The Income Gap in China: Rural Areas Need a Lift
by Zhao Manhua

By the end of 1999, China’s population exceeded 1.2 billion people, 69 percent of whom live in rural areas. The situation in China’s countryside is thus a good indicator of economic development and reform progress in the country as a whole. One important indicator is farmers’ income level, which is closely related to their living conditions.

Since 1998 the economic situation in China has changed dramatically. Shortages ended, and there is now an oversupply of most industrial goods. Weak demand has slowed China’s economic growth. Given these conditions, farmers’ consumption is particularly important for expanding domestic demand and propelling economic growth. With a vast population and low living standards, China’s rural areas represent a huge potential market. If farmers’ income can be increased, this potential market will play an important role in promoting economic development in China.

Since economic reform began in 1978, farmers’ living conditions have improved and their income has gradually increased. In 1978 the annual per capita net income of rural households was a mere 134 yuan (1US$=8.3 yuan). By 1999 it had increased more than 15 times, to 2210 yuan. Despite these improvements, the gap between urban and rural dwellers has grown.

In 1978 the annual per capita income of urban residents was 343 yuan—two and half times the 134 yuan average income of rural residents. This ratio reflects the fact that urban residents enjoyed free medical care, free housing, good education, and convenient amenities—all of which were lacking in the countryside.

In early 1980s the income gap between urban and rural residents narrowed. In 1984 the income ratio dropped to 1.6:1, a historic low that was never repeated thereafter. The gap narrowed because economic reform focused on rural areas and policies were favorable to the agricultural sector. Before reform farmers were worried that they had too little grain to live on. In the mid-1980s, they produced so much grain they worried about the lack of storage capacity. As a consequence, grain producers were able to achieve bumper harvests in a row. By the mid 1980s, agriculture grew at an annual rate of 7 percent. The successful rural reform resulted in a steady and quick increase in rural income, narrowing the income gap.

Beginning in 1985 the focus of China’s economic reform shifted to cities, and the income gap grew. In 1994 the ratio of urban to rural incomes reached a record 2.9:1. In 1999 the gap narrowed slightly to 2.7:1. In the first three quarters of 2000, per capita cash income in rural areas increased 2.5 percent, while income in urban areas rose 8.4 percent, leaving the income gap a little wider than it was in 1978.

The change in income distribution is consistent with the inverted U-shaped curve first put forward by U.S. economist Simon Kuznets in 1955. According to Kuznets, rising inequality in income distribution is inevitable as economic development takes place. When economic development reaches a higher stage, income distribution becomes more equitable. Is Kuznets’ hypothesis compatible with China’s income distribution? What is the relation between income and development? When is the income gap still reasonable and acceptable?

In 1998 per capita consumption was 1,892 yuan in rural areas and 6,201 yuan in urban areas—a ratio of 3.2:1. Refrigerators and washing machines, which most urban households now own, are still uncommon in the countryside, where only 10 percent of rural families own refrigerators and just 21 percent own washing machines.

Because the profit from agricultural investment is relatively low, many farmers decided to shift their investment out of agriculture, into other more profitable sectors. If this trend continues, grain output in China could drop significantly, possibly forcing China to import grain, thereby weakening the foundation of the economy.

To narrow the income gap between urban and rural areas and improve rural living standards, China should take the following steps: