The Social Economic and Environmental Impacts of Trade

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					Mar.2004                                                                  Chinese Business Review, ISSN 1537-1506
Volume 3, No.3 (Serial No.9)                                              China Business Review (Journal),Inc.,USA

     The Reasons of Income Gap between Urban and Rural Areas in China

                                        and its Policy Suggestions

                                                       Wen Wang*

     Abstract:   This paper points out that one of the main reasons for income gap between urban and rural areas in
china is difference of human capital reserve on education which are decided by Chinese government’s urban area
privileged policy and the current education system. This paper also compares the different human capital reserve
in two area, and analyzes the under-qualified human capital reserve in rural areas is resulted by these following
reasons: The shortage of public spending in compulsory education for several decades has contributed to low
school attendance and the great illiteracy beyond urban areas; the inefficient educational system has caused
peasants to lose interest in education; No support for adult education has closed the doors for adults to earn money
in non-agricultural industries. Vocational schools cannot attract the huge number of potential customers since
their curricula and skills are out of date. As policy suggestions, governments should invest enough money in
compulsory rural education, and creating a pragmatic rural education system is also vital.
     Key words: rural human capital compulsory education             public spending China.


     The gap of the standards of living between urban and rural areas in China is enormous, the income gap range
from 2.3 to 5 times within the same province in 2001(china 2002 year book), which is far from the acceptable
level in most countries, namely 1.5. It is a burning problem since it will affect China economy (discussed later in
the consequence of low-educated rural population). The Chinese government and experts abroad and home have
been trying to find the causes and solutions. Besides capital investment, China should also pay attention to
investment in human capital in the near future (Heckman, 2002). This paper will explore the link between the
knowledge economy and peasant productivity that directly beget peasant’s income.
     This paper proceeds in this following way. Section 2 compares the income gap and schooling between urban
and rural areas in china. Section 3 presents the side effect of low-educated rural population in china. Section 4
analyzes the reasons for current situation, which include policy privilege in urban education access and existing
unreasonable education system. Section 5 concludes.

      2.Comparison of Income Gap and Schooling between Urban and Rural Areas in China

     2.1 The Income Gap between Rural and Urban Areas is Colossal.
     With the process of reforming and opening policy implemented in China, the general living standards was

 Wen Wang, female, teacher of Management College of China University of Geosciences; She focuses research areas on the nexus
between human resource management and marketing; Address: Management College, China University of Geosciences, Wuhan
Hubei, 430074; Tel: 027-87484821(Home), 027-87566573(Office), E-mail:

             The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

improved a lot while the income gap between urban and rural areas also enlarged. Based on the latest date
available, China 2002 yearbook, table 1 shows income in urban areas is several times of that in rural area, which
ranges from 2 to 5.6. Average urban income was 3 times the average rural income in 2001.This gap is especially
dramatic in west china, for example, Yunnan was 4.4, and Tibet was 5.6, which was far from the acceptable level
in most countries, namely 1.5(World Bank).
       Studies show that there is a strong correlation between educational level and income, Heckmen based on
China’s Urban Household Income and Expenditure Survey (2000) finds that the return on college education on
20th late century China is a 43% increase in lifetime earning average (James J. Heckman; Xuesong Li, 2003). The
correlation between schooling and agricultural output in China is: a 1% increase in rural high school attendance
results in a 2% increase in net income. If rural illiteracy decreases by 1%, peasants will achieve a 1.2% net income.
(Jingzhi Ding, Xikang Chen, 2001)
       2.2 Comparisons of Schooling between Urban Areas and Rural Areas
       The general educational level in rural areas is very low. Rural illiteracy and semi-illiteracy account for 21%
of the rural population, if we limit the workforce age from 15- 50, the percentage will be larger. 80% of the total
illiterate people are in rural area. ( the fifth census in 2000). The illiteracy in urban area is 5.22%. The average
school year of workforce is 7.33,while it is only 6.86 years in rural area, and 10.2 years in urban. (zhenguo Yuan,
2003). 74% of the total tertiary receivers are in urban area; the number of which is 28 times of that in rural areas.
The percentage of people in rural areas who receive tertiary education is average 5%, while 42% of urban people
reach this level. (Wenzhang Dong, Li Hemei, 2002)
      People who directly serve as agriculture receive a much lower education, which affects farm output. The majority
of peasants attend junior high school or lower education, which makes up 85% (China year book 2000) of the total rural
workforce. Female peasants constitute the absolute majority of attending primary high school and illiteracy See table 2.
They are the main part of workforce in rural area, but the illiteracy percentage among rural female is as high as more
than 50%. It is called “993861” troop who serve in agriculture since male range 15-55 leave their fields and serve in
other industries. 99 means the old, 38 means female since the international women day is on 8th March; 61 represents
children since international children day is on 1st June. Their low schooling begets the low farming output.

