001) China's New Urban-Rural Divide and Pitfalls forthe Chinese Economy, Canadian Journal of Development Studies / Revue canadienne d'étudesdu développement, 22:1, 165-190, DOI: 10.1080/02255189.2001.9668806

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China's Wew Urban-!&u-al Divide and Titfalls for the Chinese Economy

Qunjian 'Tian

ABSTRACT

This paper examines the widening urban-rural income gap in China which has existed since 1985, and its implications for the Chinese economy. I argue that the decliningfiscal capacity of the central government and the ensuing central-local competition for revenues, a systematic urban bias in Chinesefinancial mechanisms, and the structural vulnerability of small peasant farmers in a transitional economy have all contributed to the growing disparity between urban and rural residents. The consequences of this growing urban- rural gap have begun to haunt the Chinese economy as it struggles to readjust fiom export-oriented growth to the boost of domestic demand.

Cet article examine l'tcart deplus en plus grand qui existe, depuis 1985, entre les revenus des habitants des milieux urbains et ruraux de la Chine et analyse les rkpercussions de ce fosst kconomique sur l'tconomie chinoise. L'auteur constate que le dkclin de la capacitt fiscale du gouvernement central, la umcurrence qui s'ensuit en ce qui concerne les revenus, l'impamalitt systhatique dans les mtcanismes de financement et la vulntrabilitt des petitspaysans dans une tconomie en pleine transition ont contribut d tlargir le fosst entre les habitants des milieux urbains et ruraux Les constquences de cette disparitt commen- cent d hanter la Chine d l'heure oir le pays tente de redresser son konomie de sa croissance orient& vers les exportations et de la diriger vers la demande inttrieure.

Qunjian Tian received his PhD from Cornell University and is assistant professor of gov- ernment at Connecticut College, New London, Connecticut.

Special thanks to Paul Pickwitze, Guang Lei and Wang Liping for their comments on an earlier version of this paper. I also want to thank two anonymous reviewers for their detailed comments. The views expressed here are solely mine.

Canadian yournal of Development Studies, VOLUME XXII, NO. 1,2001

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Qunjian 'Tian

INTRODUCTION

Nothing is new about using the agricultural sector to finance a crash in indus- trialization in the history of the People's Republic of China. Extracting agri- cultural surplus and retaining profits in industries have been the key sources of capital accumulation (Perkins and Yusuf 1984; Riskin 1987; Selden 1993; Whyte 1996). What is new is the widening urban-rural divide in the reform era. While economic reforms have raised the standard of living for both urban and rural residents, the persistence and widening of urban-rural disparity have serious political and social consequences for the Chinese economy. After a brief period between 1979 and 1984 during which the income of rural resi- dents grew at a faster pace than that of urban dwellers, leading to a narrowing of rural-urban income disparity, the trend was reversed. Since 1985, in spite of the rapid economic growth, rural residents' income growth has remained sluggish. The irony is that this new urban-rural divide is occuring amid high economic growth driven largely by the rapid expansion of the rural industry and a massive process of urbanization. The launching of urban reform since 1985 and the increasing "marketization" of government and administrative agencies have given rise to a vast number of new institutions and interests. In this dynamic and complex process, new interests are proliferating and realign- ing. To the extent that the ability of these interests to wield power over policy varies profoundly, the politics of policy making and implementation has become more complex and conflictual. To the extent that policy making has been increasingly driven by interests instead of state plan, the lesser repre- sented and the powerless have been gradually but forcefully pushed to the margins. The worsening plight of peasants and its negative socio-economic consequences reflect this process of transformation, pointing to a growing dis- crepancy between the policy-making process and the institution of interests representation. As policy making has been increasingly influenced by power- ful urban interests, the continuing under-representation or even non-repre- sentation of rural interests has clearly put the peasants at a disadvantage.

In this paper, I will first evaluate the sluggish growth of rural income and the widening urban-rural income gap. I will then identify some of the factors that may explain this growing gap and examine some of the implications it poses for the Chinese economy.

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China's Wew Urban-Rural Divide: Tiqalls for the Chinese Economy

I. GROWING URBAN-RURAL DISPARITY

If history is any lesson, the Chinese communist party, which relied on rural- based power to win the struggle with the Kuomintang (the Nationalist Party) in the civil war, should clearly understand the importance of the peasantry in China. However, peasants have generally not fared well in the new People's Republic. After the third plenum of the 1 lth Central Committee in 1978, rural residents were among the first to benefit from the economic reforms. As a result of a large increase in agricultural output and government procurement price, and the liberalization and revitalization of the local markets, average net income for peasants grew by 14.7% annually (discounting inflation, net income grew by 11%) between 1979 and 1984. During the same period, net income growth for urban residents was only 8.7%. However, since 1985, despite the rapid economic growth and the increase in agricultural produc- tion, rural income growth has slowed down (CNA 1993). Between 1986 and 1990, rural net income growth was at a low annual average of 4.82% and gross income growth at 11.6%. Between 1991 and 1995, rural net income growth slipped further to an average of only 4.28% (2.0% in 1991; 5.9% in 1992; 3.2% in 1993; 5% in 1994; and 5.3% in 1995). The situation in the large agricultural provinces in the interior was even worse. Between 1991 and 1995, annual rural net income growth in the central provinces was only 0.28% (an annual increase of only three yuan) and in the western provinces, by -0.74% (an annual decrease of 4.3 yuan) (Liu 1997).