      3.The Consequences of a Low-qualified Rural Population

      Negative effects of the colossal gap in income, presents in following aspects:
      3.1 The difference in income leads to different living standards. And people cannot have a balanced attitude
when they face such problems, so the rural increasingly hate the urban; therefore the crime rate is increasing these
days, which affects the stability of the society.
      3.2 Large-scale low-qualification rural population retarding China's modernization process. The modernization
of agriculture is based on a qualified workforce, which has mastered modern technology and has ability to run
businesses. But this condition is not satisfied in reality. As far as China, an agricultural country, is concerned; it is
obvious that if there is no modernization in agriculture, there will be no modernization in the wider society.
      3.3 Having a negative influence on urbanization, which is an important measure taken by the Chinese
government to help improve peasants’ income. Under-qualified peasants place huge direct strain on cities when
they are urbanized, Peasants who are under educated have no professional skills, and some of them have moved to
cities but still live under the poverty line." The urbanization effect" cannot be applied, and development is

             The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

retarded. The typical case is ChongQing, which is the latest city to come under the direct control of the central
government. There are more than 24 million peasant-residents among its 30 million people. The number of the
people below the poverty line is from 140 thousand in 1999 to 650 thousand in 2002 since it became a centrally
controlled. The social security system cannot afford such a huge burden and was nearly crashed.
      3.4 It reduces the competitive advantage of Chinese products in the global market. Peasants now are the main
source of labor in the manufacturing industry. Many urban workers are moving into white-collar work, due to the
lack of blue-collar job security, which has resulted from the reform of state-owned enterprises. Rural people are
filling these less secure positions. Take the Wuhan shipping plant for example, more than 80% of technicians
came from rural areas in 2002.In the repairing industry, (including cars and motorcycles), more than 70% of
technicians were peasants. In the global economy, China will be “world manufacture plant”. Abundant and
qualified labor is the most attractive for foreign investors (Jinchang Zhang, 2003). Young men from rural areas
provide such labor. Furthermore, with the development of the Chinese economy, rural areas just can provide
positions for 20% of the rural population; the other 80% will have to go to cities for work. Their low qualification
results in a high rate of rejects products. The rate of the rejects averages 30% in Chinese production that induces a
cost of 200 million RMB every year. (Baimu, 2002)

     4.Analysis Reasons for These Disparities.

      There are several reasons for such situation and this paper gives reasons from policy privilege and
unreasonable education framework since they still exist currently.
      4.1 Unequal Approaches to Education are Responsible for Today's Unqualified Rural Population.
      A major disparity exists in public spending in rural and urban education. Public spending is structured to
favor urban populations, and as a result vast numbers of peasants miss out on even basic education. (The Chinese
two-dimension urban-rural economic structure). Compulsory education in China favors urban people, but
excludes many peasants, who have an equal tax burden. (1) Peasants’ absence in compulsory education is at a
high level. Governments pay most spending on primary schools and secondary schools in urban areas. By
comparison, the expenses for education in rural areas are contributed by peasants who are encourage to solve
problems by themselves which include providing all educational facilities and salaries of teachers. Peasant, whose
monthly income was 188 RMB in 2000(Deyuan Zhang, 2000), definitely could not provide good educational
facilities. Therefore, a lack of desks and chairs in classrooms is very common. Substandard buildings threaten all
students and staff who work in them. Teachers' salaries are often postponed several months, or frequently even
more than a year, which has resulted in a serious drainage of teaching staff. The worse is that the central
government eliminated investment in rural education in 1985, replacing it with money from the collective budget
(which comes from taxes paid by peasants), and then the responsibility for compulsory education was turned from
the government to peasants, and this situation continues. Take the educational expenditure in 2000 for example;
the public expense for each pupil in common primary schools was 37.18 RMB per year, increased by 4.09% from
35.72RMB in 1999, of which each rural pupil received an average 24.11RMB, a 0.42% increase, with other
increase 3.67% going to every urban pupil. Public expenditure for each student in common secondary schools was
74.08 RMB, decreasing by 3.75% from 76.97RMB in 1999. Rural secondary students received an average 38.67
RMB in expenditure, a decline of 12.41% from 44.15RMB in 1999 (China education and science website).The net
result is an increasing dependence on peasants in the funding of rural schools. To solve such shortage, rural

             The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

schools have to require higher fees and tuition fees are higher in poor rural areas than those in rich urban areas.
Such a phenomenon is common now. A lot of families are too poor to afford such tuition fees, so that a large
number of students drop out of school. For example, in Tongdao county Hunan province, 25 thousand students
should be in junior high schools, but the enrolled number was 8 thousand in 1999(Dingwenjie, 2002). Such low
rural attendance in even compulsory education is increasing these years and can be attributed to the introduction
of the differentiated urban-rural educational funding policy.
     4.2 Present Rural Adult Education
     Low investment in rural adult education has resulted in a deficiency of schools, low enrollment, and
unqualified teaching staff. Table 3 shows very limited institutes for rural adults, there are 871 tertiary institutes,
but just 3 for peasants, who are not eligible to enroll other one. There were 1000 adult peasant students at these
schools while there were 3054600 urban residents in other schools. And peasants account for the main members to
receive elementary education, they account for 96% of the adult population who received elementary education.
Discrimination also exists in re-employment projects. The government only provides training courses for urban
residents. Nowadays, thousands of redundant employees in cities can choose different free courses in
re-employment centers, while peasants have to pay fees by themselves if they are unqualified and want to learn
new skills, which are important for them to improve their income.
     4.3 Unequal Access to Other Kinds of Public Goods.
     Public goods is a very important channel for people to get information or education, but in China, rural
residents exclude to use them even they paid more tax than people in urban (Deyuan Zhang, 2000).
     4.3.1Telecommunications and electronic media, which are important tools for acquiring knowledge, serve
mainly urban groups. In rural area, telephone ownership was at less than 3.93% of households. In contrary, the
ownership in cities was 40%.(Xinhua journalistic agency,2000).Furthermore, there are still 15% administrative
villages do not access to fixed phone until now.69% of the rural population had access to radios, while internet
users accounted for 0.3%,and 22% of urban households were connected to the internet. Rural cable television
access was little. Take Shaanxi province for example, where the rate of households with TVs (black& white or
color) ownership is 71%,people living in the capital city’s outskirts cannot get cctv-7, an agricultural program that
introduces new technology and releases agricultural information, while it is skipped impatiently by city residents.
At the same time people who urgently need it cannot get it). The same situation occurs in Yunnan province.
     4.3.2 Low investment in the development of agricultural technology and agricultural education.
     The outlay invested by the government is far less than the requirement of agricultural development. The
expenditure on agricultural research &development is less than 0.1% of the GDP. There are few agricultural
technicians: on average one serves 400 hectares of land or 133.3 thousand grassland. The effort to disseminate
agricultural techniques is not enough.
     4.4 The Present Education System does not Suit Rural Needs
     4.4.1 The present education system is designed for urban groups, who commonly receive compulsory education,
go to university, and then join the industrial workforce, irrelevant for peasants who are on the breadline. It is difficult
for peasants to see any benefits in receiving a junior high school education, since what they learn has no relevance to
agriculture, which is instead related to industry. Therefore it affects the desire of peasants to invest in education.
They have their own plans: most rural students cannot achieve the entry requirements of universities. Even if they
can luckily get in, they cannot afford the expensive tuition fees. If they can, they most often go to Guangdong to find
a job after they graduate. The opportunity provided by getting a degree may not be reflected in the cost of the degree