In the early period of reform, as a result of a higher rural net income growth, the income gap between urban and rural residents was narrowed from a ratio of 3.1:l in 1980 to 2.4:l in 1984. However, in 1985, as rural income growth was again outpaced by urban income growth, the gap between the two began to widen again; in 1989, it had increased to a ratio of 2.9:l and by 1995, it had reversed to its pre-reform level of 3.2:l (table 1 and fig. 1).1

1. However, according to Riskin and Rahman (1998), the official statistics may have over- stated the extent of the urban-rural income disparity by exaggerating the rate of urban income growth and understating that of rural income. According to their studies and the China Human Development Report (Riskin et al. 1999, p. 54), in 1995, the rate of growth in nominal urban income was only slightly higher than that of nominal rural income. In real terms, the ratio of urban to rural per capita income actually declined from 2.42 in 1988 to 2.38 in 1995. This dif- ference may be explained by the different methodologies, such as relatively inclusiveness in terms of pecuniary earnings and non-pecuniary benefits used in the two surveys and by the much smaller survey pool used in Riskin and Rahman's study. Riskin and Rahman's survey gives the narrowest disparity; the Statistical Yearbook, the medium; and the urban-rural household survey, the greatest.

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Table 1. Urban-rural divide in per capita disposable income (PDI) Unit: Yuan

Year Nominal Urban price Deflated Nominal Rural price Deflated Urban-rural urban PDI index urban PDI rural PDI index rural PDI disparity

Notes 1. Rice index means rrban and rual comumer price index. 2. Data fa 1981-1984 are daMl hum X. Cheng (1997, p. 90) and D. T. Yang and H. Zhou (1999, p. 112). 3. Data fa 1996-1998 are ctawn from chi^ Statinical Yearbook 1999 (p.293, 298, 318). While the rual PDI

is consistent with the statistics from R m l Hwsehold Su~ey, urban PDI recorded in China Statistical Yearbmk 1999 is constantly lower than the statistin hwn Urban Haaehold Survey upon which both C h q , Yang and Zhw's studies rely. Given the absence of recent Urban H o m l d Swey data, I used a rather aude method to calculate a mugh estimate ofthe urban mminal PDI during the period of 1996 to 1998 by using statistiu of 1995 as used in Cheng's work as a base and the growth rate of u b n PDI han 1996 to 1998 as recorded in China Statistical Yearbook 1999.

Souce: China Statistical Yearbwk (1999); Cheng (1997); Yang and Zhcu (1999).

It is interesting to note that while urban-rural income disparity has nar- rowed again since 1996, urban-rural disparity in consumption has continued at a high of 3.1: 1 (table 2). Since average inflation rates during this period were about the same in urban (3.77%) and rural (3.13%) areas, the persistence in urban-rural consumption disparity may point to some forms of pecuniary and non-pecuniary earnings by urban residents in the "gray area:' which are not accounted for in the official statistics or revealed to researchers in their various studies. While systematic data on this is not available, the frequently reported cases of corruption among officials and government employees may indicate the existence of a vast amount of urban disposable income (He 1998; Yang et al. 1997). Corruption can also occur at an institutional level as gov- ernment institutions divert and embezzle funds earmarked for agricultural investment, aid to peasant farmers and even antipoverty funds to cover their institutional expenses or to provide outright benefits for their employees. For

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China's Wew Urban-Rural Divide: Titfalls for the Chinese Economy

Figure 1. Growing urban-rural disparity

- Urban income - - - - Urban consumption

Yuan - Rural income m 1 = -. 1 = Rural consumption

- 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

Year

Table 2. Per Capita Consumption of Rural and Urban Residents, 1980-1998

Unit: Yuan

Year National Average Urban Residents Rural Residents Urban-rural

1980 236 496 178 2.8:l 1981 249 520 192 2.7:l 1982 266 526 21 0 2.51 1983 289 54 7 232 2.4:l 1984 327 598 265 2.3:l 1985 437 802 347 2.3:l 1986 447 833 351 2.4:l 1987 550 1089 41 7 2.6:l 1988 693 1431 508 2.8:l 1989 762 1568 553 2.8:l 1990 803 1686 571 3.0:l 1991 896 1925 621 3.1:l 1992 1070 2356 718 3.3:l 1993 1331 3027 855 3.51 1994 1746 3891 1118 3 5 1 1995 2236 4874 1434 3.4:l 1996 2641 5430 1768 3.1:l 1997 2834 5796 1876 3.1:l 1998 2972 61 82 1895 3.3:l

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170 Qunjiun l i a n

example, according to a report in late 1998, of a total of $65 billion in state funds set aside for the purchase of grain since 1992, $25 billion (40%) had dis- appeared. Investigators found that much of the missing funds had gone into luxury condominiums, futures trading and the purchase of cars and mobile phones (McCarthy 1998). As I will show in the next section of this paper, a recent investigation by the Central Auditing Agency has revealed the preva- lence of these illicit practices even among the national ministries directly under the State Council. As a result of these malpractices, the figures in the books and their actual end use can vary wildly. The persistent urban-rural consumption gap can also point to the continuing importance of what Shaoguang Wang calls "the second budget," the extra-budgetary funds (yusuanwai zijin) accrued to various government institutions.2 While the sources of the extra-budgetary funds can be both urban and rural, the end point of their outlays is mostly urban. This can generate sizable consumption power in both pecuniary and non-pecuniary terms, taking the form of exclu- sive benefits a specific danwei (institution or company) provides to its employees (Wang 1995b; Deng et al. 1990).3

11. STATE AND PEASANTS IN CHINA'S TRANSITIONAL ECONOMY

No single factor could account for the complicated process that led to the rise of this new urban-rural divide. In this paper, three major factors have been identified. First, the declining fiscal capacity of the central government and the ensuing central-local competition for revenues have had a direct impact on

2. Before 1980, extra-budgetary funds were primarily composed of depreciation funds - a fixed residual amount that remained with the locality and provided a pool of funds that could be recirculated to enterprises in the form of grants for the renovation of capital equipment. The fiscal reforms of the 1980s created new sources of extra-budgetary funds, including new local taxes, non-tax levies and various kinds of miscellaneous charges and fees. Since extra-budgetary funds are not shared with upper levels of government, this created strong incentives to collect them, as evidenced by their explosive growth since the early 1980s. Between 1987 and 1991, extra-budgetary funds at the provincial level increased by almost 60% - from 202.88 billion yuan to 324.33 billion yuan. Equal to only 20% of the national budget in the early 1980s, extra- budgetary funds grew to the same size as the national budget by the end of the decade (see Wang S. 1995b; Dang et al. 1990; Oi 1999).

3. This phenomenon is actually well known and widespread. The amount of these benefits can vary from different danwei and regions and often take the form of bonuses, subsidized housing, cooking oil, fruits, free sightseeing tours, phones installed at public expenses, govern- ment cars and government-paid gas coupons.

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China's New Urban-Rural Divide: Titjalls for the Chinese Economy 1P

Table 3. Government revenue as percentage of gro# domestic product (GDP)

Unit: 100 million yuan

Year Government GDP % of revenue Budgetary revenue to GDP Deficit

1979 1146.38 4038.2 28.4 -135.41 1980 1159.93 4517.8 25.7 -68.90 1981 1175.79 4862.4 24.2 37.38 1982 1212.33 5294.7 22.9 -17.65 1983 1366.95 5934.5 23.0 -42.57 1984 1642.86 7171 .O 22.9 -58.16 1985 2004.82 8964.4 22.4 0.57 1986 2122.01 10202.2 20.8 -82.90 1987 2199.35 11 962.5 18.4 -62.83 1988 2357.24 14928.3 15.8 -133.97 1989 2664.90 16909.2 15.8 -158.88 1990 2937.10 18547.9 15.8 -146.49 1991 3149.48 21617.8 14.6 -237.14 1992 3483.37 26638.1 13.1 -258.83 1993 4348.95 34634.4 12.6 -293.35 1994 5218.10 46759.4 11.2 -574.52 1995 6242.20 58478.1 10.7 -581.52 1996 7407.99 67884.6 10.9 -529.56 1997 8651.14 74462.6 11.6 -582.42 1998 9875.95 79395.7 12.4 -922.23

Swa: China Statisticdl Yeadu& 1999, p. 266.

the slow growth of rural income in the form of various financial burdens that have been transferred to peasants. Second, the financial system has a persistent bias that benefits urban interests in the forms of easy credits to state enter- prises and subsidies to urban residents and excludes rural residents. Third, economic reform without the development of corresponding institutions for equal representation of all social interests has made small peasant farmers more vulnerable to powerful urban interests. This is reflected in the massive diversion of funds earmarked for agricultural investment and procurement of agricultural produce to projects that benefit urban interests.

First, since 1986, the government budget has been constantly in the red (table 3). With the exception of 1979, when China fought a major border war with Vietnam, in every year since 1988, the government budgetary deficit has been over 10 billion yuan, and since 1991, it has been over 20 billion yuan. Between 1994 and 1997, the annual government deficit was persistently between 50 and 60 billion yuan, reaching a high of 92.2 billion yuan in 1998. Since the beginning of reform, government budgetary income declined from

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172 Qunjian 'Tian

28.4% of GDP in 1979 to 10.7% in 1995, a drop of about 18% (China SSB 1999; Wang 1997; Hu 1996). Given the declining share of financial resources under its control, the government simply does not have sufficient financial resources to redistribute them among different sectors, regions and income groups (Wang 1995b).

Partly because of its decreasing share of financial resources, the central gov- ernment has transferred more and more of its responsibilities to local govern- ments, including expenditures on education, health, pension and social welfare funds, price subsidies and fixed capital investment (Wang 1995a). The scheme of central government sponsoring programs without matching funds, known as wou qingke, nichuqian (I take people to dinner, you pay the bill), has increased the financial burdens for local governments. In addition, the central government has frequently raided local finance. For example, in 1981 the central government "borrowed" about seven billion yuan from some provinces and in 1982, another four billion, which was never paid back. Despite the promise that it would stop such practices in 1983, from 1984 to 1987, the central government again "borrowed" from Shanxi Province alone 1.76 billion yuan, 180 million yuan, 170 million yuan and 290 million yuan respectively. While this "borrowing" stopped after 1987, the central govern- ment substituted another form of tanpai (specific fund-raising apportions) called "local contributions." This affected the rich provinces along the eastern coast most severely (Wang 1997). Therefore, contrary to the prevailing view in the literature on China's central-local government relations, it is not entirely fair to blame local governments for all of the central government's financial difficulties. This becomes clear when we look at the spending side of the budget. The central government's declining share of revenue has often been matched by a corresponding declining share of total government spending. Oddly, even after 1994 tax assignment reform, when the central government's share of total revenue reached parity with that of local governments, its declining share of total government spending continues. For example, in 1994 and 1995 when the central government's share of total revenue (290.65 billion yuan in 1994 and 325.6 billion yuan in 1995) was 26% and 9.1% more than local governments' share (231.16 billion yuan in 1994 and 298.56 billion yuan in 1995), its share of total government spending (175.44 billion yuan in 1994 and 199.54 billion yuan in 1995) was only 43.4% and 41.2% of that of local governments (403.82 billion yuan in 1994 and 482.83 billion yuan in 1995) (China SSB 1999).

Part of the problem lies in the central government itself. For the most part, the central government has been overstaffed and corrupt. Before the shuffle in

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China's Wew Urban-Rural Divide: Titfalk for the Chinese Economy 173

1998, there were 56 ministries under the State Council. Each ministry had a total of about ten ministers and deputy ministers. In 1994, these ministries controlled a pool of extra budgetary funds of more than 200 billion yuan. This "third budget," as Hu Angang calls it, constituted about 40% of the govern- ment's total budgetary income (Hu 1996). According to a recent report by the Central Auditing Agency to the National People's Congress, various central ministries have recently illicitly collected and misused more than 16.4 billion yuan of public funds to buy stocks and build luxury hotels and apartments for themselves.4 On top of the corruption (paobu qiangjin "go to the ministries with money") in these ministries, their welfare costs and their wages are a huge drain on government finances.