             The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

since now it is not easy for graduates to get a good job. Why not go to Guangdong now and get a job?
      4.4.2 The present education system actually drains human resources and development capital in rural areas to
cultivate talent for urban development. The education that students receive suits urban work, hence the investment
in education in rural areas has no rural benefit because graduates will stay in cities after graduate. It is common
that the more students in a family, the poorer the family will be less. For example, it takes 57 thousand RMB to
pay for a BA in Jingshan county, Hubei province. A peasant in this area has an average income of 400 RMB
monthly. How could they afford this expense? Furthermore, most graduates choose to live in cities and dislike
working in rural areas. The vast majority of peasant graduates become first-generation urban migrants. A huge
investment of time & effort needs to be made up from the city. So it is unrealistic to equate peasant urbanization
with flows of capital to rural areas.
     4.5 The out of Date Vocational Education System does not meet its Real Target Consumer- Peasants Needs
      4.5.1 Peasants are the real target consumer of vocational school, as mentioned before. They desire to learn
kinds of skills since non-agricultural income plays an important role in the total income of a rural family. Well-off
peasants mostly have family members who have temporary jobs in plants or other forms of income unrelated to
agriculture. The remark of “We depended on the harvest in the past, but now we rely on paid work” reflects the
change of peasants’ income. There is extreme competition for low paid jobs, which require physical strength, and
these jobs are typically unsafe and are not secure. Peasants need any kind of technical training, which can be seen
from 70% students in vocational schools are from rural areas.
      4.5.2 The shortage of advanced technicians and the lure of the market
      There are 140 million workers in urban areas in China at present, of which 70 million are technicians. Basic
technicians account for less than 60%, intermediate technicians constitute 35%, and advanced level technicians
are just 3.55%. In developed countries, advanced technicians constitute 35%, intermediate technicians account for
50%, and elementary make up 15%, so there is a long way to go. According to the third quarter reference cost of
labor declared in Shenzhen in 2002, the monthly salary for people with Master’s degrees was: low 2400RMB,
medium 3500RMB, and high 5900RMB, while the price for skilled fitters was 3200 RMB, 4300 RMB, 6600
RMB respectively. One plastics plant in Qingdao was eager for a skilled wielding and provided 160,000 RMB per
year. It seems that the supply of experienced blue-collar workers is far less than demand and there has every
reason to support the existence of good vocational schools.
      4.5.3 The present vocational education situation is discouraging. Although predictions concerning vocational
education are brilliant, the facts are pessimistic. Of 38 vocational schools in Wuhan city, closed 10 in 2002, and
20 of the remaining schools struggle to remain open. In Shannxi province, last year in the entrance examination to
key vocational schools, there were 800 students registered to sit the enroll exam in one district, but only 2 students
actually took the exam (Baimu, 2002). The reason is that most vocational schools apply out of date
planned-economy syllabuses and teaching techniques. Students who study in such schools master traditional skills
and cannot satisfy the needs of high-tech industries and the current job market demand. Therefore just a few
students will go to vocational schools. In addition, private vocational schools have a bad reputation: cheating
students, high fees, and poor teaching, which hinder the development of private schools.