Therefore, given the increasing responsibilities and difficulties of local finance, many of the central government's policies and programs, which lacked sufficient funds to support them, could only become new burdens for the peasants. Many of these increasing burdens take the form of various legal taxes and illicit charges and fees (Wen 1996). In December 1993, the Economic Daily listed its estimate of the average burdens for peasants. First are taxes to the state, including agricultural taxes, vehicle registration fees and slaughter taxes. Second are various "expenses" which, according to fiscal law and poli- cies, are imposed and used by the local governments. These include village education fees, birth control fees and militia training fees. Third, distinct from taxes, are the funds levied on all net incomes by the village co-operative eco- nomic units such as tiliu, an elastic "deduction" that households have to pay for using land and other facilities belonging to the collective. Finally, there is another form of levy: "volunteer" labour (which averaged 9.75 days in 1991 and which was often compulsory) or its equivalent in cash. All these could amount to about 23.3% of average rural income, and the list does not include all the illicit charges that do not even have a name (CNA 1993, no. 1493).

In the 1990s, the central government held a series of conferences on agri- culture. However, the failure to reverse the deteriorating situation with regard to peasant burdens raised doubts about the effectiveness of central govern- ment policies. For example, although the State Council issued a decree in 1991 clearly stipulating that the total burden for rural residents must be kept to

4. According to the report, the misuse of public funds and illicit charges has involved various ministries under the State Council including State Taxation Bureau, the Ministry of Public Safety and the Central Customs Agency. The most notorious is the Ministry of Water Irrigation and Control, which alone misused more than 300 million yuan of the funds allocated for water control to build hotels and apartment buildings and to buy stocks. (See Canada-China News, Ottawa, 3 July 1999, p. A-6 and Commercial Times, Taipei, 9 July 1999, electronic edition).

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Qunjian Tian

Table 4. Government expenditure, 1980-1 998

Unit: 700 million yuan

Year Total expenditure

SOE Subsidies to Expenditure Urban price % of total Agiwltural % of total investment loss-making on SOEs as % subsidies expenditwe inveNnent experditue

SOEs of total

463.52 37.7 117.71 10.0 82.12 6.7 345.69 30.4 159.41 14.0 73.68 6.5 361.77 29.4 172.22 14.0 79.88 6.5 436.58 31.0 197.37 14.0 86.66 6.2 575.85 33.9 218.34 12.9 95.93 5.6 672.28 507.02 58.8 261.79 13.1 101.04 5.0 735.87 324.78 48.1 257.48 11.7 124.30 5.6 658.63 376.43 45.8 294.60 13.0 134.16 5.9 655.36 446.46 44.2 316.82 13.0 158.74 6.4 640.09 598.88 43.9 373.55 13.2 197.12 7.0 712.20 578.88 41.9 380.80 12.4 221.76 7.2 753.51 510.24 37.7 373.77 11.0 243.55 7.2 790.15 444.96 33.0 321.64 9.0 269.04 7.2

1031.79 411.29 31.1 299.30 6.4 323.42 7.0 1072.18 366.22 24.8 314.47 5.4 399.70 6.9 1318.47 327.77 24.1 364.89 5.4 430.22 6.3 1473.39 337.40 22.8 453.91 5.7 510.07 6.4 1714.90 368.49 22.6 551.96 6.0 560.77 6.1 2071.28 333.49 22.3 712.12 6.6 626.02 5.8

-

Snwx ChiMStatisticdl Y d 1999(p. 267.269): Yang and Zhou (1999, p. 125).

within 5% of the net income of the previous year and again in 1993 it can- celled 37 items of fees imposed on peasants, fees and taxes continued to add up to more than 10% or even 30% of their net income. According to a 1994 survey of 60 counties in Liaoning, 28 exceeded the 5% cap. Among the 64 counties surveyed in Jiangsu, 40 exceeded it. In Queshan county, Henan province, there were as many as 30 types of charges. In 1995, after turning over to the state 51 kilograms of grain per person, which was worth 61.2 yuan, each person had to pay an additional 28.3 yuan, which amounted to 20% of total net per capita income (Yang et al. 1997).

At a deeper level, however, the growing urban and rural disparity reflects a persistent urban bias, which has been identified as one of the key structural problems of policy making in developing countries (Lipton 1977). Cities and the state institutions rooted in them are centres of power that seek to domi- nate the policy-making process in favour of their own interests. During the early period of China's development, this took the form of control of the agri- cultural surplus at low prices in order to serve the top priority of rapid indus- trialization by keeping down the cost of wages and food for urban industrial

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China's 'New Urban-Rural Divide: Tirfalls for the Chinese Economy 175

workers (Selden 1993). With the introduction of urban reform since the mid- 1980s, the political imperative has shifted to attending to the needs of power- ful urban interests. This is reflected in the financial mechanism that transfers resources from the rural to urban areas. First, overwhelming shares of gov- ernment outlays were allocated as investment to the urban sector. Throughout the reform period, government expenditure on investment in state-owned enterprises (SOEs), subsidies to loss-making SOEs and urban price subsidies accounted for more than 50% of government outlays between 1985 and 1990, more than 40% between 1991 and 1992, more than 30% between 1993 and 1995, and slightly less than 30% since then (table 4). This does not even include the item designated as "other urban expenditures" in Yang and Zhou's study (1999).

In addition, rural residents were always the most severely affected by the high inflation of the late 1980s and early 1990s. Because rural residents did not have access to the price subsidies enjoyed by urban residents, high inflation ultimately constituted a higher inflationary tax on them. It is odd that some- times when inflation ran high, the prices for daily necessities were often lower in big cities than in rural areas. Prices in urban areas were often brought down by supply from various vegetable, egg, meat and poultry production facilities (ji di) financed by metropolitan governments, constituting a form of indirect subsidies to urban residents. This is closely related to the political power of urban residents. Since the massive anti-government demonstrations in 1989, the government has been particularly sensitive to the discontent of urban res- idents, especially those in large cities. Rural residents may be angry (according to Yang Yiyong's study, more than 57.16% of the rural residents surveyed are not happy with the current situation), but because they are widely dispersed and live far from power centres, they have difficulty organizing effective col- lective actions. As a result, residents in big cities usually get the most attention and subsidies. In 1989, the municipal government of Beijing used 4.5 billion yuan to stabilize the consumer prices in the city. In 1995, the subsidy rose to 7 billion. Ever after the tax reform in 1994, financial assistance and transfer pay- ments from the central government to Beijing amounted to 475 yuan per capita (where per capita net income was 4731.22 yuan that year). At the same time, financial assistance and transfer payments to much poorer Jiangxi amounted to a mere 8 yuan (where per capita net income was only 2521.12 yuan the same year); to Guangxi, 37 yuan; and to Henan, 84 yuan (where per capita net income was only 2398.35 yuan) (Hu 1996; Yang et al. 1997). Between 1986 and 1993, total antipoverty funds from various levels of gov- ernments and ministries was only 10 billion yuan, an annual average of only

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176 Qunjian Tian

a little more than 1 billion (Kang 1995; Piazza and Liang 1998). During the same period, however, government subsidies to loss-making SOEs were 369.2 billion yuan and price subsidies to urban residents, 261.7 billion yuan. Instead of narrowing the urban-rural gap, central government policies on financial assistance and transfer payments have helped widen it. Political need for sta- bility and practical consideration for self-interest created an imperative for government and administrative elites to attend to the needs of urban interests.

In contrast, throughout the reform period, government spending as invest- ment in agriculture never exceeded 7.2% of total government expenditures, despite repeated pledges to increase investment in agriculture (Wen 1996) (see also table 4). According to a report by the Institute of Rural Development under China's Academy of Social Sciences, except for the period between 1978 and 1984, when about 60 billion yuan flew from urban to rural areas through financial and fiscal means, during the reform era, the financial transfer mech- anism functioned to siphon resources from rural regions to urban areas. From 1952 to 1991, more than 1,314.07 billion yuan (about 22% of the GNP for each year) was channelled from rural to urban areas through the transfer mechanism of price differentiation between agricultural produce and produc- tion inputs (Cheng 1997). From 1985 to 1994, about 400 billion yuan was transferred from rural to urban areas. In 1994 alone, 134 billion yuan was transferred. In 1980, 1985, 1990 and 1992, the government extracted 6.6 billion yuan, 18.8 billion yuan, 38 billion yuan and 59.7 billion yuan, respec- tively, in taxes from the rural sector. Total agriculture-related investment from the government budget, including investment in agriculture, rural relief and rural capital construction was 15 billion yuan in 1980, 15.3 billion yuan in 1985,30.7 billion in 1990 and 37.3 billion yuan in 1992. Except for 1980, the government took in more than it invested in from agriculture (Yang et al. 1997). While the rural economy contributed more than three quarters of the overall economic growth in 1994, urban-rural disparity reached a new high that year. (According to Liu Shouying, the rural economy, including agricul- ture and rural industries, represented 55.7% of the GDP and between 1991 and 1995, and 8.2% of the 11.8% growth rate of the economy came from con- tributions by the rural economy). While fixed national capital investment increased by 23.8% in 1991,42.6% in 1992 and 50.6% in 1993 resulting in a 13.2% increase in GDP, total national investment in agriculture decreased from 10.3% in 1991 to 2.2% in 1993 and a mere 2% in 1994. If we factor in inflation, it actually decreased by 7% (Yan 1995).

Finally, the interests of peasant farmers were further harmed in the mid- 1980s by the rush to establish local industries and development zones, and to

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China's 'Nav Urban-Rural Divide: Titfnlls for the Chinese Economy 177

speculate in stocks and real estate. Local governments had strong incentives to favour industry over agriculture partly because policy signals from the centre had encouraged them to do so, but more importantly, industry could be placed more firmly under their control so that it could become a goose that would lay the golden eggs to fill up their own coffers (White 1993; Oi 1999).

While the development of township and village enterprises (TVEs) has helped improve welfare and generate employment opportunities for rural res- idents in certain areas, most notably in the lower Yangtze Delta around Shanghai, the Pearl River Delta in south China and the Bohai Bay area around Beijing and Tianjing, local industrialization is mostly an urban and township phenomenon in the vast agricultural provinces in the interior.5

One direct consequence of this rush towards industrial development and speculative business was the spread of "fund-raising fever" (jizi re), "develop- ment-zone fever" (kaifaqu re) and "real-estate fever" (fangdichan re). Faced with the excessive thirst for investment capital, banks and local governments issued between 100 and 200 billion yuan in unauthorized loans. According to figures released from 26 provinces, an estimated total of more than 52.4 billion yuan was diverted out of deposits held by banks in the interior and 44 billion yuan from agricultural procurement accounts. The diversion of funds from rural regions to urban and coastal areas led directly to a severe shortage of procurement funds for agricultural produce. As a result, in the autumn of 1992, farmers were handed at least six billion yuan worth of IOUs (white slips) by state procurement agencies. Despite repeated directives from the central government prohibiting their use, the problem of white slips only worsened (Wedeman 1997).

In addition to IOUs, the circulation of capital gave rise to difficulties of another kind. Because capital diverted to other uses is not readily returned, the slow capital flow back to the procurement funds and Agricultural Bank could only make the shortage worse (CNA 1993, no. 1492; H. Ma 1997a). The short-

5. While rural industrialization has contributed significantly to the increase in the income of rural residents since the mid-1980s, contributing to more than one third of rural income growth between 1985 and 1988, its contribution began to slow down in the late 1980s and early 1990s (Liu 1997, p. 419). This may be related to the structural problem with the development of local industries. Rapid expansion of local industries also led to duplication and waste, leading in turn to heightened competition and declining profits. Even in Jiangsu where the most rapid development of TVEs occured, profits of rural industries fell from around 32% in the early 1980s to less than 10% in the late 1980s and early 1990s. In southern Jiangsu, where TVEs were the most developed in the country, their profits dropped to less than 5% in the early 1990s (Wan 1993, p. 117; Naughton 1995, p.150-151).