     5.Policy Suggestions

     This paper makes the following points:

             The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

      1) The income gap between rural and urban area in China is monumental, one of the strong influences of it is
the different schooling in these two areas. Obviously, human capital reserve intensively relates to individual income.
      2) The low-educated rural population is harmful to Chinese economy and society. Huge disparity on living
standards will influence stability of society. In china, rural population will be main part of workers in “the world
manufacture plant”; their qualification will determine the world plant can exist or not.
      3) Policy privilege in urban area resulting in the difference in education (formal or informal) between rural
and urban area is the main reason for poor human capital reserve in rural area, which beget current income gap.
Historically, education investment benefit a lot, which results in the rural residents out of schools, and unsuitable
special technique school system is a barrier for peasant to improve their skill and disable them to have
non-agriculture earning which is now an important part in peasant’s gross income.
      4) Based on analysis, suggestions for improving education approach of rural residents should be given.
Compensating education investment in rural area should be given through fiscal transfer, forming suitable
education system for rural areas both in compulsory and post compulsory education including vocational schools
and adults schools.
      The Chinese government has moved to improve peasants’ ability to increase their income, but without the
exercise of a genuine counter political authority or legitimated educational spending in rural areas in the form of
independent agricultural unions, the current situation is more favorable urban residents rather than peasants.
      Pragmatic methods to reduce education burden on peasants are as fellows:
      1) Compensating for rural compulsory education and making sure the increase of education spending in rural
areas. The central government invests more in rural areas through incomes transfer as many foreign counties did.
      2) The rural education system should cater to the need of peasants. Students in junior high school can be
divided into two groups according to historical records, so that a suitable percentage of students can go to senior
high schools, then university, based on their performance, willingness and their financial situations, while the
others can be taught practical skills.
      3)The government needs to reform the special technique education system by merging some schools to build
qualified groups and encourage them to set market-oriented courses. The governments should still provide a
favorable environment for private investment in vocational education, while implementing strict controls over
assess qualification and supervise tuition fees levels, so that disadvantaged peasants are protected.
      4)Investing more in all communications infrastructure, such as TV, Internet, telephone, which let peasant can
access to them. Relative facilities like agricultural database and information center should be in building. Then
free lecturers and all kinds information can reach them at a low expenses.
      Spreading new techniques through training courses. According to the green box policy of the WTO, there is a
great gap in subsidies for agriculture between developed countries and China. The former spend 10% of the
national produce income, while china had decreased its spending from 2.55 in 1979 to 0.5% in 19948. The
Chinese government should reduce this gap. For example, funding agricultural technology and introducing
encouraging performance appraisal for agricultural technicians and involving intelligent people in spreading new
agricultural techniques and notions.

    1.Sylvie Demurger, Jeffrey D. Sachs, Wing Thye Woo, Shuming Bao, Gene Chang,Andrew Mellinger.
Geography, Economic Policy, and Regional Development in China, NBER working paper w8897 Apr 2002.

             The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

     2.James J. Heckman. China's Investment in Human Capital , NBER working paper w9296 Oct 2002.
     3.James J. Heckman, Xuesong Li .Selection Bias, Comparative Advantage and Heterogeneous Returns to
Education, NBER working paper w9877 Aug 2003.
     4 . WuCangPing,M. Chinese Demography Situation and Solutions. Tsinghua University publishing
     5.LiJingYi, M. The Development and Education of Chinese Rural Population, The people’s publishing
     6. Dongwenzhang,Hemeili,J. Present Human Capital Situation in Chinese Rural Areas and Policies Advices,
Chinese Rural Economy, 2002,6,pp96-102.
     7.Sichuan female union work team.Solutions to Exploit Female scientific human Capital in West China,
Chinese Economics System Reform, 2000,4,pp78-81.
     8.DaiQun,J. The Difficulty to Cross the Gap between the Urban and the Rural, News period,2002.
     9.DingwenJie,J. How about the Poor Situation of Education, Banyuetan,2002,37, p52.
     10.DingJingZhi,ChenXiKang. J. Analysis Influence of Basic Education on Chinese Agricultural Economy
Efficiency, Economy Research, 2005,6,PP59-62.
     11.BaiMu,J. Calling for Skilled blue collar, Developing Human Capital, 2002,8,p13.
     12.ZhandDeYuan,J. The Poor Humanism and Poor System in Chinese Rural Area , Humanities Journal,
     13.CongShuHai,M. Analysis Public Expenditure, Shaihai finance and economics university publishing
     14.Jinchang Zhang. China's Labor Productivity, High or Low? USA-China business review, 2003,5.
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Review, 1996,7,pp1-21.