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178 Qunjian Tian

age of funds for grain procurement could have been met by increased funds from the governments and the Agricultural Bank, but both the central and local governments failed to issue subsidies for grain procurement. In addition, the low real interest rate for procurement loans and profit motives also made the Bank unwilling to extend more loans to the procurement agencies (E. Cheng 1997). AU these made local procurement agencies increasingly reluc- tant to purchase grain. To make matters worse, local governments also defaulted on an additional five billion yuan in subsidy payments owed to peasant farmers.

The investment fever also disrupted the backward flow of money from the coastal regions to the interior. As banks in the coastal regions diverted h d s out of postal remittance acwunts, postal orders sent by migrant workers fiom cities and coastal regions often could not be cashed. Post ofices and banks in the interior were often forced to issue "green slips," IOUs by the post office (Wedeman 1997; CNA 1993).

Caught in these "fevers," the banks and various government agencies fre- quently diverted procurement accounts to other uses. While other govern- ment outlays were well guarded by related departments, funds earmarked for agricultural procurement became vulnerable. At the national and provincial levels, government and financial institutions at every layer would appropriate apurtiaon of their share of the fundgttm~zvani&ydiau&mid~a or to p r u d e mizigb M s hr tdkim ermpbyem. Oh mamy occasioms, they simply dhwfcd their s b m tex &more lucrative inter-bank market or purely speculative business. For example, one agency in Nanjing operating under the central agricultural development fund had nothing to do with agriculture. Its main business was real estate speculation in Hainan and other coastal cities in the south. The Jiangsu Agricultural Bank also put money aside in some funds &ati could generate hugely profitable returns for its employees.6 At l o w kveIs, k d banks took their share to township~and.xillage.m~rises because industry could generate higher and quicker returns than agriculture. At the bottom of the "food chain," peasant farmers ended up with IOUs. Even if the IOUs were eventually redeemed, given the high inflation rates during this period, delays in payment constituted a hidden tax that further eroded rural income growth (Wedeman 1997; E. Cheng 1997).

The sluggish growth rate of income for peasant farmers and the increasing disparity between urban and rural residents could not be reversed until the terms of trade for agricultural produce improved. This was by no means an

6. This information comes from employees in these two institutions.

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China's Wew Urban-Rural Divide: Titfalls for the Chinese Economy

Table 5. Major grain pice as percentage of international market price

Year Rice Wheat Com

easy task. On one hand, the declining financial capacity of the central govern- ment severely constrained its ability to improve the rural situation by dra- matically raising the procurement price of agricultural produce. On the other hand, there was little room for an increase in the price of agricultural produce. According to Wen (1996) and Lu (1997), prices for most of the major cereals in China were already above international levels (table 5). In addition, because food still accounted for about 50% of consumption expenditures by urban residents, full liberalization of the grain markets and rapid increases in food prices could threaten social stability, a political price that the government was not willing to pay (Rozelle et al. 2000).

But even at this price level and with an increase in government procure- ment price in 1994, agricultural profits were still minimal as peasant farmers faced a "scissors" situation. Filtered through different layers of pi bao gong si (profiteering companies run by government institutions at various levels), the prices of inputs such as fertilizers, plastic sheeting and pesticides rose more rapidly than the prices of agricultural produce, and effectively raised the prices of agricultural inputs and the cost of farming. As a result, good harvests did not necessarily bring good income (zengchan bu zengshou). Between 1990 and 1994, while the procurement price of agricultural produce increased by 56.3%, the prices of major agricultural production inputs such as fertilizer and pesticide rose by 61.6%. For example, even after a rise in procurement price in 1994, the sale of 50 kg of rice would have brought in 44 yuan while the cost of producing it was 41 yuan (including agricultural tax) - a profit margin of only 3 yuan. If the price increase of production inputs such as fer- tilizer and pesticide were factored in 1995, the cost could be as high as 49 yuan to produce 50 kg of rice and the peasant would lose 5 yuan (Li 1995). In Jiangxi, the profit for producing 500g of rice in 1994 was only four cents ren- minbi, a profit margin of only 10%. At the same time, the price of major agri- cultural inputs increased more than 20%, and the price of electricity more than doubled (Wang, X. 1995). As a result, more and more peasants aban- doned their land and left the countryside to seek opportunities in the cities.

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180 Qunjian Tian

While the problem with price differentiation in agricultural produce and inputs has lessened since the second half of the 1990s as China has moved more toward a market economy in which market forces rather than govern- ment pricing determine the prices of agricultural produce and inputs, the introduction of market forces has also created new kinds of problems. Since the prices of major Chinese cereals are often above international market level, market forces lead to more imports of grain to equalize the price differentia- tion between the Chinese domestic and international markets. For example, in 1995, grain imports set a new record at 20 million tons. While increased imports of grain could reduce grain prices and therefore benefit consumers, they could also depress income growth for peasant farmers (Lu 1997). This problem can only become more serious as China moves toward entry into the World Trade Organization (WTO). While China's entry into the WTO may turn out to be beneficial in the long run, the pains for structural adjustment in the short run as a result of heightened competition from abroad may fall disproportionately on Chinese peasants. One can hardly expect small Chinese peasant farmers to compete successfully with multinational agribusiness groups (according to official figures, by mid- 1998, China's farmland was less than 0.08 hectares per capita, not even 25% of the global average [Smil1999]). There is no way that small Chinese peasant farmers can keep up with multi- nationals' promotion initiatives tailored to maintain consumers' enthusiasm. These challenges to smaU farmers are not really something new. Japan, Korea and countries in the European Union are all fierce protectors of their agricul- tural sector, even though among all the OECD countries, farmers and their workers now make up only 8% of the labor force. In North America and the European Union, they make up less than 5% of the labor force and contribute less than 2% of GDP (The Economist, 25 March 2000). Even the United States and Canada help their plighted farmers in some way. Given the lack of insti- tutionalized representation of rural interests that exists in the industrialized democracies, Chinese peasant farmers are particularly vulnerable in the face of these new challenges.

111. THE URBAN-RURAL DIVIDE AND ITS CONSEQUENCES

Heavy financial burdens and illicit charges have been the cause of widespread anger and instability in the rural areas. According to one report released by the Central Committee for the Comprehensive Administration of Public Order in June 1994, there were a total of 720,000 court cases of the rural areas in the country in the first four months of 1994. These included more than 2,300

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China's ?Vew Urban-!Rural Divide: Titfalls for the Chinese Economy 181

cases of disturbance, over 370 of which involved more than 500 people, 22, more than 1,000 people; and 9, more than 5,000 people (Z. Wang 1995).

Lack of funds has severely hindered rural development and education in the agricultural provinces in the interior, further depriving rural youth of most of the career opportunities available to urban residents. For example, there have been increasing complaints about the annual national entrance exam system of discrimination in favour of already privileged residents of big cities. Most universities, including the best ones, are located in big cities, and a disproportionate number of their slots are allocated to their local residents. As a result, most Beijing and Shanghai students who sit the exam are accepted to university, and many of them are admitted to good schools even though their scores were far below those of students from rural areas and smaller towns who may not be admitted at all. In addition, students in big cities, even if they score poorly, can still pay to attend some second-rate colleges that have sprung up in cities to meet the demand for degrees (Eckholm, 10 July 2000). The widening rural-urban gap, the slow pace of rural development and the lack of opportunities have led to a "flight of rural capital" and an outflow of migrant workers into cities.

While systematic data on capital flight from rural areas is not available, one noticeable form of this outflow is related to the household registration system (hukou) (Chan and Li 1999). After many years of rigid control, the hukou system began to loosen up in the late 1980s. With increasing urbanization, the urban residence cards have become increasingly available for purchase by rural residents. While the names of the cards may be different, the basic requirement is money. The price tags may vary from city to city, but they usually do not come cheap. Some places still ask for cash. The capital city of Beijing has the most expensive resident cards. In addition to a quota and various costs to go through all the papers, the official price for a Beijing resi- dent card was 100,000 yuan in the early 1990s. According to Wang and Zuo, a "blue-stamp" hukou in Shanghai could cost US$200,000 for foreign investors, or one million yuan for domestic investors (Wang and Zuo 1999). However, an increasing number of cities have now tied the sale of their residential cards to the purchase of their huge reserve of surplus apartment buildings, a result of the real estate speculation fever mentioned earlier. The price for a two- or three-bedroom apartment is usually between 200,000 and 500,000 yuan in major cities and between 50,000 and 200,000 yuan in small ones. Still attracted by better education and more career opportunities for their children, the newly rich from rural areas have increasingly chosen to invest their money

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182 Qunjian Tian

in the purchase of urban residential permits for their families. This has further diverted capital away from rural development.

Another well-known consequence of the rural-urban gap is the outflow of rural youth from the countryside, which by the late 1990s reached a total of of 80 to 120 million. Most of the migrants come from the agricultural provinces in the interior where rural industries are the least developed. Unlike the migrant workers in China's past, the majority of the new mobile population is not looking for land. They are seeking better lives in the cities (Rozelle et al. 1999; Ma and Biao 1998; Zhou 1997; Solinger 1999; Croll and Huang 1997).

The influx of peasant labourers has created new urban problems.' Major cities find it difficult to accommodate and absorb this vast inflow of migrants when they themselves are burdened with a surplus of unskilled labourers. Although most rural migrants end up with low-level jobs in industries such as construction, garbage collection and peddling that urban residents abhor (Zhou 1997; Eckholm, 10 March 2000), they are still regarded as "stealing the rice bowls" from local residents. Treated as "country bumpkins" and "blind floaters" (mangliu), they are blamed for most of the rising crime rate and the crowding and dirt in the cities. This sentiment can only intensify as more and more urban residents lose their jobs and have to compete for low-paying jobs. Even in official briefings, migrant workers are referred to as "outsiders:' and social mixing with local residents is rare. Cities have periodically formulated rules to restrict the entry of rural migrants and bar them from certain jobs. A recent controversy involved a plan by the Beijing city government at the end of 1999 to reduce the number of migrants in the city by several hundred thou- sand from an estimated three million. The government made public a list of 103 job categories from which migrants are barred. In some cases, urban employers are also required to pay a per-head fee for each migrant they hire so that the money can be used for unemployment fund for urban workers (Wang and Zuo 1999; Eckholm, 12 December 1999). Early this year, the central government issued an emergency call for cities to limit entry of rural migrants (Eckholm, 10 March 2000). Thus, the growing rural-urban disparity has increasingly turned into what Cheng X. (1997) called "a peasant crisis in the cities."

Another consequence of the growing urban-rural divide is less obvious but not necessarily less serious. Partly because of government policy that gives pri-

7. Visitors to Chinese cities will notice the heavy metal gates to apartment buildings, secu- rity doors on each apartment and metal bars wrapped around the windows and balconies of residential apartments.

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China's mew Urban-Rural Divide: CPitfalEcfi the CEfrrcse Economy

Table 6. Urban and rural savings lb& 100 mllmn pm

Year klasvings lkllm- ~~ Amount Share % Amount Share %

Soure: ChhinaSBtiRiical Yea- 1996, in Y. Yarg (1997, p. 126)

Table 7. Annual increase in savings

Year % of growth in % of growth % of.total % of growth % of.total total savings in urban savlngs in rural savlngs

savings savings

brrce: China Statrst~al Yearbodr 1996 In Y. Yang (\$%IT. p 126)

ority to urban development and partly because of the "transfer mechanism" that siphons funds from rural to urban areas, a sizable middle class has emerged in Chinese cities, what Bardhan (1984) calls "the proprietary classes.'' Whitethis is a positive development in itself, the emerging middle class and its growing influence may have important implications for welfare distribution and the Chinese economy. In 1978, cities had 17.9% of the total population and 34.1% of national income while rural areas had 82.1% of the population and 65.9% of national income. By 1996, when urban population increased to 28.1% of the total, cities' share of national income jumped to nearly half of the national total.