     Table 1 the income gape annual income per capita between urban and rural areas by region in 2001
                         Region             urban              rural                ration
                  Beijing               11577.78         5025.50           2.3
                  Tianjin               8958.70          3947.72           2.3
                  Hebei                 5984.82          2603.60           2.3
                  Shanxi                5391.05          1956.05           2.8
                  Inner Mongolia        5535.89          1973.37           2.8
                  Liaoning              5797.01          2557.93           2.3
                  Jilin                 5340.46          2182.22           2.4
                  Helongjiang           5425.87          2280.28           2.4
                  Shanghai              12883.46         5870.87           2.2
                  Jiangsu               7375.10          3784.71           2.0
                  Zhejiang              10464.67         4582.34           2.3
                  Anhui                 5668.80          2020.04           2.8
                  Fujian                8313.08          3380.72           2.5
                  Jiangxi               5506.02          2231.60           2.5
                  Shandong              7101.08          2804.51           2.5

         The Reasons of Income Gap between Urban and Rural Areas in China and its Policy Suggestions

              Henan               5267.42         2097.86            2.5
              Hubei               5855.98         2352.16            2.5
              Hunan               6780.56         2299.46            3.0
              Guangdong           10415.19        3769.79            2.8
              Guangxi             6665.73         1944.33            3.4
              Hainan              5838.84         2226.47            2.6
              Chongqian           6721.09         1971.18            3.4
              Sichuan             6360.47         1986.99            3.2
              Guizhou             5451.91         1411.73            3.9
              Yunnan              6797.71         1533.74            4.4
              Tibet               7869.16         1404.01            5.6
              Shaanxi             5483.73         1490.80            3.8
              Gansu               5382.91         1508.61            3.6
              Qinghai             5853.72         1557.32            3.8
              Ningxia             5544.17         1823.05            3.0
              Xinjiang            6395.04         1710.44            3.8
China year book 2002
Note: the income of urban is disposable income, the income in rural is net income
                              Table 2 the distribution of rural educated people
                  Tertiary      Senior high Junior         high Primary      Adult            No     formal
Education level                                                                                             Total
                  education     school      school              school       illiteracy class education
Number       of
                  3426          205338           1606858        2212849      139852          693637        4861960
% the total
                  0.07          4.22             33.05          45.514       2.876           14.267        100
Male labor        2726          147074           986876         1098372      43964           227895        2506907
% in the total
                  0.056         3.02             20.298         22.591       0.904           4.687         51.56
Female labor      699           58264            620042         1114477      95888           465742        2355112
% in the total
                  0.014         1.2              12.753         22.922       1.972           9.579         48.44
From China annual demography (2000)

   Table 3 comparisons between rural adult education and the national adult education (1999)
                                                                    Number      of
                                        The       Enrollment
                                                                    students    in Number of teachers
   Category of school                   number of Number
                                                                    institutes     (per 10000)
                                        schools   (per 10000)
                                                                    (per 10000)
   Adult tertiary         Total         871         115.77          305.46         9.76
   institutes             Peasant       3           0.04            0.1            0.01
   Adult intermediate     Total         544657      9028.79         7503.93        33.07
   institute              Peasant       440         7.34            21.93          1.35
   Adult                  Total         180103      519.70          536.82         5.74
                          Peasant                   500.25          517.07
   institute                            179139                                        5.56
China 2000 yearbook
                                                   (Edited by Hongwei Dong,Jinzhou Sun and Xuefeng Wang)