Between 1985 and 1995, savings by urban residents increased by an annual rate of 36.3% compared with 27.1% for rural residents. In 1985, the urban res- idents' share of national savings was 65.2%, and in 1995, it skyrocketed to 79.1%. At the same time, the rural residents' share fell from 34.8% to 20.9%.

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Qunjian 'Tian

Figure 2. Urban-rural savings and growth

, , , Urban - Rural

m h 0 m "l m 0 h C m N m m

m m "l

0) m m m m m m * 0, - 4 3 3 C C - m 4 C

Year

Figure 3. Share of urban and rural savings

0 Urban Rural

120 r- -- -- -- - -- --- --

m h 0 m "l m 0 m C h N m m m Ln

m m m m 01 m X m 3 '4 r. - ,-4 s 4 m 3 m C

Year

By mid-1996, total savings by urban residents reached 2.711 trillion yuan, 40% of which went to the top 20% of urban households, concentrated mostly in the largest metropolises and coastal cities (see tables 6 and 7, figures 2 and 3). By mid-1999, per household savings for the top 20% of urban households reached 146,615 yuan ( World Journal, 6 August 2000).

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China's 'Nav Urban-Rural Divide: Titfalls for the Chinese &conomy 185

The dramatic increase of the financial assets of urban residents together with cheap rent and other social welfare privileges and subsidies, has boosted disposable income for urban residents in major metropolitan cities. For the top income households, their consumption tastes could no longer be satiated with domestic products. Instead, they have increasingly shifted their con- sumption to imported luxuries. For example, since March 2000, under the United States-China agricultural agreement, large shipments of fruit have landed in China. Even at a cost several times that of the domestic fruit, 1,800 cartons of Sunkist oranges sold in two hours in Shanghai. In Dalian, another major northern port city, 16 tons of Sunkist oranges sold within three days. In Beijing, tens of thousands of imported grapefruit, priced at $1.50 each while similar Chinese fruit costs only 10 cents, were sold within a short period of time (World Journal, 7 August 2000, p.A7; Meizhou Renjian Xingfubao, 24 July 2000, p.12). Also recently, more and more urban newly rich residents of major cities have been choosing to send their children to study abroad. With an annual average cost of 100,000 yuan, this is more than ten times the average annual income of an urban resident. Several recent exhibitions and meetings (the English and American Education Exhibition, the International Education Exhibition and the English College Preparatory Consultation Meeting, held in Beijing, Shanghai and Shenzhen, respectively) attracted "unexpectedly" large crowds (Zhang 2000).

This sizable urban disposable income is also one of the major attractions for more and more multinational corporations (MNC) to move into the Chinese market. By early 1999, among the world's top 500 MNCs, more than 300 had investments in China and more than 100 had located their regional headquarters in Beijing or Shanghai (Commercial Times, 10 February 1999). Unlike the early small investors from Hong Kong, Taiwan and overseas, Chinese who have been engaged mostly in small, labour-intensive processing industries for exports, the new wave of MNC investors target mostly the domestic Chinese market, especially the surging purchasing power of the met- ropolitan "yuppies." The entry of MNCs into the Chinese market has been one of the factors that have driven the SOEs into further difficulties by undercut- ting their market share in the major cities.

At a time when SOE products have been increasingly pushed out of the market of major cities, the sluggish growth of rural residents' income has further driven down demands for local products from the rural market. Since the loss-making SOEs cannot easily sack their redundant employees, the government has to continue pumping money into their payrolls in order to maintain stability. The result has been the piling up of bad loans for state

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186 Qunjian Tian

banks. And these bad loans, in turn, have exposed the entire financial system to great risk.

CONCLUSION

This paper argues that the growing urban-rural divide caused by slower rural income growth after 1985 is partly due to the government policy that contin- ues to extract more than it invests in the rural economy. This points to a per- sistent urban bias in the policy-making and policy-implementation process that continues to focus on powerful urban interests. Given the political sensi- tivity of urban discontent after the massive anti-government demonstrations in 1989, the government continues to direct most investment credits and other resources to urban interests in order to maintain stability. In addition, the declining share of financial resources by the central government and the ensuing dynamics of central-local competition for revenues have all translated into various financial burdens for the rural population and eroded their income growth. Finally, the increasing rural-urban disparity also points to the partial nature of reforms and serious structural vulnerability of the small peasant economy in China's transitional economy. This is best exemplified in the various schemes to divert funds out of rural areas to projects that benefit urban interests. All these factors have helped undercut the potential of rural development, leading to an increasing disenchantment among rural youth and massive rural migration into urban areas.

More significantly, the widening rural-urban disparity has led to serious pitfalls for China's transitional economy. As affluent urban yuppies have increasingly shifted their consumption to imported luxuries and sent their children to study abroad, the declining income levels of rural residents have further driven down demands for local products. With the surging disposable income and concentration of wealth in major metropolitan centres that are luring more and more MNCs into the Chinese market, the joint effect of heightened competition from without and declining demands for their prod- ucts from within could only drive the less efficient SOEs into further financial difficulties. Combined with the massive flows of rural migrants into the cities, the pending bankruptcy of many of these loss-making SOEs and the large- scale layoffs associated with it pose a serious threat to the very stability the government has been trying to maintain. Thus, urban bias in state policies and forces unleashed by the partial nature of reforms that siphon resources from rural areas to pump up urban living standards have come full circle and are shaking the very foundation of their continuation.

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China's 'New Urban-Rural Divide: Tigalls for the Chinese Economy

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